The World's #1 Renewable Energy Network for News, Information, and Companies.
Untitled Document

Investing In Offshore Wind Power

Last week, the long-embattled Cape Wind project got a break: Utility NStar(NST) agreed to buy 27.5 percent of the proposed offshore wind project's output. Together with a previous power purchase agreement with National Grid (NGG), this gives Cape Wind a buyer for 77.5 percent of the project's total projected output. Jim Gordon, Cape Wind's President speaking at Offshore Wind Power USA in Boston, called the NStar deal the "starting gun" for Cape Wind's financing round.

Yet speakers and attendees at Offshore Wind Power USA agreed that the Cape Wind story remains a cautionary tale for potential offshore wind developers, rather than a signal the the U.S. offshore market is open for business.  While the Bureau of Ocean Energy Management has made progress in defining the leasing process, this process is still expected to take six to eight years to complete.  There remains a notable lack of coordination between and among the score federal and state agencies which have a say in the process.

Perhaps more importantly, the Production Tax Credit (PTC) and Investment Tax Credit (ITC) were not extended as part of the payroll tax cut extension.  The American Wind Energy Association is continuing to pursue the PTC extension through other legislation, but many observers at the Offshore Wind conference opined that these incentives will not see any action until Congress' lame duck session, after November election.  Few offshore wind developers are willing to invest to move their projects forward until they have some certainty about the PTC and ITC, so most offshore wind projects in the United States are likely to remain on hold at least until the end of the year.

Europe

Offshore wind in the U.S. is far from the whole story.  The European Offshore Wind industry is entering its full commercial stage, with projects amounting to several gigawatts of capacity expected to be built over the next few years, making the global industry worthy of investors' attention. 

European offshore wind is not without hiccups.  The European financial crisis has slowed (but not stopped) financing for wind farms, despite the fact that some farms require investments in the billion Euro range.  Another recent problem, which will be familiar to onshore wind developers, is grid interconnection.  Although Germany has a legal requirement that transmission operators connect new wind farms to the grid, this is an unfunded mandate, and the transmission companies do not have the funding or even enough of the right sort of cable to meet this obligation in a timely fashion.  Grid connections for two large wind farms were recently delayed by 12 and 15 months because of such problems, costing the developers hundreds of millions of euros in electricity sales.

Offshore Wind as an Investment

Such hiccups happen in new industries, and they can lead to buying opportunities for investors.  Often the best time to buy stock is after most people realize everything is not smooth sailing, but before all the problems are resolved.  This allows excess returns, as stocks which were initially priced as highly risky investments gain value as the industry learns to tackle such challenges.

As the only renewable energy resource able to produce power on the scale of hundreds of gigawatts close to the world's most energy-hungry and population dense cities in Europe and America's Eastern seaboard, offshore wind will play a prominent role in the transition away from fossil fuels.  The only question in my mind is when this transition will occur.  My feeling is that this maturation of the offshore wind market (at least in Europe) will come within the next few years, leading to substantial rewards for investors with good timing. 

Offshore Wind Stocks

Most onshore wind turbine manufacturers either already have turbines designed for offshore use, or are developing them.  The current market leaders are Siemens (SI) and Vestas (VWDRY.PK), but Vestas is rapidly losing ground to a host of new entrants, including Chinese players like Sinovel (601558.SS) who are largely responsible for the fierce price competition which led to the poor performance of wind power stocks in 2011.  

Given the inauspicious competitive environment among turbine manufacturers, I think better investments are to be found in other parts of the wind farm.  According to Walt Musial, the manager of offshore wind and ocean power systems at the National Renewable Energy Laboratory, the turbines only account for 32 percent of the cost of a wind farm, on average.  Fully 52 percent of the cost lies in other farm components, such as support structures, the undersea cables that collect power from the turbines and send it to shore, and the various power converters needed.

