By Lindsey Sporrer
The United States is on track to realize the current administration’s goal of having 100% green electricity power the nation’s grid by 2035 and the more-ambitious goal of net-zero emissions by 2050. Of the ways to achieve this green electricity goal including solar, wind, geothermal, biogas, eligible biomass, and low-impact small hydroelectric sources, President Joe Biden has made a point to focus on increasing U.S. offshore wind energy. In fact, he signed an executive order in his first month in office to double the country’s offshore wind leases by 2030. A wind lease is an agreement between a property holder and a developer to create a certain amount of turbines on the property; the developer, in turn, pays the property holder. The order would effectually increase the U.S.’ wind leases of this type by an additional 41gigawatts (“GW”). To give this some context, at the end of 2020, the U.S. had 1,117GW of electricity-generating capacity. A single gigawatt powers between 300,000 and 725,000 homes, so achieving the goal of this order would power between roughly 12.3 million and 29.7 million homes. Expressed another way, Biden’s goal would increase the area of federal waters being leased from 2,656 square miles to 5,313 square miles. A natural follow-up question is: how will this increase impact the country? This article explores not only that question but also the possibilities for investment opportunities as a natural consequence of these increases.
Wind Energy: An Introduction and a Brief History of Past Incentives
Wind energy can be offshore, in the water, or onshore, on land. The American Clean Power Association reported that as of April 2020, 11.1% of the country’s electricity is produced by wind, solar, and energy storage power plants. As of 2020, wind energy accounts for over seven percent of the U.S. electricity supply. In Iowa and Kansas, wind energy represents over 40 percent of each state’s total energy supply. Also included in the top five wind energy producing states are Texas, Oklahoma, and California. Though there are many reasons for differences between states, the amount of wind naturally occurring within a state cannot be ignored. Regionally, the South is the farthest behind in terms of production of wind energy.
The ability of a turbine to produce energy is a function of how much wind is blowing through it and the efficiency of the turbine. For a hydro-power comparison, the Hoover Dam is a 2GW facility, but the amount of electricity it generates depends on how much water flows through it. For those considering investing in wind turbines, it is worth noting that prices are falling for the turbines themselves. This is due to the increasingly competitive market for turbines. In 2019, the average installed cost was down to $1,440/kW from its peak circa 2009 of approximately $2,215/kW. Additionally, the cost of maintenance is also decreasing.
In 2009, Congress established the American Recovery and Reinvestment Act which created Section 1603 and Section 1705. Congress’s goal was to stimulate the U.S. economy through various policy instruments and create a strong foundation for long-term economic growth. Sections 1603 and 1705 were the two main policies created by this act to promote renewable power. Section 1603’s grant program provided a subsidy for investing in “new renewable generation capacity.” Section 1705 was an amendment to an earlier Section 1703 and supported “conventional renewable power, transmission, and biofuel projects.” However, Section 1603 effectively ended in 2012 and the loan program created in Section 1705 ended in September of 2011, thus it remains to be seen if Congress will propose similar energy incentives.
Recent Changes and Legislation
Though Covid-19 has affected the U.S.’ domestic economy, offshore wind energy has been far less adversely impacted than other energy sectors. In November 2020, then-president Trump officially withdrew the United States from the Paris Climate Agreement, a worldwide initiative that supporters believe combats climate change globally. The U.S. entered into the agreement five years prior with other countries creating an international agreement designed to address climate change by imposing stricter emissions reduction commitments.
Under President Biden, things are different. One of his first acts as President was to re-enter the Paris Climate Agreement. The Department of Interior is mandated to determine which steps can accelerate the “responsible development” of renewable energy on land and water that is public, including the aforementioned goal to double renewable energy production from offshore wind by 2030. Separately, Biden also signed an order in January 2021 to end subsidies for fossil fuels – coal, crude oil, and natural gas.
