The answer, my friend, is blowing in the wind.

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With demand for electricity increasing at about a 2% clip annually, and states like California bracing for a summer of blackouts, the need for new generation is acute, especially in the West and Northeast where little new generation has been developed in nearly a decade.

While most of that generation will come from finite sources such as natural gas, the need to supplement traditional sources is growing.

My colleague Jim Seymour has done an outstanding job examining the future potential of fuel cells, a promising new technology used to generate energy. We have also looked at the current and future potential of hydropower. Here, we look for answers. Here, we look for answers in the wind.

As the Wind Blows

Wind power's potential is enormous. And while the costs of development and inconsistent government policies have hindered investment in wind-power technology, investment opportunities in wind may surpass other renewable resources.

Wind power is nothing new. We can all picture that serene Dutch windmill amidst a field of tulips, pumping water from the ground. Historic evidence suggests primitive wind devices were used to run boats along the Nile as early as 5000 B.C.

Wind is an obvious source of power. It is abundant and free. According to analysis by the U.S. Department of Energy, "good wind resources" -- areas with average annual wind speeds of 13 miles per hour or more -- are plentiful along the East Coast, the Appalachian Mountain chain, the Great Plains and the Pacific Northwest. In fact, North Dakota alone has enough energy potential from wind to supply 36% of the electricity to the continental U.S.

As the Wind Blows Leading Wind Generation Potential by State
State	Wind Capacity (billions of kWhs)
North Dakota	1,210
Texas	1,190
Kansas	1,070
South Dakota	1,030
Montana	1,020
Nebraska	868
Wyoming	747
Oklahoma	725
Minnesota	657
Iowa	551
Source: Pacific Northwest Laboratory, American Wind Energy Association

Turning wind into power is similar to the hydrogeneration process. Commercial wind towers can span 20 stories high with rotors that span more than 100 yards. The wind catches the rotors, causing them to spin like a propeller while the shaft spins a generator to make electricity.

Generating power from wind requires a utility to have dozens of towers grouped in what is commonly called a wind farm. The towers produce electricity simultaneously, and the power is placed directly onto a transmission grid just like power from traditional generation plants.

There are issues: While the fuel is free, development costs remain high. "Even though the cost of wind power has decreased dramatically in the past 10 years, the technology requires a higher initial investment than fossil-fueled generators," according to a report from the Department of Energy, noting that initial costs are recovered over time as the fuel to generate power is free.

Wind power costs between $40 and $60 per megawatt hour, depending on average wind speeds. For example, the anticipated cost of power from a wind farm being developed in Texas is less than $40/MWh. Yet, the cost of power from a wind farm being developed in a less blustery area in the Pacific Northwest will be more than $50/MWh. Still, that compares favorably to traditional coal generation, which averages about $50/MWh, natural gas at about $42/MWh and nuclear above $80/MWh, according to data from the American Wind Energy Association, or AWEA.

Interest rates are also a factor. "Wind is a highly capital intensive technology," according to a report from the AWEA. "There is no fuel cost for a wind plant, so most of its costs are in the capital required for equipment manufacturing and plant construction. This in turn means that wind's economics are highly sensitive to the interest charged on that capital." According to a recent study conducted at the Lawrence Berkeley Laboratory, if wind plants received the same financing terms as gas plants, the cost of wind-plant development would drop by 40%.

Which Way Does the Wind Blow?

One key to the development of wind as a power source has been the federal wind energy production tax credit, which provides a 1.5-cent per kilowatt credit for the first 10 years of a wind plant's operation. According to the AWEA, the credit reduces the costs of wind by about 0.7 cents/kw over the projected 30-year life of the plant.

The tax credit was almost eliminated in 1999 and will likely be the source of debate as Congress and the Bush administration consider the future direction of energy policy.

While the AWEA is optimistic about the future of the credit, it remains concerned. "At a time when California and much of the West is reeling from a shortage in electric-generation capacity, the growth of one of the most promising and economical new electricity sources has been hampered by on-again, off-again federal government policies," AWEA Executive Director Eandall Swisher recently told Energy Insight, an industry trade publication.

Concerns about wind energy typically fall into two camps: reliability and the environment. "The major challenge to using wind as a source of power is that it is intermittent and it does not always blow when electricity is needed," according to the DOE report. Also, since you can't store wind power, timing is an issue. Furthermore, many wind plants are in remote areas, making delivery of electricity to the grid -- and on to areas in need of power -- a challenge.

Environmental issues also persist, including the noise and visual impacts of large wind farms. Yet the issue of most concern is the possible damage to the ecosystem because birds fly into large wind farms. "Most of these problems have been resolved or greatly reduced through technological development or by properly siting wind plants," according to the DOE. "Avian mortality remains an issue to be better understood and resolved." At the same time, wind proponents are quick to point out that wind generation produces no greenhouse gases or pollution, a major benefit.

Gusty Investment Opportunities

At the end of last year, there were 2,550 megawatts of wind-generation capacity in the U.S., well under 1% of total generation. However, at least 40 projects are in development, which will add 4,500 megawatts of wind generation capacity over the next three years.

Wind Gusts Major Wind Generation Projects in Development
Project	Location	MW	Partners
State Line	Washington	300	FPL Group (FPL:NYSE)PacifiCorp*
Nevada Test Site	Nevada	260	Siemens, Vestus
Reliant Texas	Texas	208	Reliant Energy (REI:NYSE)
Storm Lake	Iowa	196.5	Enron Wind (ENE:NYSE)
*A unit of Scottish Power Source: American Wind Energy Association

Many of those projects are in Texas, where utility deregulation legislation includes a requirement that utilities install at least 2,000 megawatts of wind generation by 2009. Already companies like Reliant Energy (REI:NYSE - news - boards), TXU (TXU:NYSE - news - boards) and Britain's National Wind Power are developing significant wind farms in the state.

By far, the largest utility players in the wind business are FPL Group (FPL:NYSE - news - boards) and Enron Wind (ENE:NYSE - news - boards). FPL owns more than 1,000 megawatts of wind generation and Enron operates more than 1,400 megawatts with more than 4,300 turbines.

While significant in the wind business, wind is dwarfed by other power sources. "Wind is important, but it remains a very small portion of utility's businesses," says AWEA spokesperson Jamie Stone. Enron is also involved in the manufacturing and installation of wind turbines for other companies with products generating from 750kw to 2 megawatts of power.

As the cost of wind-power technology is reduced, more utilities and independent power producers are looking at opportunities in wind.