Investing in Wind Power’s Quiet Growth

by David Fessler, Investment U’s Senior Analyst

Tuesday, August 9, 2011: Issue #1574

This past weekend, my family and I attended a dear friend’s eightieth birthday party in upstate New York. On our way home, we drove by two enormous wind energy farms: one outside of Corning, New York, the other on the edge of Scranton.

Both farms stood along ridge tops, and both were recently constructed. The Pennsylvania farm had a dozen wind generators. The New York facility had at least twice that number. All were spinning away, generating power for their owners.

With all the attention given to coal, oil and natural gas, wind power hasn’t been making national headlines.

But when I saw these new wind farms in my own backyard, I was reminded that wind isn’t “dead.” Despite some analysts’ pessimism, it’s quite the opposite. Wind’s quietly expanding around the United States, and offering great investment opportunities.

The growth prospects for wind power couldn’t be brighter. Turbine costs are coming down, and they’re becoming more efficient and more widely deployed. It follows that investing in wind power will also bring good fortune down the road to stockholders who choose wisely…

Wind Power’s Dramatic Decade-Long Rise

The huge increase in U.S. wind installations can be appreciated by viewing two maps, courtesy of the National Renewable Energy Laboratory. Each shows total wind installations by state and number of megawatts per state in 2001 and 2010.

Total Wind Installations in 2001

Total Wind Installations in 2010

What a difference a decade makes. Wind power increased from just a few states and a little over four gigawatts (GW) to 39 states and over 40 GW. That’s a 10-fold increase in as many years.

As you can see from the map below from the Energy Information Administration (EIA), the largest numbers of wind turbines are in the Great Plains states. That’s where conditions are the best for terrestrial wind generation in the United States.

The sizes of the circles on the map below represent the output of the entire group of turbines at one location, or wind farm. Individual turbines typically installed by utilities range in size from one to three megawatts.

Wind Turbine Capacity

Beside the wind-rich Midwest, the map also reflects other areas with large concentrations of wind farms. That’s because many states have renewable portfolio standards (RPS) that foster alternative energy production from wind power.

That’s the same reason you see no wind farms in the Southeastern states. They generally experience very low levels of wind, making wind energy farms economically infeasible, and their RPS are generally more focused towards the installation of solar.

The map below shows the average wind speeds across the United States. Yellow and green represent areas that aren’t good for wind.

Wind speeds across the United States

The Best Ways to Invest in Wind Energy

Investors could play the sector by investing in turbine manufacturers like General Electric (NYSE: GE) or industry leader Vestas Wind Systems (OTC: VWDRY.PK), a Danish manufacturer of wind turbines.

However, GE isn’t a pure-play in the space, and Vestas is sitting near its 52-week low. Perhaps the best way to gain exposure to this potentially rewarding (albeit risky) sector is through either one of two wind ETFs.

The PowerShares Global Wind Energy ETF (Nasdaq: PWND) and the First Trust ISE Global Wind Energy ETF (NYSE: FAN) are almost identical, but there are a few important differences…

  • PWND tracks the Nasdaq OMX Clean Edge Global Wind Energy Index. It includes companies in wind manufacturing and installation, distributors, and even end users of the power produced by wind. It has 36 companies in its portfolio.
  • FAN tracks the ISE Global Wind Energy Index. It gives an aggregate weight of 67 percent to companies that it classifies as providing goods and services to the wind industry, and a 33 percent weight to companies associated with the wind industry, but not exclusively so. It has 56 different companies in its portfolio.
  • FAN has double the exposure to the United States (16 percent compared to eight percent for PWND). PWND has over three times the exposure to China (20.91 percent) that FAN does (6.56 percent).
  • Both PWND and FAN have underperformed the general stock market, returning -12.38 percent and -4.49 percent year-to-date, respectively.

Having said all of the above, wind power could see a resurgence as governments look for ways to put millions of unemployed workers back into the job market. (Before I get any mail, I’m NOT advocating huge government subsidies for wind power.)

The technology can clearly stand on its own, and is getting cheaper (read: more cost-effective) all the time. Investors wanting a long-term exposure to wind power might consider either of the above ETFs as an entry point into the sector.

Good investing,

David Fessler