Wind Power: 5 Ways to Play the Next Revolution in Energy

You can’t see the latest revolution in energy.

But European sailors once harnessed it to explore the world.

The Dutch counted on it to drain their wetlands, mill their grain, and saw their logs.

In Texas, the state that was built on oil, they’re even using it to replace crude.

And while it may no longer turn centuries-old Dutch windmills, wind power is fast becoming the next great global energy trend.

It’s one that promises big benefits to investors as well… even in the Lone Star State.

Wind Power in the Land of Oil

Of course, the term “Texas rich” was coined to describe the vast wealth many Texas oilmen (and women) have amassed over the last century, with Houston #1 on the Forbes magazine list of millionaire cities.

Today, Texas leads the nation in oil production, pumping close to 100 million barrels of crude oil out of the ground every month. By the end of 2014, Texas alone produced more oil per month than every OPEC country except Saudi Arabia.

But these days, everyone from billionaire T. Boone Pickens to candy giant Mars to tech leaders Google and Microsoft are investing in the other leading energy source in Texas – wind power.

It doesn’t come out of the ground. It doesn’t require pipelines. It can provide power day and night.

And it’s handing investors an opportunity most oilmen are completely missing.

In 2013, wind farms in Texas produced 36 million megawatt hours (MWh) of electricity, according to the U.S. Energy Information Administration (EIA). Second place Iowa generated less than half that amount.

Texas wind alone could power 3.3 million homes, according to the American Wind Energy Association. That’s roughly one-third of the state.

And unlike oil, which is a one-time resource, wind power will never run out.

But Texas isn’t betting on wind power because the state is worried about running out of oil.

It’s betting on wind power because it’s cheap.wind power

The EIA estimates that the total cost of generating electricity, including plant construction, operations and maintenance, makes onshore wind the second cheapest way to generate electricity after natural gas.

Cheaper than coal, nuclear, and every other form of generating electricity.

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Overcoming the Final Hurdles in Wind Power

The growth in wind power has created some hurdles to further expansion, though none of them are insurmountable.

With momentum building in the industry, the consensus is that all of the current hurdles are only temporary.

Wind power is the fifth most popular method of generating electricity in the U.S., producing 4% of all electricity in 2013. But, notes the EIA, it’s the fastest growing source of electricity, with companies from candy maker Mars to tech giants Microsoft and Google rushing to build new wind farms.

The reason is taxes.

Tax breaks that significantly reduce the cost of wind generated electricity expired at the end of 2013. A bill that would retroactively restore those breaks, as well as 60 others that expired last year, is currently languishing in the Senate Finance Committee. By beginning construction of wind farms towards the end of last year, companies were able to lock in the then-current 10-year tax breaks on new wind farms. Those tax breaks no longer exist.

The current Congress, however, currently appears to favor restoring those tax breaks, which would accelerate the growth of wind power in the U.S.

The second hurdle is the location of most wind farms. The windy, undeveloped prairies and remote mountain tops that are the best locations for wind turbines often lack easy connections to the nation’s electrical grid. Generating electricity is one thing; transmitting it to homes and businesses is another. Utilities and government agencies are expanding the critical infrastructure to overcome that hurdle, but grid expansion won’t happen overnight.

The third major hurdle is the intermittent nature of wind power. Unlike a coal, nuclear or natural gas generator that can run 24/7, wind power rises and falls with the breeze.

New battery technology that can cost-effectively store massive amounts of power to smooth power fluctuations is one solution. Connection to an electricity grid that also draws on other sources of power generation is another.

As a sole source of power, wind energy may only be viable in some windswept areas.

But with natural gas prices increasing, and wind turbines becoming steadily more efficient, wind power is on the rise as a growing part of the energy mix.

Investing in Wind Power: Five Top-Notch Opportunities

In fact, there’s no question that wind power will continue to grow in the U.S. and globally. American wind power has delivered 30% of all new generating capacity for the last five years. In nine states it now provides more than 12% of all electricity.

In Europe, according to the European Wind Energy Association, wind provided 8% of the European Union’s electricity in 2013, double the amount wind provides in the U.S., and that figure will rise for 2014. In some countries, such as Denmark, on windy days more than half of the country’s electrical needs are provided by wind turbines.

Investors can capitalize on this trend in several ways.

First, there are the companies that manufacture wind turbines and other equipment for the industry.

The best known American companies are General Electric (NYSE:GE) and Siemens (OTC:SIEGY). But because wind turbines are a small fraction of their revenue, neither one is a wind energy pure play.

The most attractive wind power manufacturing companies are from Denmark the U.S, and China.

With a 23 per cent market share, and 35,500 wind turbines installed, Copenhagen-based Vestas Wind Systems (OTC:VWDRY)  is the largest wind turbine and auxiliary systems manufacturer in the world. Since its founding in 1979, the Denmark-based company has installed wind turbines in 65 countries that generate a total power capacity of about 38.3 gigawatts (GW). Its stock has jumped 27.7% year-to-date and eye-popping 629.07% over the last two years. Its current free cash flow of $1.398 billion is the highest in the company’s history, and its two-year history of divesting itself of non-core operations appears poised to fuel further growth.

Broadwind Energy (NASDAQ:BWEN), based in Illinois, manufactures steel towers and other components for wind turbines, and also provides maintenance and other field services. It currently has a backlog of $228 million in orders, and recently announced a $10 million share repurchase program to boost its stock price. Its stock has gained a modest 4.85% in the past year, but analysts’ one-year target price of $9.50 represents a 49% upside, and the combination of future orders, increasing field service revenue, and share repurchases make that target reasonable.

China Ming Yang Wind Power Group Ltd. (NYSE:MY) manufactures and services megawatt-class wind turbines in China, with clients in both Asia and Europe. The company is one of the world’s 10 largest wind turbine manufacturers, and is the largest non-state owned wind turbine company in China. Its stock has been on a two-year tear, skyrocketing 89.29%, 90% better than the S&P 500, and its third-quarter 2014 results showed a backlog of signed orders totaling 3.7GW of capacity, with gross profits up 78% over the third quarter of 2013.

Second, there are utilities that rely on wind power for a significant portion of their electricity, such as NextEra Energy (NYSE:NEE). The company, which sells electricity primarily to residential power companies, generates 40-56% of the electricity it sells by wind power. The stock is up 21.85% since the beginning of the year, almost triple the Dow’s 7.87%. It currently yields 2.8%, and has raised its dividend every quarter for the past five years.

Finally, the best pure play for investing in the entire wind energy sector is an exchange traded fund (ETF). There is one focused on wind energy in the U.S.

First Trust ISE Global Wind Energy ETF (NYSE:FAN) follows the ISE Global Wind Energy Index. Two-thirds of the fund’s holdings are companies that provide goods and services exclusively to the wind power industry. The remaining third is companies that are significant participants in the industry. The fund has gained 64.47% over the past two years, handily outpacing the S&P 500 (46.95%) and the Dow (37.24%). Its current yield is 1.26%.

Is wind power an investment idea whose time has come? If oil-rich Texas has embraced it, the rest of the country, and the world, can’t be far behind.

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