A major wind tax subsidy is scheduled, without another renewal, to expire at year's end and natural gas, one of wind's biggest competitors, is dirt cheap. These are some tough conditions for the wind-energy sector and its investors.
But if included as a narrow slice of a diversified portfolio, renewable energy—including wind—is one way to take advantage of emerging markets' growing energy demands and a global "green" mindset that some observers insist will only strengthen in coming years.
Investors can buy the shares of major domestic wind-energy market participants like General Electric (ticker: GE) or overseas firms (also U.S.-listed) Vestas (VWS), Siemens (SI), and Gamesa (GAM). But the more diverse and perhaps lower-cost way to gain exposure is limited to two exchange-traded funds (ETFs). The first is PowerShares Global Wind Energy ETF (PWND), which is based on the NASDAQ OMX Clean Edge Global Wind Energy Index. It has an expense ratio of 0.75 percent. There's also First Trust Global Wind Energy ETF (FAN), with an expense ratio of 0.60 percent. These funds maintain roughly 75 percent overlap of companies. FAN is a little cheaper and includes nearly twice as many holdings as PWND. FAN also commits a 33 percent weighting to companies that are only loosely involved with wind development; there can be advantages and disadvantages to that mix. On the other hand, PWND is more of a pure wind-energy play.
Near-term challenges don't completely diminish the strong underlying reasons for longer-term growth in renewable energy, including wind.
"Although the recent financial crisis has made financing these capital-intensive projects problematic and falling energy prices have further compressed their earnings potential, many utilities are still going forward with their renewable-energy project plans," said Abraham Bailin, Morningstar ETF analyst, in a commentary. "PowerShares Global Wind Energy provides a direct avenue for investors seeking exposure to this growing industry."
Here, we explore five reasons to be bullish longer-term on wind power. But we'll start with five reminders of why investors will have to be patient.
The Bearish Case
Lost support. The sustainability of wind without government incentives is in question, even in higher-production states like Texas. Investment dollars in wind energy will drop by nearly two-thirds if Congress fails to extend past the end of 2012 a key tax credit that's set to expire at year's end, the American Wind Energy Association predicts. Right now, the PTC (Production Tax Credit) program, a five-year depreciation tax credit program, along with state-based RPS (Renewable Portfolio Standards) that mandate a greater percentage of electricity from clean-energy sources, provide powerful incentives for large-scale wind farm development. The PTC provides an income tax credit of 2.2 cents per kilowatt-hour for electricity produced from wind turbines. Congress first enacted the credit in 1992 and has renewed it four times. But lawmakers have also allowed it to expire three times. Another program, a federal Investment Tax Credit (ITC) known as the Treasury 1603 grant, has already expired. A mixed Congress leaves PTC extension uncertain. It has White House support. Sen. Charles Grassley (R-Iowa), one of the sponsors of a bill that would preserve the credit, has said he expects no decision until after the November election.
Overbuilding. Siemens President and CEO Peter Loescher warned in July that oversupply in the market was leading to pricing pressure in its renewables business. The company reported in mid-July that profits from its renewables division fell 48 percent in its fiscal third quarter. Both Gamesa and Vestas management have noted the downward pressure on prices from oversupply, aggravated by reduced project financing because of economic turmoil in the euro zone.
Unreliability. Although wind technology is evolving, Mother Nature isn't always an ally. While there is an abundance of wind in the jet streams, it is much easier to harness ground wind. Is that enough? Tapping into the jet stream remains, for now, an unreachable feat that may prevent wind energy from reaching its potential. Or is it simply a challenge left for evolving technology, and investment in that technology, to solve? There are a limited number of effective wind corridors in the United States that can sustain a desired output of 1MW or larger. Investors might screen wind power companies by focusing on those established in or buying up the most profitable acreage.