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.
Competition. The boom in cheap natural gas can be good news for the environment because it's cleaner than coal. Of course, the extraction practice known as fracking remains an environmental controversy onto its own. But natural gas is a reminder of the uphill climb for renewables such as wind.
Volatility. Investors know it's not the easiest market to stomach. ETF PWND has, over the past three years, posted a standard deviation of roughly 31 percent, according to Morningstar data. To put that in context, the standard deviation of the S&P 500 over the same expanse was about 16 percent.
The Bullish Case
Standing on its own. Generators are trying to position for a subsidy-free existence someday. For example, NextEra Energy (NEE) is an electricity provider whose regulated segment, Florida Power & Light, distributes power to 4.5 million customers in Florida. Consolidated generation capacity totals nearly 41.3 gigawatts and includes natural gas and significant wind and nuclear assets, making it a U.S. leader. The firm's merchant segment generates and sells power throughout the United States and more than 50 percent of this segment's generation capacity is wind. Its executive chairman Lew Hay, who spoke this summer in Washington, desires this future: The U.S. production tax credit for wind should be extended and phased out over five to 10 years.
Heavyweights like GE may be able to withstand the market volatility tied to a lost tax incentive. GE said orders for wind turbines more than doubled in the first quarter of 2012 from a year earlier, although partly because wind-farm developers are scrambling to beat the December tax deadline.
MLPs: Just like gas. The looming deadline has some on Capitol Hill thinking in a different direction. One bipartisan proposal would expand the beneficial tax attributes of master limited partnerships (MLPs) to renewable energy investments. While an MLP resembles a traditional stock in part, the company behind it is handed tax benefits it must pass on to investors, usually through dividends. Current law only allows this special tax treatment for MLPs that invest in oil, natural gas, coal extraction, and pipeline projects.
Private investment as proxy? Private money is still flowing, which could bode well for public follow-through. For instance, Houston-based Clean Line Energy Partners is thinking big, and taking on a big regulatory fight, it details in a press release. The energy infrastructure developer plans to gather permits and rights-of-way for new multi-billion-dollar transmission lines to carry electricity from U.S. wind-power resources in the middle of the Lower 48 to the population centers on the coasts. One way Clean Line's proposal differs from other transmission methods is in its use of direct current transmission, believed to be cost-effective over alternating current. This is a technology embraced in China and expanding its grid.