Wind power stocks: Beware hidden risks

Wind power stocks include companies that make components for wind turbines and those that use wind turbines to generate power.

Although publicly traded wind companies are considered green stocks, wind power does draw some objections from environmental groups. It also faces some challenging technical problems.

Concept has appeal, but wind power is imperfect

One of the key problems with wind power is that varying wind speeds cause its electricity output to fluctuate. In many areas, the wind is stronger in the daytime, when demand is lower, and dies down in the evening, when consumers use more appliances. Also, electrical power can’t be stored efficiently, so to make economic sense, it must be used when it is produced. As a result, it can’t supply all electricity needs, and utilities must maintain back-up power capacity or costly storage that is equal to their reliance on wind power.

One way for wind power stocks to overcome some of these problems is to have a large number of wind turbines operating at the same time. But this raises another problem: although the space between the wind turbines can be used for agriculture, a wind farm dominates the landscape, making it unsuitable for tourist areas or nature reserves.

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Further, if wind turbines are located in populated areas, citizens may protest about noise from turning blades, making it difficult to win regulatory approval. The obvious solution is to locate the turbines in remote locations, but this involves a larger investment in transmission lines. Many citizens will not accept transmission lines on or near their properties, which may mean more regulatory approval is needed, this time for the lines, adding further costs to new wind-power projects.

On top of that, many environmentalists believe wind turbines kill birds. For efficiency, wind farms must be located where the wind blows fairly constantly, but these locations are often on migration routes.

High construction costs are another difficulty wind power stocks face. These include the cost of the turbines themselves, plus buying or leasing the necessary land. Installation can also be expensive, depending on the terrain and distance from the power grid.

Technological improvements and larger turbines are driving down costs. And, if wind power is kept to a small proportion of the total power grid, but widely dispersed, it can be more readily absorbed into electrical-power systems. Moreover, if oil and natural gas prices rise again, wind power would become more attractive.

Wind power has the potential to become more profitable, but investors should choose companies based on their performance, rather than for ideological reasons, as not all wind power stocks will profit equally. Today’s wind power operations depend on government subsidies, and that’s always a risky situation.