Investors seeking long-term low-risk investments need to look to the wind

With another post this week looking at how the sustainable energy market is doing exceptionally well, Emma Howard writes in The Guardian about one of the important sustainable energy industries, wind. She shows that, for investors who seek long-term low-risk investments, the 20 year lifespan of an onshore wind farm is an attractive prospect.


Is the wind industry still a safe bet for investors?

Four years ago, Danish wind turbine manufacturer Vestas was on the brink of bankruptcy. The company famous for sending in the bailiffs to evict employees occupying their Isle of Wight site, axed more than 3,700 jobs. Relations were in turmoil as the chair, deputy chair, chief financial officer and deputy chief executive left in quick succession. The CEO himself followed one year later as net losses escalated sevenfold to £53m.

Fast forward to 2016 and the world’s biggest turbine manufacturer is reporting historic successes, including a record €685m (£530m) net profit last year and a 22% increase on revenue to €8.4bn (£6.5bn). It also recently announced it had been awarded a contract to supply turbines for Europe’s largest ever onshore wind project in Norway.

Vestas’ head of external communications Michael Zarin puts the turnaround down to its pursuit of a strategy to drive down the cost of energy while driving up revenue from servicing turbines, rather than production and development alone. In December, the company acquired US wind provider UpWind Solutions, followed two months later by the German firm Availon. They now predict 40% growth in their services provisions.

Vestas is not the only one finding success. The global wind industry is booming. A record 62GW of wind power capacity was installed in 2015, up by a quarter on the previous year. The industry has been growing steadily year-on-year, as competition has increased and the cost of producing (pdf) turbines has dropped since its 2009 peak with materials becoming cheaper in the wake of the recession.

Peak wind

So has Europe reached peak wind? Almost, according to David Hostert, European wind analyst at Bloomberg New Energy Finance. He predicts that annual growth in Europe will drop to 8-9GW, compared to 11GW last year and plateau in about 18 months.

“That has to do with subsidy schemes winding down, more competitive allocation mechanisms like auctions, and the availability of good sites,” he says.

As the locations attractive to wind developers fill up in densely populated European countries, offshore wind is expanding. Last year, Europe’s seas saw more than 3,000MW of power connected to the grid – mostly in Germany – more than double the figure for 2014. Although the oceans come with higher risks and costs, they also bring the promise of higher wind speeds and fewer objections from local communities. As technology improves and costs drop, turbines are being constructed deeper and further out to sea, with construction about to begin in Scotland on the world’s largest, floating wind turbine farm.

“The [offshore] industry is probably at a tipping point … it has matured a lot in the past two to three years and we are starting to see the cost declines necessary to ensure the long-term viability of the sector … but it is still very much a European world,” says Hostert.

But onshore investors are increasingly looking outside Europe. Of the 62GW – equivalent to almost half of Europe’s total wind capacity – installed in 2015, almost 50% was in China. The US market should also be consistently reliable for the foreseeable future, safe in the knowledge that it has the backing of a five-year federal tax credit scheme, which was extended for a further five years in December.

“In terms of technology risk, it is probably as safe to invest in a wind farm in the US as it is to invest in a road,” says Hostert.

Future growth

Zarin puts Vestas’ turnaround partly down to their vast global reach – last year they installed projects in 34 countries across five continents. “Part of our strategy is growing profitably in both mature and emerging wind energy markets,” he says.

Other companies are following suit, with China, Brazil, Mexico and India leading the way among emerging economies and other growth markets in Latin America, the Middle East and sub-Saharan Africa.

Meanwhile the widely lauded success of the global deal on climate change agreed at Paris in December is likely to bolster the confidence of investors, although Dolf Gielen, director of the International Renewable Energy Agency (IRENA)’s Innovation and Technology Centre says the industry’s potential is far greater.

“The wind industry sees this as an opportunity, but the question is how is this political agreement translated into real action? […] There is some renewable energy listed there, but in our view it’s only a fraction of what could really be done with renewables,” he said.

The potential for wind power generation is vast – according to one estimate by the World Energy Council (WEC) (pdf), covering 1% of the planet’s land mass with wind turbines would create the energy equivalent to all the plants generating electricity in the world today.

For investors who seek long-term, low-risk investments, the 20 year lifespan of an onshore wind farm is an attractive prospect. Meanwhile pension funds have now also started to invest in offshore farms for the first time, For Hostert, this is a sign that the offshore industry is entering a new phase.

He adds: “Wind will continue to grow – not at the same fast pace, but at a high rate. The underlying picture will shift – Europe will become less important, the rest of the world will become more important. Unlike where we were five, seven or even three to four years ago – it’s a mature industry and it’s here to stay.”

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