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Published on November 1st, 2013 | by Guest Contributor

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Offshore Wind Has Tremendous Investment Potential

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November 1st, 2013 by
 

Originally published on Roen Financial Report.
By Harris Roen.

A significant alternative energy investment theme with potential for growth over the next few years is offshore wind. This article looks at the promise of marine based wind, potential pitfalls, and names three investments that could benefit from large-scale offshore wind development that is likely coming.

The Potential of Offshore Wind

wind_speed_map_lg

In 2011, the U.S. Department of Energy and the U.S. Department of Interior jointly published a national offshore wind strategy. According to the report, in areas with less than 100 feet of water the generating potential of offshore wind equals the entire generating capacity of the current U.S. electric system. If you include all of the potential offshore wind capacity, marine-based windmills could generate four times the current U.S. electrical demand!

A big plus is that some of the best offshore wind sites are near major population centers of New England, the mid-Atlantic, Gulf of Mexico and mid-Pacific coasts. The strategy estimates a deployable offshore resource that could generate 10 gigawatts of electricity in less than 10 years, at a cost of $0.10/kWh. This projection increases five-fold by 2020, to 54 gigawatts generated at $0.07/kWh. This would make offshore wind very competitive with both fossil fuel and renewable based generators.

wind_lease

So far, there have been two successful auctions of offshore wind leases in the U.S.—in Virginia and Rhode Island. Together, these auctions have generated $5.4 million by the Bureau of Ocean Energy Management (BOEM), leasing out 277,369 acres that could generate gigawatts of clean power. The fact that these two auctions generated positive action is a very good sign. Accordingly, BOEM plans to auction off leases in New Jersey, Maryland and Massachusetts in 2014.

Offshore Wind Challenges

Pun intended, but there are some significant headwinds to successfully executing offshore wind in the U.S. and abroad. The farther off the coast you go, the stronger the wind speeds. However, this means deeper depths, which increases technical challenges. Even at a large scale, offshore wind costs more to build and maintain than its land-based counterpart.

Another limiting factor pointed out by PennEnergy Research is the shortage of suitable operation and maintenance vessels. In order to tug large payloads, secure offshore towers, lay cables and the like, you need costly specialty ships. The competition for these ships is especially acute because of the increase in new offshore oil and gas fields. Oil and gas can offer better prices to gain access to this limited specialized fleet.

Another concern is that federal tax credits favorable to wind are set to expire at the end of 2013. Though there is a real risk that these credits will dry up, I believe there is a good chance the tax credits will be extended. Developing domestic sources of clean energy is a white-hat issue for both parties. Even during the fierce budget battles at the tail end of the Great Recession of 2012, congress had the votes to extend the credit.

Offshore Wind Investment Strategies

Two companies and an Exchange Traded Funds (ETF) are worth a look at as investments in offshore wind. Keep an eye on price, though, given the current frothy condition of the market.

ABB Ltd. (ABB) is a Swiss company whose products and services include power transmission, distribution and power-plant automation. Its systems are key in addressing the challenges of constructing, transporting and connecting large, distant offshore wind platforms. As a result, ABB recently secured a large offshore wind order. ABB has solid earnings and growing annual sales, but looks overvalued at current trading levels in the mid 20s. This stock looks more like a buy in the mid to high teens.

Parker-Hannifin (PH) is a large, diversified industrial manufacturing company that has a wide array of products. Of interest here is that Parker-Hannifin is a key supplier of underwater high-voltage power cables. We believe it is well positioned to take advantage of the growth of offshore wind with its subsea power cables. This well run, profitable company has excellent cash flow, but seems overpriced at current trading levels. The stock would look more interesting if it traded back down in the low to mid 80s.

Since there are very few publicly traded pure-play wind companies in the U.S., a good way to add wind to a portfolio is by investing in an alternative energy ETF. A good wind-oriented ETF is First Trust ISE Global Wind Energy Index Fund (FAN). Compared to other alternative energy ETFs, this fund has a relative low expense ratio and management fee structure. On the other hand, FAN has a high potential capital gains exposure. Though this fund has been beat up in the past, it has posted an astounding 74% return in the past 12 months.

Summary

Even though the price of solar photovoltaics continues to drop dramatically, wind power is still one of the most economical forms of clean energy. Though offshore wind is much more expensive to develop than its onshore cousin, the potential for large amount of steady generation cannot be ignored. The long-term clean energy investor would be wise to have a strategic position in this sector.

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  • Simon Mahan

    Please stop using the old map for offshore wind – it causes folks to think there’s no offshore wind potential in Florida. Here’s a better map: http://www1.eere.energy.gov/wind/images/wind_speed_map_lg.jpg

    • Bob_Wallace

      Much better. Thanks.

      (I took down your incomplete post.)

    • Bob_Wallace

      Happy now?

  • Simon Mahan

    Please stop

  • Doug

    Higher resolution figures would be nice. Also, the narrative associated with the 1st chart seems to imply the figure only includes offshore areas with water depths less than 100 ft, but for most of California and Hawaii the ocean isn’t that shallow.

    • Bob_Wallace

      Try this one. Click to greater it.

      It show locations, but under reports wind. It’s a 50 meter altitude map and resources are much better at 80 meter.

      The stuff offshore Florida is as good as the onshore Midwestern wind we’re now using.

      Deep water calls for floating turbine. Japan now has two in the water and we’ve got a prototype in the water in Maine. Still at the stage of figuring out the best platform design. A West Coast test site is opening at Coos Bay, OR.

  • Wayne Williamson

    I think that it is very interesting that Florida has no ranking….Is that because of state policies?

    • Doug

      Yea. Its like the wind doesn’t blow there?

    • Kara

      Was Florida precluded due to it being a hurricane zone?

      • Bob_Wallace

        There was an earlier wind map in the article which was very incomplete. It showed no harvestable wind off the Florida coast.

        It’s been replaced with a more recent map which shows that there’s a good wind resource off Florida’s beaches. (See comments below.)

        Hurricanes are an issue, they are an issue with all wind farms off the Atlantic and Gulf coasts. The cost of insurance will be higher. We’ll have to wait to see how that adds to the cost of electricity.

        The US doesn’t get hit by many hurricanes that are Category 3 or higher. Currently wind turbines are designed to withstand Category 2 hurricanes. By spreading turbines along thousands of miles of coastal area it will be the case that only a small percentage would get damaged in a major storm which would spread the cost of insurance.

        • Bob_Wallace

          Speaking of hurricanes. I stumbled across a list of Atlantic named storms, hurricanes and major hurricanes per year and graphed it out.

          Looks like there’s more storms a-brewin’.

          It’s also interesting that hurricanes seem to be tracking more easterly, more often missing the US coast.

          If this keeps up we should hear some statements from climate scientists in a few years. Not many data points yet.

  • JamesWimberley

    Let me quote Wikipedia (en.wikipedia.org/wiki/List_of_offshore_wind_farms_in_the_United_States):
    “As of 2013, there are no offshore wind farms in the United States.”
    There aren’t any under construction either.
    Given the long lead times and large scale of offshore wind projects, policy uncertainty is crippling the sector.

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