We might be in an environment of soaring prices for fossil fuels, but the green shift is still moving closer. Renewable energy expected to be the overarching theme in the world for the next 30 years.
Many different renewable sources are being explored. One of the main ones is wind, an optimal source of energy from both an environmental and an economic angle, Morningstar believes.
Why is that? Wind is 40 times cleaner than gas and 75 times cleaner than coal – which together contribute 55% of global energy consumption. Plus, it is also the cheapest energy source in many countries.
But time is running out. Global carbon emissions reached record levels in 2021, so the road to net zero by 2050 (which is the goal of the Paris Agreement) is long.
Morningstar thinks global wind capacity will grow 2.7-fold (or up to 165 gigawatts per year) by 2030. This is more than two times short of the installations required to achieve net zero just 20 years later (about 390 gigawatts).
It does however provide a large runway for businesses that partake in the wind transition theme – which could provide opportunities for certain beneficiaries and their investors.
Energy Security Drives Investments
Morningstar’s estimate is for wind capacity growth is at 11% annually until 2030, outlined in our recent deep dive into wind turbines.
In the report, equity analyst Matthew Donen explains that some of the optimism the analyst team has towards wind energy is based on steps taken in response to uncertainty over energy security, rather than ambitious environmental targets.
The goals to become independent of other countries are a lot more tangible than focusing on environmental targets, which have typically lacked substance in how to achieve them.
Donen says wind will play a crucial role in reducing energy dependency, particularly following the war in Ukraine and the current energy crisis, which has increased governmental focus.
"Europe’s dependence on Russian fossil fuel restricted the role the continent could play in preventing the war in Ukraine," he says.
"Low-carbon alternatives, such as wind, is the best long-term solution for energy security and independence and can be done quicker than other cleaner sources than oil and coal, such as nuclear."
More Actions Required
Policymakers have of course recognised the role wind can play in achieving such energy independence and are stepping up targets and accelerating the speed of permitting onshore wind construction – which is welcome after a period of regulatory uncertainty.
That said, accelerating investment into more wind energy will not be enough for renewables to gain a large enough share of the electricity mix in order to eliminate greenhouse emissions. Plus, Europe has remained highly dependent on buying from external energy sources: it imported approximately 58% of the energy it consumed in 2020, and fossil fuel from Russia was the biggest contributor, representing 24.4% of total energy requirements.
Retiring high carbon-emission coal plants will also be required and has moved higher up the agenda of energy departments. At COP26, the main decision-making body for the United Nations on climate change, 46 countries committed to phasing out domestic coal by the 2030s and 2040s.
Stocks for Wind Power
Our preferred way to invest in the megatrend would be through utilities and developers that offer investors higher-quality growth while being a beneficiary of the energy transition theme. We like businesses within these sectors that will either remain leaders in the transition to wind energy such as Orsted, RWE, and NextEra Energy, or with significant upside, like American Electric Power.
We anticipate that wind turbine manufacturers will continue to yield weak profitability due to competitive industry pricing, limited product differentiation, and lengthy investment cycles restricting industry profitability.
Our analysts’ picks for investors to access the global wind theme are Orsted and RWE in Europe and American Electric Power and NextEra Energy in the United States, which provide investors with higher-quality exposure. Donen explains that turbine manufacturers have been unable to carve out moats and therefore rivalry is expected to persist because of pressure to keep the levelised cost of electricity (LCOE) of wind low and the threat of China, which has raised its turbine capabilities. About them, Donen says the following.
Orsted (Orsted)
"Orsted is the leader in offshore wind and will partake in the theme for years to come having been the biggest winner of the latest UK offshore wind auctions. The business is well-positioned to benefit from an increase in wind capacity and has large ambitions to grow its capacity even further in the coming decades."
RWE (RWE)
"RWE will be a major beneficiary from the shift towards wind energy through its number two position in offshore wind development. The group's wind capacity will increase even further following its successful bid in in the recent New York Bight offshore wind auction. RWE is also positively exposed to skyrocketing power prices thanks to the highly liberalised share of its renewables power production."
Americal Electric Power (AEP)
"American Electric Power is one of the largest regulated utilities in the United States, providing electricity generation, transmission, and distribution to more than 5 million retail customers in 11 states. AEP’s transmission and distribution infrastructure, which accounts for the majority of its earnings, will be key to supporting the clean energy transition.
"Additionally, AEP is also transforming its generation fleet. AEP expects to install approximately 15 gigawatts of renewable energy through 2030, nearly double the target it proposed in 2020, consisting of 8.2 GW of wind generation across its wind-rich service territories and 6.8 GW of solar generation. The company also plans on retiring nearly 5.3 GW of coal generation capacity between 2022 and 2028."
NextEra Energy (NEE)
"NextEra Energy provides investors with the best of both worlds: a high-quality regulated utility and a growing renewable energy business. We believe that no utility in the US is better positioned to benefit from the renewable energy transition and the Biden administration's clean energy focus than NextEra. This business has secured some of the country's most desirable wind and solar generation sites and enjoys the largest market share of North American wind."
