The wind drought that plagued investors in 2018 and 2019 is likely over, but that’s only one of the factors to consider.
Renewable energy is poised for a decade of epic growth. Utility-scale solar and onshore wind continue to smash through most forecasts from previous years. If favorable economics continue to drive investment in the renewable duo, then utility-scale solar and onshore wind could generate 30% of America’s total electricity in 2030, with all zero-carbon energy sources providing as much as 60%.
While many projections expect solar power to eventually become the nation’s and the world’s top source of electricity, that milestone is still decades away. For now, wind power will continue to dominate the renewable energy landscape. In fact, three factors will make 2020 the biggest year yet for wind power and the renewable energy stocks driven by it.
1. The wind drought is (probably) over
Investors with exposure to renewable energy have come to dread three simple words in recent years: “lower wind resource.” That phrase has been uttered by electric utilities and power generators since the middle of 2018 to explain why revenue growth stalled compared to the year-ago period in question.
The wind drought, as it has come to be called, caused NextEra Energy Partners (NYSE:NEP) to miss out on about $18 million in revenue in the first half of 2019. That was equivalent to 6% of total revenue in that span. Meanwhile, NextEra Energy (NYSE:NEE) cited lower wind resource as the primary reason it reported a $229 million reduction in first-half revenue for its power generation subsidiary, NextEra Energy Resources, compared with the year-ago period. That was equivalent to roughly 5.5% of the subsidiary’s total revenue.
Fortunately, the latest numbers suggest the wind drought is most likely over. In the first half of 2019, the United States produced only 1.6% more electricity from onshore wind turbines compared with the same period the previous year. That’s despite a 15% surge in installed capacity in that span.
In the second half of 2019 (with data through November), the United States produced 22.4% more electricity from onshore wind turbines compared with the same period in 2018. That outpaced the 17% increase in installed capacity in that span.
In other words, a subsiding wind drought and improved technology from newer turbines should allow investors to reap the rewards of wind energy’s recent expansion (dating back to capacity growth in 2018) once fourth-quarter and full-year 2019 earnings are released. Then again, the benefits should extend beyond one quarterly report.
2. A near-record amount of wind came online in 2019
The U.S. Energy Information Administration (EIA) expected 12,200 megawatts of wind power to come online in 2019. That would have represented the second-highest level of capacity additions in a single year, behind only the 13,200 megawatts installed in 2012. For comparison, no other year has eclipsed 9,000 megawatts.
Most important for investors is the fact that an estimated 6,000 megawatts came online in December 2019. In other words, most of last year’s additions weren’t reflected in last year’s electricity data because they weren’t even in operation. When combined with the subsiding wind drought, the new capacity should drive American wind power to significant year-over-year growth in 2020.
It’s unlikely to be a one-time fluke.
3. A record amount of wind is expected to come online in 2020
The EIA expects a record 14,300 megawatts of wind power to enter service in 2020. Over 10,000 megawatts is expected to come online from September to December of this year, including 7,200 megawatts in the final month. That four-month figure is enough to increase the nation’s total installed capacity by roughly 10%.
The growth will be impressive. What might be more impressive is that a handful of companies will be responsible for the lion’s share of it. For example, Xcel Energy (NASDAQ:XEL) expects to place 1,922 megawatts of new wind power into service in 2020. That will help the electric utility holding company roughly double the amount of wind it directly owns by the end of 2021. When capacity from power purchase agreements is counted, the company expects to tap into 11,000 megawatts of total wind by the end of 2021.
It’s all part of the company’s “steel for fuel” strategy, which aims to replace resource-intensive coal-fired power plants with low-cost wind farms. Xcel Energy expects fuel expenses to represent only 28% of an average customer bill by 2024, down from 47% in 2010. That should also fuel earnings and dividend growth for shareholders, too, to the tune of 5% to 7% per year for the foreseeable future.
The extra cash flow should help Xcel Energy divert resources to transmission line investments, which are likely to be the next major obstacle (and opportunity) in renewable energy, since renewables can both cause or relieve grid-level congestion. But those announcements aren’t expected until the second half of the decade. For now, and especially in 2020, onshore wind power will continue to dominate the renewable energy landscape.
Author: Maxx Chatsko
Source: Fool: 3 Reasons Wind Power Is Poised for a Breakout in 2020