Wind Energy Incentives and Development
While the Database of State Incentives for Renewables and Efficiency (DSIRE) contains information on incentives by zip code, there are also several federal incentives which can help finance wind energy projects regardless of location in the U.S. The first of these incentives is the Production Tax Credits from the Energy Policy Act of 1992. Production Tax Credits give one to two cents per kilowatt-hour for the first decade of wind electricity generation and the incentive has been extended for another year as of December 2020. Additionally, the Investment Tax Credit assists in the initial phases of development by crediting back 30% of any offshore wind project begun prior to December 31, 2025. Another incentive is accelerated depreciation through the federal Modified Accelerated Cost-Recovery System which makes it possible for developers to depreciate certain wind energy projects over five years. Recovering the cost basis for an asset class as large as turbines has massive implications for a company’s balance sheet. Being able to depreciate over five years rather than over the entire life span of the turbine allows investors to recover money earlier, thus making the investment more worthwhile.
For farmers and ranchers, another energy incentive is available: the Rural Energy for America Program (“REAP”). This incentive provides a 25 percent grant for swapping a diesel irrigation engine with a propane-powered engine. The program applies to both new renewable energy systems and energy efficiency improvements. Producers of agriculture with half or more of their gross income flowing from agricultural operations and certain rural and small businesses are eligible to apply for the program. The funding amounts for fiscal year 2021 will be published when the full-year appropriations act is enacted.
Investing in Wind Energy REITs
Developing wind projects is expensive, but once up and running, wind energy is currently the cheapest form of new electricity generation available. Although smaller farm and non-commercial scale turbines are less expensive in total, per kilowatt of energy producing capacity, they are far less cost-effective than commercial wind turbines. Investing in offshore wind energy is even more expensive than land wind energy. According to the Institution for Energy Research and the Energy Information Administration, offshore wind is over 250% more costly than wind power onshore. Utility scale wind turbines cost approximately $3-$4M including the turbine plus installation. To most of us, the financial barrier to entry surrounding Biden’s executive orders is impossible to climb if not for scaled-investment options accessible to individuals like ETFs and REITs. Both ETFs and REITs allow individuals a chance to profit from a portion of a corporation’s investment in wind energy.
An ETF is a “basket of securities” bought or sold through a stock exchange or a broker. ETFs are considered by some to be a way to diversify in multiple securities through one instrument. Fidelity calls them “one of the most important and valuable products created for individual investors in recent years.” Beyond any potential altruistic reasons to invest in renewable energy, there are also clear potential financial comparisons for choosing to invest in wind energy stocks. There is an ETF specifically for wind stocks called the First Trust Global Wind Energy ETF–stock symbol FAN. FAN is the only global renewable energy ETF specifically targeting wind. FAN outperformed the Russell 1000 by 32.3% during a one-year window from December 2019 to December 2020. The Russell 1000 index comprises over ninety percent of the total market cap of all U.S. equity market stocks. Some noteworthy leaders in FAN’s holdings are Northland Power, General Electric, and NextEra Energy, Inc. NextEra Energy “generates, transmits, distributes, and sells” electric power to retail and wholesale customers across North America. For anyone looking to focus on wind energy specifically, FAN is a good place to explore first.
A REIT is a real estate investment trust which owns, controls, or finances real estate varying from office buildings to hotels to apartments and more. REITs can help diversify one’s portfolio, but REITs are another way to invest, and they have the benefit of high-yield dividends. Many REITs are simply listed on the larger stock exchanges and may be bought into the same as other public companies. REITs are an opportunity for smaller investors to be involved in large projects such as wind energy creation. By law, REITs pay out 90% of taxable income to shareholders which clearly makes them very attractive to investors. A commonly mentioned drawback to REIT dividends is their inability to fall into the category of “qualified dividends,” thus creating a tax liability. However, a less commonly known aspect of REITs is that there are also many tax advantages such as avoiding double taxation.
Conclusion: What to Watch
As of now, the future of wind energy looks bright globally and domestically. The Global Wind Energy Council predicts a dramatic increase in offshore wind sources in years to come. The average turbine generates enough energy each month to power over 460 average homes in the United States. To understand the rate at which corporations are taking notice of wind energy opportunities, data from the BloombergNEF is helpful: In 2020, companies invested in 23.7GW of renewables capacity despite the adverse market effects of Covid-19. To put this in perspective, 23.7GW would power an average American home for 2.4 million years. In 2019, corporations bought around 20GW, and in 2018, the number was only 13GW. Though 2020’s 23.7GW included international corporations, most of them are in the Americas. That–combined with President Biden’s goal to double offshore wind and increase the number of offshore wind turbines in the U.S. by 8,446 turbines–makes it seem likely that 2021’s numbers will blow away prior-year investments.
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