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Global player makes a stiff bet on wind

Since it announced it was moving into wind three years ago, global power company AES has had a busy time, not least after it bought veteran American wind project developer Seawest. While America remains its number one market, Britain, France and emerging markets in eastern Europe are coming firmly into focus

When AES Corporation, a major player in the world of power generation, announced a three-year plan to invest a billion dollars in alternative energy -- with half aimed at wind -- it signalled an ambitious new pace, even for a company known for its rapid evolution. But if the company's 25-year history is anything to go by, let alone its wind project purchases since the April announcement, AES means what it says. Five years down the road, it expects to be installing 1000 MW of wind power a year around the world.

Since beginning as an eight-person start-up in 1981, AES has become a global force, generating and distributing electricity to 11 million customers in 25 countries on five continents. The American company, based in Arlington, Virginia, now employs more than 30,000 people worldwide, maintains 128 power generation facilities and sells more than 44,000 MW of electricity through 14 regulated storefronts. AES went public in 1991, was added to Standard & Poor's 500 Index in 1998 and reported 2005 revenues of $11.1 billion.

For most of its first quarter century, AES relied on fossil fuels for the bulk of its generation. A significant shift in 2004 saw the company invest in a minority share of a small East Coast wind developer, US Wind Force. A few months later came the $60 million purchase of Seawest, a proven California-based builder and operator of wind farms with more than 3200 installed turbines and 850 MW to its credit in the US and Europe since 1982.

Now, after three busy years, AES has poured $265 million into wind power, formed a new alternative energy group and is about to significantly ratchet up its numbers. The company currently operates 600 MW of wind facilities as it pursues another 2000 MW, primarily in the US. As rising production costs, global security concerns and dire environmental issues continue to dog traditional energy sources, AES is making a stiff bet on wind.

US and Europe focus

"In 2004 we started investigating wind opportunities," says Ned Hall, the company's vice president of renewable generation. "We invested in Wind Force to concentrate on the Mid-Atlantic and then we formed a foundation by acquiring Seawest. That set a strategy in motion to focus on the US and Europe."

Meanwhile, the company has committed $100 million in investments that will generate more than 17 million tons of carbon reduction credits through 2012 and is currently developing three liquid natural gas (LNG) regasification terminals in the south-eastern, mid-Atlantic and New England regions of the US. Elsewhere, AES continues to evaluate future investments in solar and wave technologies, as well as non-electricity ventures such as ethanol, bio diesel, methane capture and conversion, synthetic fuels and new technologies aimed at reducing greenhouse gas emissions.

"We've created this group to focus exclusively on alternative energy," says Bill Luraschi, the company's executive vice president of business development. "We expect worldwide energy consumption to double in 20 years and this new group is designed to meet that increased demand."

The half of the billion dollars not earmarked for wind, according to Luraschi, will be directed mostly at looking into climate change activities and LNG. AES already operates in countries where 60% of the world's projected energy growth is expected to occur within the next five years. "We think the alternative energy sector complements our traditional generation business," Luraschi says. "Our global footprint will be a competitive advantage and we're really excited about our prospects."

Wind thus far

The company's biggest wind power success thus far, the 120.6 MW Buffalo Gap project near Abilene, Texas, brought 67 Vestas turbines online last year. This year, less than two weeks after the billion dollar announcement, AES bought 56 MW worth of veteran Vestas turbines that have been in service in southern California since the 1980s and had belonged to Enron: the 35 MW Tehachapi Pass Wind Project and the 21 MW South Tehachapi Hill Wind Project. Neither facility, according to Hall, is subject to the bird and bat-related concerns commonly associated with the Altamont Pass area in northern California.

Both Tehachapi projects will eventually become part of an upcoming AES repowering effort. The deal, expected to close within weeks, will bring the company's total of installed wind projects to 654 MW. "Seawest has been doing repowering in the past and both of those projects have power purchase agreements with Southern California Edison, so we'll have to work with them. But we haven't really had time to re-evaluate the situation and haven't yet got any firm plans on when and how to repower the facilities," says Hall.

If California wants to reach the targets set by its renewables portfolio standard (RPS) legislation, repowering will become increasingly important, continues Hall. "That's part of our strategy for California," he says. "We also operate other facilities there that would lend themselves to repowering in the future."

Hall also notes that Texas and California are two states looking at much needed increases in transmission capacity. "I think transmission is the top issue in terms of growth in the industry," he says. "Both Texas and California recognise that and are working diligently on it. Both have active plans that would allow significant development. And both are investing a lot of money on upgrading their systems. We have ambitions to keep growing in Texas and Seawest operates 250 MW in California. Those are two main targets."

