Remarkable technological advances in the wind power sector have fueled the imaginations of many investors over the years. Although the very first wind-driven electric generator was developed over a hundred years ago, the market for wind-generated power continues to deal with issues of sustainability and stability. To date, companies operating within this sector find themselves highly reliant upon government subsidies; therefore, they are at the mercy of ever-changing political winds. As investment vehicles, companies with exposure to the wind energy sector have historically carried an above-average level of risk, but certain recent trends have brought the industry’s overall sustainability into question.

Since the technology first became a mainstream reality, the promise of clean and efficient wind energy has tantalized investors. With zero emissions and minimal operating costs, one would expect demand to be off the charts. Unfortunately, high start-up costs have effectively made this path an unattractive alternative to cheaper forms of energy like coal. Furthermore, with the discovery of new fracking techniques bringing about a recent resurgence in natural gas supply, wind power now also faces an additional competitor that boasts low emissions and superior reliability.

Meanwhile, the 2012 Presidential election demonstrated how government subsidies play an outsized role in this market. Indeed, pre-election uncertainty about the future of the Renewable Electricity Production Tax Credit resulted in curtailed demand across the entire wind-power industry. The world’s leading wind turbine supplier, Vestas, saw a $1.3 billion loss in the fourth quarter of 2012 as a direct result of this. Its fellow market leader, General Electric Company (GE - Free GE Stock Report), also saw substantially lower demand within its wind segment. 

Although the tax credit has since been extended, customers have thus far been slow to return, unwilling to take on the sizable upfront costs in a global economy that is still plagued with uncertainty. Indeed, with the U.S. government’s budgetary issues yet to be resolved, the long-term viability of this tax credit continues to be a major concern of potential investors. While these subsidies represent a respectable attempt to support the development of a socially responsible green technology, investors should be especially wary of the short-term volatility within the currently frothy market. 

To make matters worse, there are signs that popular sentiment may be slowly moving away from this form of alternative energy. Some people in communities with installed wind turbines have started to discover possible health ramifications to this technology. Reports of headaches, dizziness, ear pain, and disturbed sleeping patterns suggest that the low frequency sounds generated by wind turbines may be responsible for these physiological ailments. Some communities such as Falmouth, Massachusetts have even considered decommissioning their newly built wind plants as a result of these concerns.

Although this industry faces strong headwinds at the moment, investors would be foolish to ignore its tremendous growth potential over the long term. Health ramifications notwithstanding, wind turbines will likely encounter renewed demand once the economy gains steam. Although new installations may be limited to off-shore coastal locations or other unpopulated areas, the industry should nonetheless benefit from growing global energy demand. Indeed, as people become more affluent in developing nations, demand for environmentally friendly forms of energy will naturally also increase, especially in countries like China and India.  Leading wind turbine suppliers such as Gamesa, General Electric, Siemans (SI), Sinovel, and Vestas, appear set to take advantage of this trend.

Component makers should also see improved demand over the long term. For example, Woodward (WWD) makes wind convertors and specializes in solutions that integrate new wind plants with existing power grids. Carbon-fiber manufacturers like Zoltek (ZOLT) and Hexcel (HXL) are also potential beneficiaries, as the industry increasingly augments its traditional glass fiber technologies with this technologically advanced material in order to build lighter and bigger rotor blades. Finally, companies that produce protective coatings used on wind turbines, such as Cytec (CYT) and PPG Industries (PPG), will likely also partake in the rising tide.

Although we believe that the wind industry holds much promise down the road and is here to stay, near-term issues should be of concern to investors. Given subsidy-driven demand, this sector’s inherent volatility is inappropriate for risk-averse investors. Although nimble traders may enjoy this unpredicatability, prospective long-term investors should focus on developments that affect this sector’s future outlook. New bladeless technologies like the Ewicon system and Saphonian turbine promise to revolutionize wind-energy production, but are still in nascent stages of development. As with most growth industries, wind energy potentially offers great rewards in exchange for its high risks. That said, investors will want to tread carefully before leaping onto this spinning wheel of progress.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.