171113 Wind Turbines

3 reasons wind energy is a compelling investment

Articles | 13 November 2017

There is a long term structural shift in energy supply underway globally. Our global resources team is steadily increasing their investment in renewable energy – starting with wind power. Here are three reasons why. 

1. Wind energy no longer needs government subsidy to compete with conventional energy sources
First, the standardised (or “levelized”) cost of wind energy can now be competitive with conventional energy even without subsidy. This means demand for wind energy products will be less reliant on government policy and increasingly determined by market forces. The below chart shows the cost of onshore wind energy has decreased by 65% over the last 7 years. It also shows how this has now converged with the estimated average level of its major competitors, Coal and Combined Cycle Gas. Importantly, the data is estimated annual averages. Because all projects are different, there is in fact a wide range around each of these estimates. Nevertheless, the decline in onshore wind costs clearly make it competitive with conventional sources of power in many markets.

Wind generation can be competitive with conventional electricity sources    

(Source: Lazards Levelised Cost of Energy reports 4.0, 5.0, 6.0, 7.0, 8.0, 10.0. CFSGAM Analysis. Datapoints represent midpoint of annual estimated range for each power source.)

2. Wind energy production is growing globally
As wind becomes increasingly cost effective, we are seeing significant growth in wind power installations. The below chart shows how cumulative wind capacity has increased to almost 470GW with annual installations now running at around 50GW per year. This is evidence that wind is not just competitive on paper: it is being confirmed by the capital allocation decisions of utilities and IPPs across the world.

Cumulative Global Wind Capacity     

(Source: BP Statistical Review of Energy 2017, CFSGAM analysis)

3. There is room for exponential growth
Finally, despite the historical growth, there is still decades of running room ahead. The below chart shows global demand for energy by type since 1965. With the conventional sources, oil, gas and coal at the bottom, and alternatives towards the top, it shows just how much opportunity there is for renewable energy sources to grow over the long term. The small green slither at the top is wind.

Global Primary Energy Consumption By Type     

(Source: BP Statistical Review of Energy 2017, CFSGAM analysis)

Onshore wind is increasingly competitive with conventional energy, corroborated by the growth in installations and that there is significant room for growth given it is such a small part of the energy mix. While renewable energy has always been part of our remit, we continue to grow our investment in this space, particularly as our assessment of the economics and bottom-up research is supportive.

We currently have a small position in Vestas Wind Systems, a Danish-listed company that designs, manufactures, installs and services wind turbines across the world. Vestas Wind Systems is the largest western market player and continues to innovate. Vestas has generated free cash flows of around 1 billion dollars per year since 2013 resulting in attractive capital returns to shareholders. While the company is currently contending with a highly competitive market and increased policy uncertainty in the USA, they have outperformed peers due to their strong Balance Sheet and wider margins. We believe Vestas is the best way to play the long-term trend towards having more wind as part of the global energy mix.


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