Opportunities in the Wind Energy Value Chain

On November 11, 2009, in Alternative Energy Stocks, Green ETFs, Green Stocks, Wind, by Andreas Schreyer
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After having introduced the wind energy market and established why it has such a very promising future in “Wind Energy: Now Is the Time to Invest”, we explored ways to invest in this space, from the broad industry index approach of the specialized wind ETFs (FAN) and (PWND) to the targeted method of focusing on top wind turbine manufacturers such as Vestas (VWDRY.PK) outlined in “Finding Opportunities in Wind Energy”. For all practical purposes, this latest article could have been entitled “Investing in Wind Energy, Part 3” and it takes us to mostly unsuspected ways to invest in this vastly untapped source of renewable energy.

When it comes to the selection of wind energy stocks, a look at the value chain beyond turbine manufacturers reveals what are, in our opinion, some of the best ways to play this market. With the turbine manufacturers located approximately in the middle of the value chain, we first look downstream to where the demand is coming from.

Demand for electricity ultimately comes from the consumers, industry and individuals, but the demand for renewable energy mostly originates with the utilities that are forced by regulatory mandates to gradually decrease the percentage of their energy mix coming from fossil fuels. Utilities seldom develop their own wind farms; instead they acquire them from project developers or simply buy the electricity from Independent Power Producers (IPPs). Table 1 below lists some of the key downstream wind market participants: the project developers, Independent Power Producers and utilities.

Table 1: Project Developers, Independent Power Producers, Utilities

Company Name Ticker Symbol Country
A-Power Energy Generation Systems APWR China
E.ON AG EONGY.PK Germany
FPL Group Inc. FPL USA
Iberdrola Renovables IBDRY.PK Spain
Nacel Energy NCEN.OB USA
Naikun Wind Energy Group NKWFF.PK Canada
Otter Tail Corporation OTTR USA
Western Wind Energy Corporation WNDEF.PK Canada
Xcel Energy XEL USA

 

The list is ranked alphabetically and includes some of the larger players in their respective fields as well as some emerging ones. Besides a couple of large U.S. utilities, many of the companies are either foreign or small (or both), but they all can be traded on the over-the-counter markets. The list also varies widely in terms of exposure to wind energy. Some, like A-Power Energy Generation, a small-cap Chinese Project Developer which has positioned itself masterfully as a wind pure-play to Wall Street investors, in fact generates the bulk of its revenue from waste heat cogeneration projects. At the other end of the scale we find companies such as E.ON, an $81 billion German energy behemoth which recently came to the attention of U.S. investors when they opened the world’s largest wind farm in West Texas. It might be a great energy company, but a wind pure-play they are not. To find pure-play wind companies you need to look to much smaller companies such as Nacel Energy, Naikun Wind Energy Group, and Western Wind Energy Corp. which, at $20 to $25 million in market capitalization, are not even ranked as micro-caps.

 

While no publicly traded utility company offers exclusive focus on wind energy, we like the U.S. utilities as they stand to profit from the long-term shift to renewables. With a market cap of about $825M, Otter Tail Corporation is a smaller utility but they have made great strides in incorporating wind in their generation portfolio. Larger utilities we prefer for their forward thinking strategies are FPL Group Inc. which already generates 10% of its electricity from wind, and Xcel Energy, as their NextEra Energy Resources subsidiary owns 25% of current U.S. wind capacity.

The last and maybe the most unrecognized but also the most promising segment of the wind energy supply chain can be found upstream from the turbine manufacturers. It turns out that wind turbine manufacturers are mostly system integrators and they outsource many of the critical components to specialized firms. Table 2 below includes a broad collection of wind components manufacturers which produce blades, bearings, transmissions, generators, towers, power electronics and other key ingredients.

Table 2: Wind Turbine Components Manufacturer

Company Name Ticker Symbol Country
ABB ABB Switzerland
American Superconductor Corp. AMSC USA
Ameron International Corp. AMN USA
Broadwind Energy, Inc. BWEN USA
Hexcel Corp. HXL USA
Trinity Industries Inc. TRN USA
Timken Co. TKR USA
SKF SKFRY.PK Sweden
Toho Tenax TINLY.PK Japan
Toray Industries TRYIY.PK Japan
Xantrex SBGSY.PK France
Zoltek Companies Inc. ZOLT USA

The list is a sampling of publicly traded companies and is by no-means exhaustive. Few of them are wind pure-plays, but this gives them some solid diversification and financial strength. While new wind turbine makers appear by the dozen, the components used in their assembly require very high levels of expertise and specialization. Many of these specialties have significant barriers to entry and the incumbent suppliers are not easily displaced. They promise to grow as fast as the wind energy market grows and their margins tend to be easier to maintain and several have the fundamentals to provide great investment potential.

