Wind power stocks offer a lot of conceptual appeal, but also harbour a number of unique risks

The conceptual appeal of wind power stocks is obvious—these companies operate (or build and make parts for) wind turbines, which offer a source of clean, endlessly renewable energy that could conceivably replace fossil fuels like oil, coal and natural gas.

Wind power has been used for centuries around the world through the use of windmills for pumping water and milling grain. Historically, windmills are most associated with Holland, where they have been used extensively for centuries. Today, wind power plants use large blades to catch the wind, turning rotors in turbines that produce electricity.

Just as oil, coal or natural gas-fueled plants use steam or combustion gases to turn electricity-producing rotors, wind plants use wind turbines, often assembled on a large single wind site called a wind farm.

Most of the installed wind generating capacity today is in Germany, Spain and Denmark, although it is making inroads in North America, especially in Texas. However, like other alternative-energy firms, wind power stocks face significant costs and risks.

Governments around the world continue to invest in wind projects and accompanying electrical-power grids. Antiquated power grids can hold back wind power stocks. Upgrades to power grids are important to wind power stocks because, while most power plants are located near big cities to keep transmission costs down, wind farms tend to be in more remote areas with steady winds. As well, low transmission capacity, or none at all, has hurt the ability of wind power stocks to build new projects.

One of the main problems with wind power is that varying wind speeds cause its electricity output to fluctuate. For example, 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.

In many cases, wind power companies have to fight local municipalities to build their wind turbines on their land. Many citizens object to large numbers of wind turbines on a “wind farm” taking up a lot of space. In some cases, the space between the wind turbines can be used for agriculture. However, a wind farm dominates the visual landscape and is often deemed unacceptable in tourist areas or nature preserves.

If the wind turbines are located in populated areas, noise from turning blades can spark public opposition that makes it difficult to win regulatory approval. The obvious solution is to locate the turbines in remote locations. But that requires a bigger investment in long-distance transmission lines.

Risking a large amount of capital for a technology that still is considered new and unproven makes it necessary in most cases to rely on government subsidies to attract investors. Removal of these subsidies would make most wind power companies unprofitable.

On the other hand, some wind power stocks also create their own hidden assets. They accumulate rights to promising acreage long before the land rush starts. They have the technical and political skills they need to foresee and deal with environmental and political obstacles ahead of their competitors.

How to profitably invest in wind power

Many governments around the world are cutting subsidies for alternative energy investments as they look for ways to deal with their ballooning budget deficits.

However, one way to offset the risk of subsidy cuts is to look for alternative energy producers that have already secured long-term, government-guaranteed contracts for the power they generate.

Above all, we recommend investing in electrical power generating companies that are active in wind power but are also have a sound base of other operations to offset the added risks of wind power.

Have you invested in wind power stocks? Have they been profitable for you? Share your experience with us in the comments below.

Note: This article was originally published in March 2010 and has been updated.