Wind
Executive Summary
The image of wind turbines spinning across an amber Midwestern landscape has come to represent sustainable development throughout the United States. This pleasant visual only begins to scratch the surface of the opportunity wind presents to investors. The scope and scale of domestic wind energy is growing rapidly, and now presents a viable alternative to oil and natural gas along with robust environmental, social, and economic benefits. Investing in the expansion of wind energy creates positive impact on the global and local levels by a) reducing reliance on the fossil fuels responsible for greenhouse gas emissions and b) promoting job creation in isolated rural communities.
The first phase of growth in the wind industry relied on supportive subsidies and other incentives, but this is changing as underlying market economics now favor wind. Policies still have a material impact on the industry, but no longer play an outsized role in determining its fate. The main catalyst for growth is now wind energy’s declining production cost, which augurs well for rapid expansion and increasing market share in the coming years. Current projections suggest that wind facilities will account for 50% of U.S. electricity generation by 2050, up from 6.6% in 2018.
Opportunities for three types of wind facilities are considered in this paper:
Utility-scale onshore wind continues to dominate the other sub-sector of wind energy, as the increasing size of turbine blades and wind farms deliver the lowest production costs in the industry. Many utilities plan to further reduce costs by consolidating facilities and building increasingly centralized operations.
Community wind farms rely on a distributed generation model, typically using smaller turbines and deploying fewer units than utilities, which reduces their ability to cut production costs. Community wind farms are threatened by the expansion of utility-scale onshore wind as well as the looming expiration of Production Tax Credits (PTC), which are crucial to their financing models. Yet for many consumers, distributed wind may still offer lower rates than regional utilities.
Offshore wind has the highest growth potential of the three categories of facilities. Several states in the Northeast plan to begin deploying offshore turbines before the end of 2019. Initial electricity rates for the Vineyard Wind project are surprisingly low, an encouraging sign for costal states pursuing similar projects. This creates a sizable opportunity for manufacturers and other companies in the industry’s supply chain.
The production cost of wind energy is historically low in 2019, as improved turbine technology is supplemented by PTC. Experts predict that production cost of wind energy will not be this low for the next decade, once the subsidies expire at the end of the year. This has precipitated sizable investment in projects beginning construction in 2019, while they still qualify for PTC.
The wind industry has come a long way in addressing environmental concerns, increasing attractiveness of exposure for ESG investors. Wind farm operators have made strides to curtail negative impacts on wildlife, especially birds and bats, by altering operations when chances of a direct strike increase. Novel technologies that deter wildlife are in development, which may lift current operational restrictions.
Investors can use a multitude of strategies and instruments to gain exposure to attractive components of the wind industry supply chain and ancillary businesses. This allows for a tailored approach that considers the risk parameters and goals of the portfolio. For example:
Publicly traded equities, wind and clean-tech ETFs or YieldCos for equity exposure.
Debt and fixed-income products including green bonds and project financing opportunities.
Actively managed mutual funds and hedge funds capturing opportunities in wind and the broader clean-technology space.
Private equity and venture capital funds that allow investors to participate in the growth of emerging technologies and ownership of privately held companies or infrastructure assets.
Investing in wind energy generates a positive impact on the global level by facilitating a shift to renewables that ultimately reduces the consumption of fossil fuels and decreasing greenhouse gas emissions. In the long term, this transition has the power to slow or possibly halt the effects of climate change.
Investors can also have an immediate impact on the isolated rural communities where wind farms tend to be concentrated. These projects initially create jobs during the construction phase and later require technicians to operate and maintain facilities.
Impact investors can add to these positive effects by directing capital to leading firms driving growth on the cutting edge of the industry.