 

Not all wind turbine components present good opportunities for investment. Towers, for example, are mostly outsourced to an ever growing list of local suppliers. With no real barrier of entry and transportation a permanent confining factor, the market for towers will continue to be very fragmented and local. Ameron International Corp. and Trinity Industries Inc. are two such companies which produce wind towers as one of many other businesses such as rail cars, barges, gas tanks, pipelines, etc. Almost at the other extreme in terms of industry concentration and geographic reach are gears and bearings which are in every wind turbine. There are a few very large global manufacturers like Germany’s SKF and Timken Co. who split the market amongst them, but in our opinion present little attraction as investments because they offer relatively low exposure to the wind market and modest profitability prospects. Much of the same statements apply to generator manufacturers which include large multinationals like ABB and General Electric (GE).

A different breed of wind player is represented by Broadwind Energy, Inc. which is providing a broad array of components and services for the wind industry. They build everything from towers to bearings and gears, and provide heavy haul transportation for the massive parts as well as complete wind farm maintenance and operation services.

With the industry pushing to ever larger, stronger and lighter turbines, carbon fiber blades have emerged as a substitute to fiber glass and other composites. Our list of manufacturers includes Japanese firms Toray Industries and Toho Tenax, a wholly-owned subsidiary of Teijin and the dominant US-based blades companies: Hexcel Corp. and Zoltek Companies, Inc.

On the power electronics front we have a large number of vendors providing anything from inverters, to wind turbine current-leveling and backup power for blade pitch control systems. ABB once more heads the list of the large players competing with specialist companies such as American Superconductor Corp. and Xantrex, which has now been acquired by French giant Schneider Electric.

The wind energy value chain features many more companies than we could list here, and not all we listed necessarily make great investments. There are several dozen companies to investigate among which many outstanding gems can be found by the informed investor.

Disclosure: No positions.

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Wind Energy: Now Is the Time to Invest

On October 21, 2009, in Alternative Energy Stocks, Green ETFs, Green Stocks, Wind, by Andreas Schreyer
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Investoblog author Garrett Beauvais contributed to this article.

Just this month the largest wind farm in the world went into production in West Texas, featuring 627 turbines producing over 780 megawatts at full capacity, enough to power 230,000 homes. The Roscoe Wind Complex cost over $1 billion to develop and is owned by E.ON Climate & Renewables North America Inc., a subsidiary of the German energy company E.ON AG (EONGY.PK). This news highlights two critical issues for would-be wind energy investors:

  • There is precious little amount of coverage and information for the wind sector from the media in general and the financial press in particular. Compared to the solar market, which is broadly followed and reported on, wind gets short shrift. To make matters worse, what little news there has been lately was rather negative
  • The vast majority of wind energy pure plays or significant industry players are foreign companies whose stocks are listed on foreign stock exchanges

Yes, in the first approximation most people equate wind energy with wind turbines, and here in the United States the name that comes immediately to mind for wind turbines is General Electric Co. (GE). The reason we will not consider GE for our green investments is twofold: 1) while large in the U.S., GE is a relatively small player in world wind turbine markets, and 2) wind turbines are only a tiny part of GE. Looking at the wind energy supply chain we find many companies ranging from materials to components, turbines, wind farm project developers to independent power producers and utilities which allow the investor to fully participate, but this will be the topic for a follow-up article.

Just as we did with geothermal energy (Geothermal Is Getting Red Hot, Part I and Part II) and for solar photovoltaic energy (Picking Solar Energy Winners), we feel that before thinking of which wind energy companies to invest in we need to set the stage with a short overview of the technology and market opportunity. Maybe most important is to identify the sector trend and go over the reasons why we believe wind energy will experience strong growth over the next few years, but also why we believe that now is a perfect time to invest.

Classes of wind power
Wind energy can generally be divided into 3 categories: land and offshore wind turbine farms which utilize towers that range in height from some 90 to 350 feet, personal and light commercial rooftop and guy-wired wind turbines meant to provide supplementary power to a single structure or usage point, and mobile inflatable and high altitude turbines that are tethered to the ground. At this point, from a personal investment perspective, land and offshore wind power is very attractive while other modes of wind power generation are either too limited in their potential investment options or too speculative at this time (high altitude wind power, while having high theoretical potential, has not yet turned into a revenue generating endeavor).

