Topic: Growth Stocks

This wind power stock’s prudent strategy helps cut its risk

Wind power stocks continue to attract a lot of investor attention. That’s because these companies build or operate wind turbines, which offer a source of clean, endlessly renewable energy that could replace fossil fuels like oil, coal and natural gas.

However, like many other alternative-energy firms, wind power stocks face significant costs and risks.

For example, varying wind speeds cause a wind turbine’s 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. 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.

The best wind power stocks have a sound base of other operations

Risks like subsidy cuts are one of the reasons why we continue to recommend that you only invest in wind power stocks if they have a sound base of other operations to offset the added risks involved with investing in wind power.

TransAlta Corp. (symbol TA on Toronto), a stock we cover in our Canadian Wealth Advisor newsletter, provides an example.

TransAlta operates roughly 80 unregulated power plants in Canada, the U.S. and Australia. These assets give it steady revenue streams and help cut its risk.

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TransAlta has been adding to its wind-power assets lately: In November 2009, it bought Canadian Hydro Developers Inc., which owned and operated 21 power-generating facilities in Alberta, B.C., Ontario and Quebec. These include eight wind farms and one biomass plant, which generates power by burning plant materials and wood waste from lumber mills.

TransAlta is also expanding its Kent Hills wind farm in New Brunswick. That’s because it won a 25-year power contract from the provincially owned electrical utility.

The company will increase Kent Hills’ capacity to 150 megawatts from 96 megawatts in partnership with Natural Forces Technologies Inc., a local wind-power developer. The partners expect to finish the expansion by the end of this year. At that point, TransAlta will have a total of 1,000 megawatts of wind-power generating capacity.

New coal restrictions shouldn’t hurt TransAlta

On June 23, 2010, the federal government announced plans to phase out older coal-fired power plants by around 2025. TransAlta’s shares fell 5% on the news. That’s because, even though it has expanded its wind-power capacity, the company uses coal to generate about 57% of its power.

Under the proposals, utilities would have to close coal-fired plants when they reach 45 years of age or when their power-purchase contracts with provincial electricity regulators expire, whichever is later. The new rules would prevent utilities from extending the lives of these plants unless they can lower their carbon emissions to the same level as natural-gas-fired plants.

However, Ottawa’s plan is still in its early stages, and much could change before the new rules come into effect in 2011. As well, TransAlta feels it can replace some of its older plants with gas-fired facilities. It is also developing new clean-coal and carbon-storage systems that would help it comply with the new standards.

We’ll continue to monitor TransAlta’s green-power expansion and update our buy/sell/hold advice as necessary in Canadian Wealth Advisor. Click here to learn how you can get one month free when you subscribe today.