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Clean Energy Investment Opportunity: Offshore Wind

A significant alternative energy investment theme with potential for growth over the next few years is offshore wind. This article looks at the promise of marine based wind, potential pitfalls, and names three investments that could benefit from large-scale offshore wind development that is likely coming.

The Potential of Offshore Wind

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In 2011, the U.S. Department of Energy and the U.S. Department of Interior jointly published anational offshore wind strategy. According to the report, in areas with less than 100 feet of water the generating potential of offshore wind equals the entire generating capacity of the current U.S. electric system. If you include all of the potential offshore wind capacity, marine-based windmills could generate four times the current U.S. electrical demand!

A big plus is that some of the best offshore wind sites are near major population centers of New England, the mid-Atlantic, Gulf of Mexico and mid-Pacific coasts. The strategy estimates a deployable offshore resource that could generate 10 gigawatts of electricity in less than 10 years, at a cost of $0.10/kWh. This projection increases five-fold by 2020, to 54 gigawatts generated at $0.07/kWh. This would make offshore wind very competitive with both fossil fuel and renewable based generators.

wind_leaseSo far, there have been two successful auctions of offshore wind leases in the U.S. — in Virginia and Rhode Island. Together, these auctions have generated $5.4 million by the Bureau of Ocean Energy Management (BOEM), leasing out 277,369 acres that could generate gigawatts of clean power. The fact that these two auctions generated positive action is a very good sign. Accordingly, BOEM plans to auction off leases in New Jersey, Maryland and Massachusetts in 2014.

Offshore Wind Challenges

Pun intended, but there are some significant headwinds to successfully executing offshore wind in the U.S. and abroad. The farther off the coast you go, the stronger the wind speeds. However, this means deeper depths, which increases technical challenges. Even at a large scale, offshore wind costs more to build and maintain than its land-based counterpart.

Another limiting factor pointed out by PennEnergy Research is the shortage of suitable operation and maintenance vessels. In order to tug large payloads, secure offshore towers, lay cables and the like, you need costly specialty ships. The competition for these ships is especially acute because of the increase in new offshore oil and gas fields. Oil and gas can offer better prices to gain access to this limited specialized fleet.

Another concern is that federal tax credits favorable to wind are set to expire at the end of 2013. Though there is a real risk that these credits will dry up, I believe there is a good chance the tax credits will be extended. Developing domestic sources of clean energy is a white-hat issue for both parties. Even during the fierce budget battles at the tail end of the Great Recession of 2012, congress had the votes to extend the credit.

Offshore Wind Investment Strategies

Two companies and an Exchange Traded Funds (ETF) are worth a look at as investments in offshore wind. Keep an eye on price, though, given the current frothy condition of the market.

ABB Ltd. (ABB) is a Swiss company whose products and services include power transmission, distribution and power-plant automation. Its systems are key in addressing the challenges of constructing, transporting and connecting large, distant offshore wind platforms. As a result, ABB recently secured a large offshore wind order. ABB has solid earnings and growing annual sales, but looks overvalued at current trading levels in the mid 20s. This stock looks more like a buy in the mid to high teens.

Parker-Hannifin (PH) is a large, diversified industrial manufacturing company that has a wide array of products. Of interest here is that Parker-Hannifin is a key supplier of underwater high-voltage power cables. We believe it is well positioned to take advantage of the growth of offshore wind with its subsea power cables. This well run, profitable company has excellent cash flow, but seems overpriced at current trading levels. The stock would look more interesting if it traded back down in the low to mid 80s.

Since there are very few publically traded pure-play wind companies in the U.S., a good way to add wind to a portfolio is by investing in an alternative energy ETF. A good wind-oriented ETF is First Trust ISE Global Wind Energy Index Fund (FAN). Compared to other alternative energy ETFs, this fund has a relative low expense ratio and management fee structure. On the other hand, FAN has a high potential capital gains exposure. Though this fund has been beat up in the past, it has posted an astounding 74 percent return in the past 12 months. 

Summary

Even though the price of solar photovoltaics continues to drop dramatically, wind power is still one of the most economical forms of clean energy. Though offshore wind is much more expensive to develop than its onshore cousin, the potential for large amount of steady generation cannot be ignored. The long-term clean energy investor would be wise to have a strategic position in this sector.

Individuals involved with the Roen Financial Report and Swiftwood Press LLC do not own or control shares of any companies mentioned in this article. It is also possible that individuals may own or control shares of one or more of the underlying securities contained in the Mutual Funds or Exchange Traded Funds mentioned in this article. Any advice and/or recommendations made in this article are of a general nature and are not to be considered specific investment advice. Individuals should seek advice from their investment professional before making any important financial decisions. See Terms of Use for more information.

This article was originally published on the Roen Financial Report and was republished with permission.

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