Time was when you talked about energy, you were talking about oil. Renewable energy was just a fun conversation at a cocktail party. Big name investors are now making that conversation a reality.
In 2011, Warren Buffett bought a 49% stake in a company investing $5.4 billion into wind energy development. T. Boone Pickens recently revived his Texas wind farm dream with a new project involving his Mesa Power Group LLC. Texas is already the largest land-based wind energy developer in the country.
But the real investment potential is in offshore wind energy production. That’s a European story that’s spreading rapidly to the US.
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Since wind speeds increase significantly away from land, offshore turbines will produce more electricity than land-based sites. The National Renewable Energy Laboratory predicts that offshore wind energy production could quadruple the current electricity capacity in the US.
President Obama paved the way in February of this year by designating four East Coast areas as possible development sites for wind turbine farms. The deal includes expedited regulatory review.
One of those areas includes Northampton County, VA where Poseidon Atlantic is building the first offshore wind turbine generator testing and certification center in the US. The turbines have to be tested to make sure they will survive the battering of harsh ocean waters.
Dominion Virginia Power, the commonwealth’s largest utility, is looking to build 400 turbines about 24 miles off shore from Virginia Beach.
The turbines used to transform wind into electricity are still in the design stage. Major companies who already build land-based turbines are now developing offshore versions.
So what’s the downside?
- The turbines will reside on the Atlantic Ocean’s continental shelf. Ways to secure them are still being figured out.
- Transmission lines to carry the energy throughout power grids are an essential and as yet little developed necessity.
- Ships large enough to transport groups of turbines have yet to be built. Existing harbors will need to be redesigned to dock those ships.
- A wind tax credit is slated to expire at the end of 2012. Congress is contemplating an extension followed by a gradual phase-out plan. The American Wind Energy Association says the credit is vital to wind industry development.
- Lack of coordination between Federal and state agencies governing development is another challenging issue.
Wind energy capacity in the US grew 31% in 2011 and accounted for 35% of all new electricity generation capacity. Total capacity is currently 46.9 gigawatts, six of which were created last year, mostly in the fourth quarter.
So how do you play this sector as an investment for your clients?
First, the US is the global leader in installed land-based wind power generation. The Virginia testing center will be its first foray into offshore development. US production is still six to eight years away.
Europe currently leads the world in offshore development as a result of Denmark’s first project in 1991. Europe’s offshore wind industry is just entering its commercial phase.
The biggest fly in the ointment there is Europe’s sovereign debt crisis which has slowed development slightly. Analysts say current industry challenges offer good entry points for investment.
Here are four areas that may provide interesting investment options:
- Turbine manufacturers
- Grid developers (transmission lines)
- Ships built to carry turbines and foundations
- Dredging companies to update harbors for the large ships
For clients looking to diversify their energy portfolios with long-term plays, offshore wind power generation might be a good choice for their higher risk allocation.