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.
So far, Clean Line Energy has drawn investor support from the Zilkha family of Houston as well as ZBI Ventures, a unit of Ziff Brothers Investments, which is the principal vehicle of the New York-based Ziff family. Terms of the financing have not been disclosed.
Domestic demand. Because 29 states have renewable portfolio standards, demand for wind has a floor. Plus, states are ramping up renewable energy programs. For instance, California has required that one-third of its energy must come from renewable sources by 2020.
Emerging markets. More than two decades after the first wind farm at sea was installed in Denmark, Europe continues to lead the push toward greater wind development (the U.K. announced a major electricity market overhaul to include more wind in May.) It does face challenges in extending capacity in the current economic climate.
But the bigger story may be elsewhere. According to a report by the International Energy Agency, Brazil alone will add 32 gigawatts of renewable energy to its power grid within the next five years. The move will put the South American economic generator in a fourth-place tie with Germany in renewable energy investment, exceeded only by China (270 gigawatts), the United States (56 gigawatts), and India (39 gigawatts).