A market in flu

xCombined, Texas and California are already home to nearly half of the close to 10,000 MW of wind power now operating nationwide. The US is on target to add more than 3000 MW this year and the signs are for market growth into the future. Like other wind market players, however, Hall is uncertain about how steady that growth will be.

"Price hikes are increasing stress in some situations," Hall says, referring to the escalating cost of wind turbines ex-factory. "There has been a legitimate increase in steel prices and, in terms of dollar costs, there has been an increase in the euro and Europe is where most machines are built. But we're in a state of flux as to whether a 30% increase in pricing will be absorbed. That's the open debate: have manufacturers merely taken the increase in demand to increase their margins? They'll tell you that they've gone through some lean years and that's where the debate pivots. The real question is, if competition heats up, will the margins sink or not?"

To the good, though, Hall does not expect turbine scarcity to last. "I think there will be plenty of supply over time," he says. "There will be an industry response. A lot of the manufacturers are expanding facilities in China and those turbines will find their way into the US, although it might take three or four years for it to shake out."

Hall also sees short term solutions coming from increased domestic turbine production. "Siemens and Suz-lon have announced plans to manufacture in the US," he says. "Gamesa has announced an expansion and GE is already here. So there are a number of first-tier suppliers and there are newcomers to the market." Bigger turbines could also help, but Hall notes the industry faces physical limitations. "We can't go beyond certain sizes," he says. "We're constrained by our ability to move bigger equipment logistically -- things like the turning radius on railroads and basic road designs. Every site has its own logistical considerations."

But he sees increasing evidence of upcoming innovations. "There are a lot of creative ideas coming into blade and tower manufacturing to make the logistics fit bigger megawatt outputs," he says. "Vestas has been a leader in technology, GE has bigger machines and the Clipper guys have tried to be very innovative, in cost and in size."

O&M costs doubled

More costly turbine prices is not the only price increase concerning Hall. "The other big unknown is that we have to understand the cost to maintain these machines over time. A lot of people are talking about increases in capital costs but operating and maintenance costs have also doubled," he says.

As for the dilemma of wind's time-limited federal production tax credit (PTC), Hall expects an extension before it sunsets at the end of next year. "The PTC has broad-based support and it fits with the objectives of the people in the US government that would have a vote on it," he says. "The current PTC structure lends itself to growth but there are a lot of other good ideas out there and the majority of our developments are focused on states with renewables portfolio standards."

Hall also sees much promise in the potential power of a would-be national RPS and points to the most recent legislative proposal for a minimum standard of 10% renewable energy in the federal electricity portfolio, representing 100,000 megawatts of renewables generation. "There's a little less than a million megawatts in the country right now and less than 10,000 of it is wind."

Company targets

AES has a keen eye to the wind market beyond its home base. "As we get outside the US, obviously Germany, Denmark and Spain are matured," says Hall. "But we have very active development in the UK and France, along with Bulgaria, Hungary, Poland and Greece. Then there's China, India and Pakistan. In South America, the Brazilian market has been slow to go forward and the risk-reward trade off, due to the current return on government bonds, hasn't been attractive so far. We're looking at other places, too, but they're a little further out there for us. Our core focus is the US first and Europe second."

Meantime, offshore development is still a largely untapped segment of the worldwide market. "We continue to investigate offshore, but the capital expenses look to be at least two times onshore and the same is true of operating expenses," Hall notes. He believes, however, that offshore will eventually play a significant role, although not necessarily in the US. "As long as onshore markets are available, that's the better choice."

Overall, Hall expects the company's core efforts in thermal generation to continue and sees wind as an expansion of a bigger concept. Nevertheless, AES clearly expects to put plenty of wind power into its future mix at a time when wind looks increasingly good when measured against fossil fuels.

"Much of the world can take on 10-20% wind without compromising the stability of the transmission systems," says Hall. "And the offsets of pollution and CO2 will motivate people to invest in wind. The other thing is that wind is fast to market and can bring generation online very quickly. It's also a fixed cost up front and a level price over 20 years as opposed to other sources that are subject to the volatility of fuel sources."

In fact, Hall sees the half billion dollars the company is about to aim at wind as a somewhat conservative estimate in a world full of third-party financing. "I hope we do better than finding $500 million," he says. "I'm very confident that we will, and we'll expect to make attractive returns through the investment. We see this as a good business opportunity -- both in returns and in future growth."

Ultimately, AES prefers not to set percentage goals on types of generation. Hall says it is more about looking for projects that make sense for the company. "Let's face it, $70 oil makes wind attractive, especially when you get 20 years of stable pricing. Today, in virtually 99% of the markets, wind is the lowest-cost renewable. That's attractive to a lot of people and, with today's prices, people are going to be signing up for wind power," says Hall.

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