FAN ETF: Opportunity To Participate In Massive Wind Expansion

With clarity in the US that voters have not endorsed denial of reality, the way forward for the Biden Administration’s plans to address climate change and exit fossil fuels ($369 billion over 10 years, Inflation Reduction Act of 2022) seems more secure. Likewise in Europe the Russian invasion of Ukraine, while creating a short term crisis due to massive shortfall of Russian fossil fuels, is leading to massive plans to expand renewables (REPowerEU) with a big focus on offshore wind. A key element for decarbonizing the global power supply is going to be massive investment in offshore wind. This is coming at a time when the wind industry is on its knees because the industry has got itself into a corner through accepting projects that are not profitable. I’ve indicated elsewhere that I think industry leader Vestas Wind Systems (OTCPK:VWDRY) is clear about the need to pass up unprofitable business and other companies (eg GE (GE), Siemens Gamesa (OTCPK:GCTAF)) are taking steps to stem the losses. We are entering a new phase in the development of the wind industry and this is a good time for investors new to this space to consider investment. First Trust Exchange-Traded Fund II – First Trust Global Wind Energy ETF (NYSEARCA:FAN) is a vehicle that might be of interest.

Is wind really coming back?

The most recent coverage by Seeking Alpha of FAN in August 2022 correctly stated that FAN’s top holdings had returned negative returns at that stage of 2022. The big issues indicated above (notably RePowerEU and the Inflation Reduction Act of 2022) have sharpened views recently about the urgent need to decarbonize and that wind (especially offshore) is a key part of the solution.

FAN’s major holdings

FAN (First Trust Global Wind Energy ETF) is understandably heavily involved with companies engaged in the wind industry. Its top 10 holdings (47.8%) are:

Northland Power (OTCPK:NPIFF) 8.03%

Orsted (OTCPK:DNNGY) 7.64%

Vestas Wind Systems A/S (OTCPK:VWDRY) 6.88%

EDP Renovaveis S.A. (OTCPK:EDRVF) 6.51%

China Longyuan Power Group Corp. (OTCPK:CLPXF) 5.50%

Boralex Inc. (OTCPK:BRLXF) 3.74%

Innergex Renewable Energy Inc. (OTCPK:INGXF) 2.71%

Engie SA (OTCPK:ENGQF) 2.27%

Owens Corning (OC) 2.26%

RWE AG (OTCPK:RWEOY) 2.26%

This provides good coverage of the wind industry, although a reason that I prefer to choose a small group of specific wind stocks is that the major holding (Northland Power) will produce 16% of its 2022 estimated EBITDA from natural gas. You have to look hard in Northland Power’s presentations to find the gas connection as corporate presentations make it look as if its almost total focus is on wind power, and indeed renewables produce 76% of its estimated 2022 EBITDA (52% offshore wind, 24% onshore wind with some solar PV).

Note that FAN is heavily biased towards European and US wind industry participants, with limited exposure to the world’s biggest offshore wind market (China).

New wind developments everywhere

To give a flavour of the changed wind environment, there is major development of offshore wind coming on both the east and west coast of the US with a goal of 30 GW by 2030, Japan plans 10 GW by 2030. China is where the action is really happening with a single offshore wind project involving 43.3 GW to commence construction by 2025. Europe, where it all started, is very focused with a group of 9 countries announcing plans for 380 GW of wind power by 2030 (much of it offshore). The IEA has a report giving a sense of the massive developments of wind power coming to achieve emissions reduction targets. The IEA has consistently underestimated renewables developments and I suspect that, notwithstanding the big numbers it projects, it may well prove to have underestimated where things are headed.

The above examples are but a hint of the overall scene currently. Choose anywhere (eg Australia, South America, India) and you will find major plans for wind expansion, especially offshore.

Risks to the wind industry

The GWEC (Global Wind Energy Council) indicates that current growth of the wind industry is inadequate to reach projected targets to constrain global temperature rise to 1.5C. Six areas of challenge are outlined by GWEC in both the short and long term. These involve i) system design, ii) workforce issues, iii) infrastructure, iv) technology, v) supply chains, vi) social acceptance.

Key issues (especially in Europe currently) relate to permitting timelines, social acceptance and land use. COVID has meant that supply chain issues are major, as is mobility of skilled workforces in times of lockdown. The phase out of coal and competition with natural gas are live issues currently. Then there is grid reinforcement and managing clean energy buildout, including electrification of transport and of everything else.

My take on the above is that the urgency to address climate issues along with energy security are beginning to help make addressing the above issues a matter of urgency. Whereas previously these issues were used to provide an excuse for not making the switch from fossil fuel exploitation, today these issues are out in the open and means to address them are being found.

Conclusion

It doesn’t take much digging around to find reports of proposed massive offshore wind expansion globally (see above). Global wind power now involves more than 837 GW capacity and 2021 brought 94 GW of new wind power capacity into operation. Under current policies (expect more!) 557 GW of new wind power capacity is expected in the next 5 years. Offshore wind is emerging as it comprises just 54 GW currently, but 21.1 GW was commissioned in 2021. It is becoming clear that a new wave of wind developments is coming, especially offshore.

I’ve been labelled by some on Seeking Alpha as being a “naïve greenie”, but I find it difficult to see how investment in wind power is not going to boom based on the above small sample of recent reported developments. Just about anywhere one looks there are big developments planned. 4C Offshores has a database of 2798 projects over 58 countries (36,569 contracts!). It has to mean that wind is showing signs of major resurgence. Offshore wind is a big deal, with big barriers to entry. I’ve made some choices, based on senior management and technical capacity, for my wind investments. These include Vestas Wind Systems (OTCPK:VWDRY) which is the biggest turbine manufacturer (up 46% last month), Orsted (OTCPK:DNNGY) which is the biggest offshore wind project developer (up 24% last month) and RWE Aktiengesellschaft (OTCPK:RWEOY) a major offshore wind developer (up 15% last month), noting that each of these companies have had a tough previous 12 months (VWDRY down 29%, DNNGY down 32%, RWEOY down 17%). Many investors not familiar with the wind space may not be comfortable about picking particular stocks; FAN provides a more industry-specific exposure. Not surprisingly FAN has tracked similarly to my individual investments, being up 17.8% in the past month and down 17% year on year. At a minimum FAN is worth having on your energy watchlist.

I am not a financial advisor but I hope that my commentary alerts you to dramatic changes happening with the energy transition and helps you and financial advisor to think about your energy investments. Perhaps it might trigger interest in FAN.