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Patrick McKeough is one of Canada’s top safe-money advisors. The Wall Street Journal, Forbes and The Hulbert Financial Digest have all recognized his ability to find stocks with hidden value. He is editor and publisher of The Successful Investor, Stock Pickers Digest, Wall Street Stock Forecaster and Canadian Wealth Advisor; inventor of the Quick Profit/Value System and the ValuVesting System™. A best-selling Canadian author, he wrote Riding the Bull, the book that predicted the 1990s stock-market boom.

How to cut your risk in wind power stocks

March 31, 2010 -  Be the first to comment
Posted by: Pat McKeough Filed in: Green Stocks
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The seeming attraction of wind power stocks is obvious — these companies operate (or make parts for) wind turbines, which offer a source of clean, endlessly renewable energy that can replace fossil fuels like oil, coal and natural gas. However, like other alternative-energy firms, wind power stocks face significant costs and risks.

One of the main 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. As well, electrical power can’t be stored efficiently, so to make economic sense it must be used when it is produced. As a result, utilities must maintain back-up power capacity that is equal to their reliance on wind power.

Wind power stocks also face high construction costs. 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. Not surprisingly, many of these companies are heavily reliant on uncertain government subsidies and political support.

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Infrastructure suppliers have much less risk than wind power stocks

A good way to profit from rising demand for renewable energy (including wind power) at lower risk is to focus on companies that build components for electrical-power grids.

In spite of the weak economy, governments around the world continue to invest heavily in upgrading their electrical grids. That’s partly because power-grid upgrades are important to the continued development of renewable energy projects, including wind farms.

While most power plants are located near big cities to keep costs down, wind farms tend to be in more remote areas with steady winds. As well, a lack of transmission capacity has been a major problem for wind projects.

One electrical infrastructure supplier that stands to benefit from continued government investment in transmission-grid upgrades is Switzerland-based ABB Ltd. (symbol ABB on New York). We updated our buy/sell/hold advice on ABB in a recent issue of our Wall Street Stock Forecaster newsletter.

Rising demand for wind power should help ABB

ABB makes transformers, transmission switches and other equipment for distributing electricity.

In late 2009, ABB received a $30-million order for specialized power equipment from Ontario’s main electricity utility. The company will deliver this equipment in 2011. This order is small next to ABB’s annual revenue of $35 billion U.S. But it could lead to more orders as Ontario closes its coal-fired power plants and invests in green-power projects. ABB is also seeing higher demand for its power equipment from developing countries.

ABB’s revenue and earnings fell slightly in 2009. However, the company is doing a good job of controlling its costs; it has been cutting jobs, closing plants and buying more raw materials from low-cost countries. These factors, along with rising demand for electrical infrastructure, could mean strong gains for ABB in the coming months.

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