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Money talks

Two years ago this column warned of the dangers inherent in mega power generation companies moving in to swamp the wind business. Our warning was relevant to the project ownership side of the industry. We feared that the advance of the oil and electricity giants, who were snapping up small wind development companies and large projects as if there was no tomorrow, would leave wind with no champions to fight its cause on the all important energy political battleground. Brawn is welcome, we argued. Electric utilities moving in, like FPL, TransAlta, EDF and Iberdrola, since followed by PPM, AES, and E.On, will bring in big money and vital expertise (particularly in wind power integration), as will oil companies like Shell, BP and Denmark's DONG (particularly offshore). But that brawn must be balanced by large scale private ownership if wind is to remain an independent sector with its own identity. Without that balance, wind will lose its voice, leaving energy politics at the mercy of coal, gas and, above all, the nuclear lobby.

Two years down the line and a better balance is coming to pass. A string of institutional investors -- Bridgepoint, Allianz, Englefield Capital, Chrys Capital, Hg Capital, Babcock & Brown, and Crescent Capital among them -- have become pioneers in wind project development. Their deep pockets are lifting the ever bigger projects that will allow wind to realise its full potential. What's important is that these companies are in it for the long term. Already becoming specialised in the peculiarities of the wind business, they are bringing in much needed sophistication. Money talks and during 2004 wind grew in stature, not just in the financial markets, but in the boardrooms of the power supply business and in the corridors of government.

Private equity is being pulled into wind by the opportunity to make big money. Making that possible is the convergence of a series of macro trends coupled with micro technology advances. On the macro side, national desire for energy independence is driving global energy policies along with the Kyoto agreement on reducing carbon emissions. Wind is a good fit with both. At the same time, the world is entering an unprecedented period of power plant construction -- and not just in the developing world. Nearly half the West's electricity generation technology will need replacing over the next decade. It's plain worn out.

In the old days, much of the massive investment now required in new generation would have fallen on us as taxpayers, not as electricity consumers -- the costs would have been hidden. But another macro trend, the global liberalisation of electricity markets, is playing to wind's advantage. These days, the full cost of building power plant is increasingly part of the price of electricity, not part of the tax base. In other words, the polluter is paying: power companies in America are factoring "carbon penalties" into their resource planning; invitations to tender for supply of new power are stipulating that fossil fuel be price-weighted in the evaluation of bids; and Europe's cap-and-trade regulation of CO2 emissions starts this month, with the expectation that it will add significantly to the price of gas and coal fired electricity.

Alongside these macro trends, micro advances in wind power technology continue, not least in the understanding of how a variable energy source can be integrated into power system operation to maintain firm power supply. It all adds up to relatively cheaper wind power, as revealed in our unique annual comparison of how the cost of wind stacks up against coal, gas and nuclear (pages 31-35). The prospects for wind have never been better. Gas is pricing itself out of the game. Nuclear has yet to demonstrate it can generate power at anywhere near a competitive price. Coal can still compete with wind on most sites, but more expensive coal generation is being given a hard time by its green competitor when good wind sites are available. Coal is also heading into a world where the cost of its pollution is being increasingly added to its price.

Listen up

Knowledgeable members of the established power industry and sharp eyed investors have spotted these price trends. It is why they want in. In the broader world, however, wind power is still regarded as an expensive luxury being pedalled by unrealistic green visionaries. Look no further for confirmation of that view than the weekly stack of global newspaper clippings on energy issues, whether from Britain, the US, New Zealand or even wind-friendly Denmark and Germany.

The misconception that wind is expensive arises because the price of electricity from a proposed wind plant is compared with the marginal cost of electricity from existing power plant -- equipment that has long since paid off its loans or is well on the way to doing so. Put another way, most wholesale market prices today are not much of an indication of the price of electricity tomorrow -- the price that wind must compete with.

A series of studies completed last year, from Ireland to Denmark to the United States, have each concluded that development of wind power will often deliver the cheapest electricity seen over the lifetime of the wind station. This is particularly true if wind is built instead of gas. Getting that message heard over the powerful lobbying voices of coal, gas and nuclear is going to be tough. But money talks. The sound of major institutional investors scrambling to grab stakes in ever larger wind developments carries with it a conviction of economic good sense that no amount of green lobbying can muster. Doubters, listen up.

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