This month's U.S. employment report reinforced a familiar trend in the current expansion, with the healthcare sector among the leading contributors to non-farm payroll growth in February. In absolute terms, healthcare has delivered the most in employment gains over the course of the cycle so far and is expected to remain a key source of payroll additions over the coming years. But in growth terms, employment in the wind energy industry is projected to far outstrip that of other sectors over the next decade. According to the American Wind Energy Association, the wind power sector supported a record 88,000 U.S. jobs at the start of 2016—an increase of 20% over the prior year compared with a 1.9% increase for payrolls overall. And according to projections by the Bureau of Labor Statistics, employment for wind turbine technicians in particular—required for the operation and maintenance of the growing installed base of turbines—will increase more quickly than any other occupation over the next 10 years (Exhibit 1). Globally, 2015 was a record year for employment growth in wind energy. A 5% employment increase in the sector, driven primarily by growth in wind power system installation in the U.S., China and Germany, raised the global total to 1.1 million jobs.

This all reflects the ongoing shift toward global emissions reduction, one of the five key themes we identified at the end of last year, and we expect wind energy to play a major role in the transition. In 2016, wind surpassed hydropower as the top source of U.S. renewable electricity generation capacity. And wind capacity worldwide rose by 16.9% in 2015 to reach 435 gigawatts (over 95% of it onshore), close to twice that of solar power. Wind still accounts for just 1.4% of global primary energy consumption, but its share has more than doubled over the past five years (Exhibit 2).

Rising capacity, falling costs

Installed wind energy hardware is composed of six principal system components. The turbine blades transfer kinetic wind energy through a rotary shaft to the gearbox. The gearbox turns the generator at a higher speed to produce electrical power. And electricity is then transferred to the grid or directly to the user through cables housed in the tower. As with other renewable sources, falling costs and improving efficiency at the system level will be the key enablers of sustained growth in future adoption, separate from any additional stimulus from government policy support for the industry. It is therefore important to identify the major sources of cost and efficiency to identify the likely drivers of future growth. For a given wind project, the lifetime unit cost or "levelized" cost of energy (LCOE) production is driven by three main factors: capital costs, operation and maintenance, and how efficiently the power can be generated. Capital costs largely consist of turbine materials and labor inputs for construction and engineering, with the shares varying by installation type. For onshore wind, turbine costs dominate; while non-turbine capital costs, and operation and maintenance tend to be much higher for offshore wind systems given their remote siting (Exhibit 3).

Efficiency of energy output is another key factor in the LCOE for both onshore and offshore wind systems. And the size and positioning of turbines, as well as the installation density of wind farms are the primary efficiency factors here. Larger-scale wind farms reduce costs for the transportation, installation and servicing of turbines, while longer turbine blades can be mounted on higher towers and therefore capture higher wind speeds to produce more electricity. The size of wind turbines has continued to increase over time, with the average diameter of a new grid-connected onshore turbine rising from around 15 meters and a capacity of 0.05 megawatts (mW) in 1985, to the largest turbines today which reach 160 meters and 8.0 mW. Smaller-scale structures capture less energy in direct proportion to their blade size and are typically used for rural electrification where a grid connection may not be available.

Wind speed itself is another determinant of wind generation efficiency, making site selection an important driver of unit costs. Theoretically, the amount of energy produced increases at the rate of the wind speed cubed—if wind speed is doubled for example, the amount of power generated increases by a factor of eight. For this reason, offshore wind is typically more efficient than onshore due to higher wind speeds at sea than on land. Nonetheless, the greater capital, operation and maintenance costs still leave offshore wind with a much higher LCOE. According to the International Renewable Energy Agency, the typical LCOE range for wind farms globally is in the range of USD 0.06–0.12 per kilowatt-hour (kWh) onshore and USD 0.10-0.21 per kWh offshore. This compares with current average U.S. retail electricity prices of USD 0.07 for the industrial sector and USD 0.12 for residential supply.

What will drive future growth?

With the seven-fold increase in global wind power capacity over the past decade, much of the increase in efficiency and decline in unit costs to date has come from economies of scale — larger wind farms and larger blades. But new innovations in turbine design and material use should also play an increasing role over the coming years. This will be particularly important for onshore wind given the higher share of system costs for which turbines account. As the scope for further increases in structure size diminishes, reducing the weight of rotor blades and improving their efficiency of energy capture will be another means of reducing turbine costs. Carbon fiber for example has been viewed as a possible source of weight reduction, though its cost is not yet competitive with the fiberglass typically used for blade reinforcement today. And the use of nanomaterials such as graphene to strengthen blades and prolong their life is also seen as a potential means of lowering costs in the future.

Sensor technology is also being developed for real-time monitoring of turbine components such as the blades and gearbox. According to the U.S. Department of Energy, wind turbines typically fail 2.6 times per year during their first 10 years of operation, and undergo an average of 3.9 unplanned maintenance incidents per year. By monitoring the condition and operating performance of these key system components, maintenance costs can be reduced through preventive repairs and less unplanned downtime. The Department of Energy believes that remote monitoring can lower these costs by as much as 40%. Turbine-mounted sensors that can adjust blade angles in response to changing wind speed and direction will also be increasingly used to raise efficiency by maximizing energy capture.

On top of efficiency improvements from the turbines themselves, innovation in wind farm positioning will also contribute to the increase in wind power adoption. Better turbine siting based on improved wind measurement should allow developers to exploit sites that may previously have been uneconomical. And similar to the operational efficiency gains from larger farms and larger turbines, industry consolidation may also increase economies of scale in turbine manufacturing. The global market is relatively fragmented, with the top five manufacturers each accounting for between 7% and 17% of market share in 2015, for a total of 53% of industry output.

In spite of industry concerns over the support by the new U.S. administration for traditional energy sources, we also still expect policy tailwinds at the state level and internationally. A total of 254 renewable energy bills were enacted by U.S. states in 2016. And 29 states have now adopted renewable portfolio standards, which require utilities to produce a specified amount of alternative energy as a share of their total electricity sales. Illinois for example has set a renewable requirement of 25% by 2025–2026, with wind to account for 75% of the total. New Mexico has set a wind standard of 30% of its renewable generation by 2020. And Maine has targeted a quadrupling of its wind capacity between 2015 and 2030. Separately, the international climate deal set in Paris in 2015 and ratified last October will go ahead with or without compliance by the U.S. federal government. As a pledge and review agreement, there are no direct ramifications for other participants should any single country fail to meet its nationally determined contributions. And for other large emitters like China and India, alternative energy adoption remains an important element of government strategy for pollution control and electricity access.

Wind power is now the largest source of renewable electricity generation capacity in the U.S., its share of global energy consumption is rising rapidly, and we expect falling costs, improving technology and ongoing global policy support to be the key drivers of future growth. For investors, we would expect a range of industries to benefit over the long term as generation capacity continues to expand. Turbine manufacturers, particularly those with a footprint in fast growing markets such as China, Brazil, Poland, Turkey and Africa,1 potential takeover targets, producers of new turbine materials and makers of sensors for remote monitoring and blade positioning should all be beneficiaries of the growth in new installations. And project developers should also benefit as more sites become cost effective and wind power continues to take share from other electricity generation sources.

1 Each of these markets has both doubled its capacity and installed more than 2 gigawatts over the past three years, with 83% of Africa's increase driven by South Africa, Morocco and Ethiopia.

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But in growth terms, employment in the wind energy industry is projected to far outstrip that of other sectors over the next decade.
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