(Mid-January 2009)

While wind power may seem novel to North Americans, its commercial viability long predates the recent surge of interest in clean technologies. And by most measures, it is emerging as the front-runner in the race to replace oil.

Europeans have been developing renewable sources of electricity — mostly wind — for decades. That’s because their reserves of fossil fuels are dramatically lower than North America’s reserves, and they moved early to develop alternatives.

But after decades of virtually unrestrained consumption, North American stores of conventional oil, natural gas and coal are running low. Even in the absence of high oil prices, national interests — reducing domestic dependence on foreign oil, curtailing greenhouse-gas emissions and financing the rebuilding of the deteriorating energy infrastructure — are dictating a new, higher priority for the development of renewable energy in North America.

“Wind power is the most mature of the renewable energies,” maintains Gabriel Micelli, investment manager, clean energy, with Pictet Asset Management SA in Geneva. Pictet is a subadvisor for Toronto-based Criterion Investments Ltd.’ s Criterion Water Infrastructure Fund and Criterion Global Clean Energy Fund. According to Micelli, that means wind, when compared with other emerging cleantech energies, is the most likely to provide an efficient return on investment.

At the end of 2007, there were 93,900 megawatts of installed wind-generating capacity worldwide, an increase of 30% from 2006. At the beginning of 2008, according to the World Wind Energy Association, wind power accounted for more than 1% of the world’s electricity consumption, with that figure climbing to 20% in some markets. (Final numbers for 2008 have yet to be released.)

Germany leads the way, with 22,247 MW of installed capacity as of Dec. 31, 2007, followed by the U.S., with about 16,818 MW, and Spain, with 15,145 MW. The emerging economies of India and China round out the top five, with 7,845 MW and 5,906 MW, respectively. Canada ranks 11th in the world, with 1,846 MW. The wind-power industry employs more than 350,000 people worldwide, in manufacturing turbines as well as in developing and maintaining “wind farms.”

So far, North American wind-power resources have barely been tapped, even though the U.S. is already in second place overall in terms of installed capacity. According to a 2007 Global Wind Energy Council report, wind power accounts for more than 30% of all new generating capacity in the U.S.

Worldwide, the GWEC is predicting annual growth in the wind-generating industry’s capacity of more than 150%, with most of that growth occurring in the U.S. and China.

Windmills have been used for purposes such as pumping water and milling grain for more than 3,000 years. The first wind-powered generator dates to the turn of the 20th century. The modern wind-power industry germinated in both the U.S. and Europe during the 1980s, spurred by high oil prices. The U.S. market lagged in the 1990s, when oil was cheap, while the European market blossomed in the 1990s, especially in Spain, Denmark and Germany.

If American legislators are serious about facilitating the commercial development of renewable energy, the opportunities for growth in the U.S. are substantial for wind power. And the U.S. does appear to be serious — at least, more so now than in the past. The Production Tax Credit, which was on track to lapse at the end of 2008, was renewed as part of the $700-billion economic bailout package in the fall. Newly inaugurated President Barack Obama has also pledged to increase significantly the renewable component in the U.S.’s energy portfolio, mainly through legislation and incentives.

The radically new take on wind power that is occurring stateside includes some unlikely promoters. T. Boone Pickens — oil baron, corporate raider, hedge fund manager and icon of the carbon-fuelled approach to energy — has been reborn as an advocate and developer of wind power and natural gas. He recently declared the U.S. is “the Saudi Arabia of wind power” and has emerged as a proponent of the new technology, particularly of its potential role in making the U.S. energy-independent.

The Canadian wind-power industry is less developed than the U.S. market. That’s partly because many areas of Canada have a wealth of moving water for hydro-electric power. That has reduced the impetus to invest in wind power as a clean, renewable source of energy.

@page_break@That attitude is beginning to change, however. The new trend in our domestic energy policy is to place less emphasis on fossil fuels — most Canadian markets still rely on coal-powered boilers for baseline power — and greater emphasis on developing renewable energies, such as wind, hydro and solar.

Wind-powered generating capacity has more than quadrupled in Canada since 2004, when capacity was 444 MW. But to reach current targets for renewable energy, more than 12,000 MW of generating capacity need to be installed by 2016.

While the provinces are racing to add generating capacity, the more immediate challenge will be to update Canada’s transmission capa-city and grid.

Investment opportunities lie in two areas: wind turbine manufacturers and wind farm developers. “We treat manufacturers as industrials and developers as utilities,” explains Micelli.

Between the two sectors, the biggest opportunities for inves-tors lie with the turbine manufacturers, which are already experiencing trouble filling orders. Although share prices for turbine manufacturers have fallen along with the stock markets, turbine purchasers are not pulling orders or scaling back on planned installations.

When it comes to wind farms, considerable investment is required before reliable returns can be expected. Wind speeds must be tracked for several years before windmills are even installed, and turbines must be manufactured and installed. A wind farm pays for itself only after many years.

But there are also development issues for companies in the turbine manufacturing sector. As the wind-power industry develops, the need for larger and larger turbines and towers to reap economies of scale is effectively acting as a barrier to entry for new manufacturers. A 1-MW wind turbine and tower costs more than US$1.2 million, and only 10 MW turbines are in the pipeline. Typically, the towers required for wind farms are more than 100 metres tall, and can be installed on land or offshore.

There are large-cap turbine manufacturers — Schenectady, N.Y.-based General Electric Co. manufactures 15% of wind turbines; the German conglomerate Siemens AG produces 8%. However, given the wide range of products these conglomerates produce, an investor will get the most exposure to the wind sector from a company that is a pure wind player.

By market share, Denmark-based manufacturer Vestas Wind Systems is the industry leader. Vestas, which trades on the Copenhagen Stock Exchange, has a market capitalization of 64 billion Danish kroners ($13 billion). Vestas is particularly strong in offshore installations.

Gamesa Corp. Tecno-lo-gica SA, which trades on the Madrid exchange, has a 13% market share and a market cap of 3.6 billion euros. Gamesa pays dividends and has the advantage of a close relationship with Spain’s leading energy developer, Iberdrola SA.

India-based Suzlon Energy Ltd. is the fifth-largest turbine manufacturer globally, with 7% of total market share. Suzlon trades on the Bombay Stock Exchange, and has a market cap of Rs101,260. In 2005, Suzlon acquired a controlling stake in Germany-based gearbox manufacturer Hansen Transmissions Ltd., effectively guaranteeing access to an element of its complex supply chain.

Vestas, Gamesa and Suzlon are all active worldwide.

Critics of wind power rightly point out that wind has a serious weakness — it is intermittent. This is why wind power is being developed in conjunction with other renewable energies, as part of a diversified renewable energy portfolio. If there is no wind, but the sun is out, solar cells will contribute more power to the grid. If it is a blustery, cloudy day, wind power will take the place of solar. If it’s dark and still, natural gas, nuclear, geothermal or other such stable baseline generation systems will take over.

Critics also claim that wind turbines kill birds. So far, however, they have proven less deadly than the common cat. IE