A changing of the guard is underway in American renewable energy. The United States is expected to generate more electricity from wind power than hydropower in 2019. It will be the first time something other than hydroelectricity was the country's top renewable energy source since the electric power sector emerged in the late 1800s.
Wind power still faces obstacles, but they aren't expected to linger. The United States is currently experiencing a wind drought, which has led to flat year-over-year electric output in the first half of 2019 despite a more than 8% increase in installed wind power capacity. Additionally, the production tax credit (PTC) for wind energy expires at the end of the year, which will force the industry to prove it's mature enough to stand on its own.
Many industry players are confident it can. In fact, wind energy leaders are looking forward to the PTC phaseout, as they believe it will give them a competitive advantage. That would bode well for NextEra Energy (NEE -0.90%) and Xcel Energy (XEL -1.20%), which lean on a combined 25% of the nation's installed wind power capacity. Here's why they're the top renewable energy stocks to buy in wind energy.
The unquestioned leader of renewable energy
NextEra Energy generated more electricity from the wind and sun than any other company in the world in 2018. Only seven countries have more installed wind power capacity than the business. It expects to maintain that dominance through its power generation subsidiary, NextEra Energy Resources (NEER), which owns wind and solar power assets across the United States.
NEER thinks it can stuff an additional 16,800 megawatts of wind power projects into its backlog in the next few years. Assuming those projects get built and remain in its portfolio, they will more than double the company's current installed wind capacity of 15,000 megawatts, which represents 15% of the nation's total.
Investors might also notice that the company's outlook reflects strong optimism about the future of renewable energy and America's ongoing decarbonization efforts. NextEra Energy estimates that the United States will build an average of 10,000 megawatts of new wind power each year through 2022. By 2023, the company expects wind-generated electricity will cost just $20 per megawatt-hour -- half the cost of natural gas -- or $30 per megawatt-hour with energy storage included. That price advantage could lead to the country building an average of 12,000 megawatts to 15,000 megawatts of new wind power generation annually from 2023 to 2030.
If those economic inflection points are met, conditions will be ripe for NextEra Energy to grow enormously (and those considerations don't even factor in its even larger opportunity in solar energy). That's huge for investors. Consider that NEER generated 28% of the parent company's total revenue and 50% of total net income in the first half of 2019. That profit engine could stay red hot for years to come.
Reaping the rewards of favorable geography
Xcel Energy doesn't directly own nearly as much wind power infrastructure as NEER, but it leans on a mix of power purchase agreements (PPA) and direct ownership to support 9,300 megawatts of installed wind power capacity. It plans to increase that to 11,100 megawatts by the end of 2021. Direct or indirect, the result is the same: lower capital expenditures and lower customer bills. That's primarily because wind farms don't require fuel once built, unlike nuclear or fossil plants, and generally have lower maintenance requirements.
Geography certainly smiles on Xcel Energy. The company's four electric utilities are located within the American wind corridor, which runs roughly down the center of the Lower 48 and is home to about 66% of the country's total wind portfolio. That's helped the company become one of the most ambitious in the United States when it comes to decarbonization efforts. In fact, Xcel Energy was the first to publicly commit to generating 100% of its electricity from zero-carbon sources by 2050.
It's well on its way. Xcel Energy generated 22% of its electricity from wind and solar in 2018, and expects to increase the percentage to 46% in 2027 and 60% in 2030 as major new renewable energy projects come online. The company estimates it will cut its carbon dioxide emissions by as much as 80% from their 2005 levels by 2030 as a result.
Xcel Energy expects to grow both its dividend and earnings per share 5% to 7% annually for the foreseeable future. Considering similar levels of growth have powered its shares to a 144% return over the last five years with dividends included -- far outpacing the 63% total return of the S&P 500 over that period -- investors should consider Xcel Energy a top wind energy stock to buy for the long haul.