In short, many of the best offshore wind investments are the companies I call Strong Grid Stocks: the companies which help grid operators move electricity in bulk.  I'd include among these cable manufacturers such as Prysmian (PRYMF.PK) and General Cable (BGC) (recall the German wind farms with grid connections delayed in part because of lack of cable, a sign of scarcity which leads to pricing power.)  I'd also include the companies such as Siemens (SI), ABB Group (ABB), and Alstom (AOMFF.PK) who supply many aspects of the power conversion and interconnection hardware needed to tie wind farms to the grid.  One of the reasons Siemens is expected to maintain its position as the world's leading offshore turbine supplier for the next few years is the company's ability to supply many of the parts and services offshore wind farms require in addition to the turbines.  Alstom also seems to be following this strategy by introducing a broad range of new products (including a new 6MW direct drive turbine) for offshore wind.

Besides equipment manufacturers, offshore wind is likely to be a boon to shipbuilders with the capability of constructing the specialized ships needed to install large wind turbines and foundations, which are in short supply.  Harbors near promising wind farms will also have to be improved to accommodate the large ships needed to install them, which is likely to help dredging companies such as Great Lakes Dredge and Dock (GLDD).

Conclusion

Offshore wind is destined to be a significant part of the energy seascape in the coming decades, and the industry is just getting its sea legs at the beginning of what will prove to be a long voyage.  As of yet, I feel it it too early for most stock market investors to embark on this particular cruise, except perhaps on the sturdy platform of a large company with businesses in many other sectors, but which stands to benefit from the future growth of what promises to be a large and prominent renewable energy sector.

DISCLOSURE: Long GLDD.

DISCLAIMER: The information and trades provided here are for informational purposes only and are not a solicitation to buy or sell any of these securities. Investing involves substantial risk and you should evaluate your own risk levels before you make any investment. Past results are not an indication of future performance. Please take the time to read the full disclaimer here.

Untitled Document

RELATED ARTICLES

U.S. Offshore Wind Power Industry Starting to Emerge

Ehren Goossens, Bloomberg A few miles off the coast of Block Island, a new U.S. industry is emerging from the Atlantic Ocean. That’s where Deepwater Wind LLC is installing a massive steel frame, more than 1,500 tons, that sits on the seabed and juts...

100-MW Kenyan Wind Farm Will Help Power Africa

Renewable Energy World Editors As part of President Obama’s Power Africa initiative, the Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution, announced that it committed $233 million in debt financing to ...

Regional News from the July/August 2015 Digital Edition of Renewable Energy World

Renewable Energy World Editors EcoFasten Solar announced that it launched a new mounting "Rock-It System" that it would be displaying during Intersolar. Product compliance was determined through testing per UL Subject 2703, which reviews integr...

With 1.6 GW of Wind Capacity Installed in Q2, American Wind Power Continues To Ramp Up in 2015

David Ward, American Wind Energy Association With 1,661 megawatts (MW) of newly installed wind turbines coming online during the second quarter of 2015 and more than 13,600 MW under construction, American wind power continues to increase its contribution to the U.S. e...
Tom Konrad is a private money manager and freelance writer focused on Peak Oil and Climate Change as investment themes. He manages portfolios for individual clients and is Head of Research for the JPS Green Economy Fund (http://jpsgreeneconomyfund...

CURRENT MAGAZINE ISSUE

Volume 18, Issue 4
1507REW_C11

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

SOCIAL ACTIVITY

Tweet the Editors! @megcichon @jennrunyon

FEATURED PARTNERS



EVENTS

Doing Business in South Africa – in partnership with GWEC, the Glob...

Wind Energy in South Africa has been expanding dramatically, growing fro...

StartUp Green

AREI, American Renewable Energy Institute, in partnership with ...

AWEA Offshore WINDPOWER 2015 Conference & Exhibition

Building Up and Trending Forward With the construction of the Block Isla...

COMPANY BLOGS

Clean Energy Patents Maintain High Levels in First Quarter, Solar L...

U.S. patents for Clean Energy technologies from the first quarter of 201...

Koch Professor drops his Koch title, still makes same errors plus s...

The Koch Professor’s title isn’t the only thing that’s...

Fact Check: AWEA represents American wind power

The American Wind Energy Association (AWEA) is proud of its members for ...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS