Is the Answer Really Blowin’ in the Wind?

The wind power industry continues to expand at a relentless pace across the globe with no decline in the foreseeable future. Indeed, since 1998, the installed global capacity of wind power went from 7,475 MW to 93,849 MW, or a ten-year CAGR of 28.8%. The United States has not remained on the sidelines during this era, and at the end of 2007, had over 12,000 MW of capacity installed of its own. Wind can very well be a viable solutions in addressing our attempts to curb greenhouse gas emissions and offer more stable and predictable electricity prices.

It is reassuring to see that well-known oil magnates T. Boone Pickens and Gary Evans have recently shifted their focus to renewables and are heavily investing in the wind sector. Mr. Evans, the former CEO of Magnum Hunter Energy who now runs GreenHunter Energy (GRH), has a whole slew of wind projects in the pipeline. Mr. Pickens, who has always thought bigger was better in Texas is working on a 4,000 MW wind farm in the Texas panhandle that will span 150,000 acres and cost upwards of $10 billion.

And remember the TXU Corporation, the Dallas-based utility that was acquired by a team of private equity investors last year and had plans for 11 new coal-fired plants? The New York Times reports that they're teaming up with Royal Dutch Shell Corporation (RDS-B) to build a 3,000 MW wind farm in the Texas panhandle.

Already, wind accounts for approximately 1% of total electricity generated in the United States. Some experts say this number could potentially increase to 7% before it is maxed out.

With power generation accounting for almost one-third of our national carbon footprint, and 50% of our power generation coming from dirty coal, displacing 7% of our generation with zero-emission wind seems to hardly place a dent in our quest to reduce greenhouse gas emissions.

And it will be a challenge to even attain that.

For one thing, due to cost imbalances of this new technology, the fate of the wind industry has largely rested on the production tax credit (PTC) that the U.S. government has put into place and then allowed to expire on several different occasions over the last decade. The wind industry has gone through boom and bust cycles just like the oil and gas industry, and with the current wind PTC set to expire at the end of 2008, the sector may need to brace itself for another decline.

Moreover, the windiest parts of the United States are not evenly aligned with the country's largest population centers. In looking at this map, one can see that the best wind sites are situated in the Midwest and Rocky Mountain regions, also the most sparsely populated regions of the continental U.S. As such, transmitting this clean power to the population centers that need it most will be an issue, as power transmission is an expensive, time consuming, and low-margin business to be in.

These challenges comprise just one of the several reasons we need to have a comprehensive energy policy in our homeland.  Such a policy will allow electricity to stem from numerous clean sources such as solar, geothermal, biomass, and energy efficiency, and permit us to diversify our energy mix. The 2007 Energy Bill did not seem to be so comprehensive, though I am optimistic that this bill was only the first iteration of many more favorable pieces of legislation for the alternative energy sector.

Regardless, while we wait for the challenges facing the industry to be addressed over the long-term, there is no shortage of investment opportunities in the short to mid-term. Many of the major wind players are based outside of the U.S., in fact, two-thirds of Texas' (the U.S. leader in installed wind capacity) wind capacity are foreign-based turbine manufacturers such as Vestas (VWS.DE), Iberdrola (IBE1.DE), and Gamesa (GTQ1.DE). General Electric (GE) is easily the largest domestic wind supplier, though it is hardly an alternative energy pure play.

Another angle to take in terms of profiting from the impressive growth in the wind industry is to target the companies that produce the special carbon fiber materials needed to manufacture wind turbines. Such an investment opportunity is St. Louis-based Zoltek (ZOLT), which now derives the majority of its revenue from wind power customers and, with capacity increases scheduled to take effect over the next year, is well positioned to capture more of the industry's growth.

Disclosure: I do not own any of the aforementioned stocks, however I am encouraged by the recent drop in price of ZOLT.

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Wind Power
Photo:lamusa, Creative Commons, Flickr