Global capacity and growth
Wind power in recent years has become incredibly attractive and total global wind farm capacity has increased rapidly over the past 5 years, growing at over 27% annually according to BTM Consult, an independent renewable energy consulting and market research firm based in Denmark. BTM forecasts that global wind farm capacity will continue to grow at over 15% annually from 2009 to 2013 from 122,000 MW (Megawatts) to over 343,000 MW.

In the U.S., total wind power capacity grew by a staggering 50% in 2008 as over 8,300 MW of capacity was added according to the American Wind Energy Association (AWEA). And while the total capacity in China is slightly less than half that of the U.S. at 12,000 MW, Chinese domestic wind power capacity grew 100% from 2007 to 2008 and continues to increase at the highest rate of any major country. We would be remiss if we did not point out that Denmark is already producing 20% of their stationary electricity power with wind turbines, followed by Spain and Portugal at 11% while the U.S. is at 1.5%.

Offshore wind power, which is viewed by many as one of the most promising sources of renewable energy, is vastly underdeveloped with less than 2,000 MW of installed global capacity, none of which is in the U.S. Clearly, there exists an enormous growth opportunity in the U.S. and in China, two of the largest global energy consumers where wind power generation has relatively low penetration. Also, unlike many other industries, leadership in wind energy production resides in countries that are not traditionally the first that come to mind when individual investors consider energy investments.

Cost
The cost of electricity from utility-scale wind systems has dropped by more than 80% over the last 20 years according to the AWEA. The so-called levelized cost which includes all the costs of producing the energy over the plant lifetime (initial investment, operations and maintenance, cost of fuel, cost of capital and tax credits) is estimated in the range of $44 – $91 ($/MWh) for wind, comparing favorably with conventional generation technologies like coal and gas. Another big plus for wind is that the initial capital costs are the lowest of any alternative energy technologies.

Environmental and visual impact
Wind power is now positioned as one of the least harmful current and future energy sources globally. The total carbon footprint of wind energy production is accounted for in the manufacturing and installation of wind turbines and the energy required to manufacture and install wind farms is paid back in the form of electricity generation in less than 6 months of operation. Ongoing energy production results in zero greenhouse gas emissions and requires no fuel or water.

There are legitimate concerns about the impact on bird and bat populations and the impact, though thought to be small, has yet to be quantified. Any impact on wildlife needs to be weighed against the potential negative impacts of other power generation sources and, by this standard, wind is almost always viewed as more attractive.

The aesthetic qualities of wind farms are provoking a lot of discussion in the U.S., specifically the proposed offshore coastal wind farms in Massachusetts and Florida where wind farms would be in view of high value residential and vacation real estate. How this issue impacts the installation of future U.S. wind farms is unclear. In Europe, wind farms, even those in view of densely populated coastal areas, are overwhelmingly viewed as modern, progressive and environmentally friendly.

Financing
Acquiring financing was a major challenge early in the life of the wind power industry. However, in recent years the combined effects of (1) a rapid decrease in equipment costs in terms of $/MWh, (2) escalating costs for construction and operation of coal, natural gas, and nuclear power plants, and (3) increases in government subsidies have made wind farms an attractive investment for traditional utility companies and upstarts alike. Looking forward, and even in light of the global recession and the near collapse of the financial markets, we do not expect the current tight financing environment to linger on into 2010 and expect lending rates and payback hurdles to come in line with those of other utility operated power plants that utilize coal, natural gas, or nuclear fuel.

Why invest in wind now?
The wind energy sector has been hurt badly by the recession and wind investments have not come back from the lows as strongly as other sectors like solar, but they had not plunged as severely either. Still, many wind energy stocks have been flat or down for the last few months while the rest of the market advanced. The reasons for the relative underperformance are multiple, but a slew of negative news is mostly to blame.

The slowdown in government funding for new wind projects in the previously largest market in the world (Germany) allowed the U.S. to leapfrog and boast the largest wind generation capacity in 2008 (25,000 MW). This positive development has been overshadowed by forecasters estimating the amount of new wind power to be installed this year in the U.S. will be down some 30% from last year and China is now poised to overtake the U.S. for the #1 spot. The shortage of transmission capacity has also hurt the wind industry and was directly blamed for the much publicized cancellation of T. Boone Pickens’ Mesa Energy project to build the largest wind farm in the world.

We believe that the negative news has been largely overblown and that valuations in the wind sector have been beaten down about as far as they are going to go. It will not be long before the analyst community realizes why wind energy is still one of the most untapped and cost effective forms of renewable energy. We also expect the offshore segment to open up in a big way for new projects in the U.S. and anticipate positive news on that front in the near future.

Disclosure: No positions.

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