How to profit from the future of wind power

Wind power has a lot of critics.

Technological advances have reduced the subsidies needed to make wind energy economical. But the perception lingers that it is a waste of money.

And lots of people see it as a blight on the landscape. Hydraulic fracturing (‘fracking|’) may have taken over as public enemy number one, but there’s still a lot of opposition to wind farms.

The Conservatives have already said that if they win the next election, that there will be no further subsidies for land-based wind farms.

But there is a solution to these problems – and it’s one in which the UK currently leads the world.

Here’s how smart investors can take advantage…

The future of wind power

There is a solution to the Nimby-ism that blocks a lot of wind farm development. And that’s to host wind farms offshore.

Offshore farms have two main advantages over land-based projects. Firstly, there’s a lot more wind at sea.  That means offshore turbines can generate power for much longer periods. Some experts reckon they can be as much as 40% more effective than onshore turbines.

Secondly, they are far less visible. This reduces public opposition, and means you can build on a much larger scale. That helps to compensate for the high cost of installation.

As more turbines are built and installed, costs are gradually starting to come down. Not only that, but installations are becoming more sophisticated. Early projects were located at most a mile or two away from shore. But the latest projects can be much further from land. This means energy companies can fine-tune their positions, to maximise generation and keep costs down.

And right now, the UK leads the way in offshore wind. More than half of all installed offshore capacity in Europe is located in British waters.

For instance, last year the London Array was completed. This is a 630MW wind farm located 20 kilometres off the Essex and Kent coasts, between Clacton and Margate, connected to a power station in London.

The London Array is currently the largest offshore wind farm in the world. But other projects under construction will dwarf it. There are already eight projects in UK waters alone with proposed capacities over 1GW (1,000 MW) in various stage of development.

And elsewhere in Europe, wind is gaining momentum. For example, Germany’s decision to ditch nuclear power has left it with few alternatives. Wind farms already supply around 10% of Germany’s total power.

Other continental governments are following suit. Sweden is also developing its own projects in the North Sea.

Meanwhile, South Korea and Japan have both outlined plans for huge wind farms. And as we’ve pointed out before, Beijing is desperate to wean itself from its dependence on polluting fossil fuels such as coal. As a result, the Chinese government has outlined ambitious plan to start a total of nearly 50 projects in the next two years, accounting for a total of over 10GW.

How to profit from offshore wind

How can you benefit from growing demand for wind power? The largest turbine maker is German conglomerate Siemens. But turbines account for only a fraction of the group’s sales, which means it’s hardly a pure play.

Vestas Wind Systems (GERMANY: VWS) is a better option. It makes, installs, and services wind turbines around the world. While it has a strong onshore presence, it has also invested heavily in offshore production, and has installed nearly a third of the world’s total capacity.

It has also agreed a joint venture with Mitsubishi (with the latter taking at 20% stake in Vestas). This has substantially increased the money available for research and development, and should help it to win business in Asia.

The company has developed the V164-8.0 MW, the largest offshore turbine on the market – to give some context, it produces roughly enough electricity to power 7,500 homes.

The turbine is designed to keep working when the wind is low and has a special warning system to alert low flying planes. Production is due to begin in 2015, with orders already coming in.

At the moment Vestas trades at 26 times current earnings. However, thanks to strong double-digit sales growth, this should come down to 16.2 times by 2015.

For other potential plays on alternative energy – including investment trusts that offer exposure to the income generated by individual wind and solar farms – you should read our recent MoneyWeek Roundtable discussion on energy. (If you’re not already a subscriber, get your first four issues free here.)

• This article is taken from our free daily investment email, Money Morning. Sign up to Money Morning here.

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