The American power sector passed a number of milestones this year related to the ongoing transition to low- and zero-carbon energy sources. The United States reached 100,000 megawatts of installed onshore wind-power capacity at the end of September. Wind power has eclipsed hydropower as the nation's top source of renewable electricity. And coal-fired power plants are being jettisoned from regional grids at a historic pace or simply being idled.
There's just one big blemish on an otherwise solid 2019: North America has been mired in a wind drought since the middle of 2018. In the first eight months of 2019, the United States generated just 4.3% more electricity from wind farms versus the year-ago period, despite a 10% increase in installed capacity in that span.
That's sapped the benefits of a massive influx in invested capital, and it has reduced earnings for a number of wind-heavy power generators and electric utilities in 2019. But there are signs that the wind drought may be subsiding. Here's why that matters for renewable energy stocks in 2020 and what investors need to watch in the coming months.
Does the September surge signify a trend?
According to the latest data from the U.S. Energy Information Administration (EIA), the United States generated 31% and 33% more electricity from wind power in September 2019 and October 2019, respectively, compared with the year-ago period. Two months don't make a trend, but the surge cannot be explained solely by increases in installed capacity in that span.
Investors who pay attention to capacity factors, a metric that quantifies the percentage of time that power assets operate at 100% capacity, may be cautiously optimistic that the wind drought could be over. Consider how wind-power capacity factors stack up from from each month of the last three years. Each metric is based on the installed capacity in the month shown, making for a straight-up comparison:
The wind drought wasn't in effect in 2017, but made its presence felt in mid-2018 and lingered through the first half of 2019. That much is clear from the chart, but a little nuance can go a long way.
First, the North American wind resource is highest in the beginning and end of the calendar year and dips significantly from May through September. The fluctuation in recent summers reflects natural volatility and not much else.
Second, this year's fall surge can likely be attributed to two factors. The continent's wind resource probably picked up a month earlier this year (in September), while the industry's repowering efforts (tearing down old turbines and erecting newer, more efficient towers) are paying off.
General Electric (NYSE:GE) has sold enough turbines to repower 4,000 megawatts of American wind since 2017 and has another 3,000 megawatts of repowering lined up before the end of 2020. Repowered assets benefit from an average 20% increase in energy production and 1.5% increase in availability, directly observed in higher capacity factors. That could allow the United States to easily top 40% capacity factors during peak wind season in the coming years.
Third, even after accounting for the above, capacity factors appear to have improved in the second half of 2019 compared to 2018. Investors will know for sure soon: electricity and capacity-factor estimates for November 2019 will be available in late January 2020 and December 2019 estimates will be available in late February 2020. That information could have predictive power related to upcoming earnings reports for power generators and electric utilities.
These renewable energy stocks could get a boost
Investors who paid attention to EIA data in late 2018 knew ahead of time that year-over-year financial comparisons were going to be rough. The same has been true for the first half of 2019. Of course, the reverse is also true: When the wind drought ends, year-over-year comparisons will be significantly improved.
NextEra Energy Partners (NYSE:NEP) has rapidly increased the size of its wind power portfolio this year, but the wind drought has blunted the immediate impact. In the first half of 2019, the company estimated that it lost out on $18 million in revenue due to lower wind resource in the comparison periods. That was equivalent to 6% of the partnership's renewable energy revenue in that period.
But in a potential preview to what's ahead, NextEra Energy Partners estimated that higher wind resource in the third quarter of 2019 drove a $12 million increase in revenue compared with the year-ago period. That was equivalent to 6% of renewable energy revenue during the most recent quarter.
The same story plays out again and again across the wind industry. NextEra Energy (NYSE:NEE), has cited lower wind resource as the primary reason for a $229 million decrease in revenue at its power generation subsidiary in the first nine months of 2019 versus the year-ago period. That was equivalent to 5.5% of the subsidiary's revenue in that span.
Not even Pattern Energy Group (NASDAQ:PEGI), which diversified its North American wind portfolio with assets in Japan, could escape shifting climate patterns. The total amount of electricity sold in the first nine months of 2019 decreased by 56 gigawatt-hours compared with the year-ago period, but lower wind resource reduced electricity sales by 134 gigawatt-hours in that span.
Investors now know what to watch
If North America's wind drought really did subside beginning in September, just ahead of the strongest period of the year for wind and encompassing the entire fourth quarter of 2019, then investors could be rewarded with spectacular year-over-year improvements when power generators and electric utilities provide their next financial updates in early 2020.
Investors can get ahead of the curve. The next data update for wind farm output and operating efficiency from November 2019 will be available in late January 2020. If the numbers are solid, then chances are good the American power sector can put the wind drought behind it in 2020.