The Latest Risk in Renewable Energy Investing: Wind Droughts

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This was supposed to be a breakout year for American wind power. It's expected to snatch the crown from hydropower as the nation's top renewable-energy source -- a title hydroelectric dams have held since the days of Thomas Edison -- and should end the year with over 100,000 megawatts of installed capacity. But the year is off to a rough start.

In the first quarter of 2019, electricity generated from wind power declined 5% compared to the year-ago period, despite an 8.5% increase in installed capacity in that span.

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Many major industry players were able to offset the declines by bringing new projects online, but investors strolling through recent filings with the Securities and Exchange Commission might be surprised by the magnitude of the declines from existing assets. The year-over-year comparisons highlight the risk of wind variability to renewable-energy investors.

Declining revenue? Blame the wind

NextEra Energy Partners (NYSE: NEP) reported a year-over-year revenue decline of 16%, or $35 million, in the first quarter of 2019. If you exclude divested Canadian assets from the comparison, then revenue actually increased by $11 million. But it could have been even better. The renewable-energy portfolio manager noted that newly acquired assets contributed a $25 million revenue increase in that span, but "lower wind resource" was responsible for a $14 million decline -- equivalent to roughly 8% of reported revenue.

NextEra Energy (NYSE: NEE), which initially formed that partnership, realized a similar decline in revenue for its power generation arm, NextEra Energy Resources (NEER). The subsidiary blamed "lower wind resource" for $92 million of the $106 million year-over-year decrease in operating revenue, equivalent to a decrease of 8%. NextEra Energy only managed to report higher revenue from its combined subsidiaries thanks to the Gulf Power acquisition, which didn't contribute in Q1 2018.

Pattern Energy Group (NASDAQ: PEGI) reported a similar trend. The business saw a slight decrease in the amount of electricity sold compared to the year-ago period when measured with its proportional stakes in noncontrolled entities. While acquisitions drove a sales increase of almost 260,000 megawatt-hours -- enough to power 25,000 American homes for an entire year -- asset divestitures and unfavorable wind conditions each offset more than half of the increase from other sources.

Those "other sources" include one surprising benefit from lower wind resource: less curtailment. That's what happens when wind farms produce more electricity than the grid can handle, which results in wasted resource. Curtailment has been an issue in some regions where wind-turbine construction has outpaced electricity transmission infrastructure, but new power lines have significantly reduced the wasted output in recent years. Energy storage projects are expected to further improve efficiency. Therefore, this benefit from lower wind resource might not be as significant in the future.

A risk, but not an existential one

The continued growth of the American wind industry will help to partially insulate investors from the risks of wind droughts, as will new power lines and investments in energy storage projects. But that doesn't mean investors can ignore the risk.

As more power generators turn to wind power for a larger share of their production in the next decade, the effects of lower wind resources could be exacerbated. Geographic concentration could do the same. Consider that 25% of the country's installed wind power capacity is located in Texas, while two-thirds resides in the 11 states comprising the American "wind corridor." More batteries and power lines might not provide much help during a prolonged wind drought in the region.

That said, the benefits of wind greatly exceed this risk. Utilities have been able to greatly reduce fuel purchases, keep customer bills low, and significantly reduce their carbon footprint. Nonetheless, investors need to keep an eye on this risk when American wind output peaks again in October. Another weak period could affect full-year 2019 results for several companies.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool recommends NextEra Energy. The Motley Fool has a disclosure policy.