Wind energy is a fast-growing renewable energy technology. From an investor perspective, we believe the wind sector provides attractive investments opportunities given the expected increased penetration worldwide. Wind, along with renewables in general, today represent a low percentage of power generation, yet there is a favorable backdrop given the increased regulatory targets and corporate demand. Aside from the environmental motivation, economic reasons are driving the demand, with technology further reducing the lifetime costs to build and operate wind projects. Particular robust growth is expected from offshore wind, which is still in its infancy and expected to inflect positively starting in the middle part of this decade.
It is estimated that as of 2019, 11% of the world’s power generation came from renewables, excluding hydro. That compares with 3.8% as of 2010. While there has been great advancement over the decade in the development of renewable energy, the majority of which is wind and solar, we believe there is certainly room for optimism to expect a further increase in said ratio, with Germany at 35.6% and Denmark at just over 80%. Note that the United States’ ratio stood at 12.9% in 2019, and not significantly higher than the world average.1
- Government policy has been friendly toward renewables: in the Climate Summit held in April of this year, many countries increased their commitments to usage of renewables and set up more aggressive targets. The U.S., for instance, announced a 50 – 52% reduction in U.S. emissions by 2030 versus 2005 levels, which would be around double the target under the Obama administration. The U.K. also raised its plans to cut carbon pollution, with a 78% reduction by 2035 from 1990 levels. Japan pledged stricter 2030 emissions reduction targets (46% reduction by 2030 from 2013 levels, up from 26%), and EU lawmakers agreed to make their climate goals legally binding (their targets are 55% reduction by 2030 versus 1990 levels). All four of them also set goals of zero net emissions by 2050.2
- Corporate demand for renewable energy has been the key driver of demand through power purchase agreements (PPAs), as nearly two-thirds of Fortune 100 and nearly half of Fortune 500 companies have set ambitious renewable energy targets. In the U.S. in 2018 alone, 6.53 GW of corporate renewable deals were signed.3 Corporate renewable PPAs, contracts between a corporate buyer and a power producer, have been key to the rise of renewables by securing revenue streams for generated electricity and by easing access to project finance . For utilities and project developers, corporate renewable PPAs provide access to corporate buyers as an alternative to government-led auctions.4 Despite challenges in 2020 due to the Covid-19 pandemic, the RE100 initiative, a global initiative bringing together businesses driving the transition to 100% renewable electricity . Corporate demand for renewable power is continuing to grow across the initiative’s growing membership of 300+ companies responsible for powering 330 TWhs of renewable energy per year and now account for more renewable energy demand than major G7 economies.5 Another key driver of increased adoption of renewable energy or setting renewable energy targets, as well as emissions reductions in general, has been the engagement led by ESG investors.
Technology improvements and levelized cost of energy (LCOE)
- Aside from government policy and corporate demand, however, the contributing factor to increased adoption of wind power has simply been improved technology/design, leading to lower costs for developers. These are measured by the so-called LCOE, or levelized cost of energy, which we can think of as a long-term offtake price that a developer needs in order to recoup all project costs (such as capex, opex, tax, financing, decommissioning and the cost of capital).
- There are a series of factors behind the technological and design improvements, which warrant a separate discussion, but a few improvements within wind include: longer blades/taller towers (in 2007, a typical blade measured 151 ft/46m, whereas by 2020, blades stood at 246 ft/75m; so including a taller tower, which can be taller than Big Ben, today a wind turbine can reach 574 ft/175m);6 improvement in material technology (cheaper and lighter materials); manufacturing improvements (modularization for cost efficiency); and data analysis for optimized site location (big data analyzing wind patterns, also helping schedule downtime for scheduled maintenance).
- As a result, the LCOE for onshore wind, for instance, has come down significantly.7 BNEF also states how LCOE of onshore wind in the most favorable geographies already represent the most competitive of any generation technology.8
While we believe the pace of cost improvement is expected to moderate, especially for onshore wind, it is by no means over. A paper published in Nature in April 2021 estimates that wind costs are expected to decline by 37 – 49% by 2050 versus 2020.9
Of particular importance in the adoption of renewables/wind is the increased development of offshore wind: 8.6GW of offshore wind capacity were awarded in 1H21, and BNEF expects that as much as 32GW could be awarded over the remainder of 2021 and 2022. Offshore wind prices have been falling, in part due to competitive auctions, facilitated by cheaper capex. Somewhat offsetting those, however, are increasing demand for localization and rising seabed costs. Nonetheless, we believe that ultimately the sheer scale of demand should result in supply chain efficiencies and continued reduction in the LCOE. (BNEF forecasts a 48% reduction in offshore LCOE by 2050 as compared to 2021.) This demand is already starting to manifest itself; BNEF forecasts more than 32GW of installations in 2030 alone, compared to a little over 6GW delivered in 2020, over a five-fold increase within a decade.
Challenges
We would be remiss if we did not discuss what is perhaps the main operational challenge of renewables, which is the issue of intermittency. Given wind patterns are not constant and the sun is not present at night, renewable generation might not be continuous and/or might not match periods of peak demand. We mentioned before how data analysis in the case of wind has helped in the selection of sites, and also to identify low activity periods for scheduled maintenance. However, the big area of improvement will come from battery/storage technology. This will allow excess electricity to be stored during periods of increased generation, which could then be used during low activity periods, smoothing the generation profile and enhancing predictability.
Technological battery improvements, along with increased production, have led to lower costs; according to the EIA, utility-scale battery storage costs decreased nearly 70% between 2015 and 2018. Furthermore, the National Renewable Energy Laboratory (NREL) forecasts that battery costs will decline a further 45% between 2020 and 2050—a welcome development that would accelerate the transition toward renewables.
Covid 19-driven supply chain issues continue to challenge the industry in the near to medium term, which could become an impediment to the U.S. government’s ambitious goals and targets to install 30 gigawatts of offshore wind by 2030.
The acceptance of wind is not universal. Despite public opinion generally supporting renewable energy, for those who live near projected wind farms, opposition in the form of “NIMBY’ism” or “not in my backyard” remains an obstacle. This is typically related to the perceived aesthetics of wind as some may view turbines as an impediment to their view, visibility or cause noise pollution within close proximity of inhabitants.
Renewables, including wind energy, should ensure for a just transition. As the fossil fuel industry, coal in particular, may suffer job losses, it is important to ensure that a low carbon energy transition can work for everyone. The U.S. wind sector employs more than 100,000 workers, and wind turbine technician is one of the fastest-growing jobs.10 That said, we believe a ‘just transition’ means moving to a more sustainable economy in a way that’s fair to everyone and can likewise transition workers from other industries so that they can participate in a clean energy economy.
As with all other investment opportunities, as sustainability-focused investors, we take into account both opportunities and risks as they relate to companies’ operations as well as the secular growth opportunities. In our view, the secular growth opportunity with wind remains strong. We continue to watch for technological and regulatory developments alongside company fundamentals to determine attractive long-term investments for our portfolio.
