Staying on track in troubled times

With toeholds in the wind markets of Europe, America and Asia, AES Corporation is using its existing might in global power generation to develop a promising new business, although it is also exercising due caution in troubled financial times

America's AES Corporation, a global behemoth in the traditional power generation sector, is moving forward to fulfil its pledge to triple investment in the wind energy sector in the three years to 2010. The focus on wind is a key aim of the company's $1 billion alternative energy strategy announced in 2006.

AES, which reported annual revenues of $13.6 billion last year, operates over 43 GW of generating capacity to supply energy to more than 100 million people in 29 countries. Now the company means to become to the wind sector what it is to the global power industry. The initial goal is to add 500 MW of new wind plant annually. So far, wind power only accounts for around 3% of AES' total operating power capacity, or 1300 MW spread across three continents, but in the past few years, the company has been laying the groundwork to add more than 6000 MW to its global wind portfolio; that is double the volume it announced a year ago (Windpower Monthly, September 2007).

By the end of 2012, 2600 MW of that pipeline, with turbine supply agreements already in place, is expected to be operating to take its online total to almost 4000 MW. Its wind market presence now spans China and Latin America as well as Europe and its home turf of North America, where it first entered the global wind market back in 2004 with an equity investment in US Wind Force LLC and Seawest Windpower a year later. Around 42% (2500 MW) of its projects in development lie in North America, with Europe and Africa making up a further 39% (2340 MW). Asia and the Middle East now account for 11% (660 MW), with the remaining 8% (480 MW) in Latin America.

All plans going forward will increasingly take into account the challenging economic climate. Higher energy prices pushed up the company's earnings in the third quarter of 2008, but AES has lowered its forecast on expected earnings per share in 2009. President and CEO Paul Hanrahan expresses concern over market conditions. "While these are trying times, we've been around for more than 27 years and have endured a number of difficult cycles, in the process we have learned some lessons in how to reduce our exposure to certain risks and make wiser investment decisions."

The company emphasises that project development is in a holding pattern and would face greater scrutiny, but wind plants with completion target dates in 2009 will continue on schedule, says Marty Crotty, who heads the company's wind division. After that, projects will be considered on their merits. Finding financing is the major determining factor, but "that really depends on a lot of moving parts," says Crotty. "You can't just answer it for wind because the pockets cover the entire portfolio across the world and it depends what happens across the entire portfolio across the world and what happens in all our development activities."

One area expecting some change will be in the link and timing between financing and construction. "We generally try not to start construction until we receive financing. We're probably drawing a brighter line in the sand on that today than we necessarily have in the past," explains Crotty.

Seizing the advantage

While due caution is being exercised, opportunities may also present themselves to acquire wind assets as less-capitalised players are squeezed. "The first priority is preserving liquidity in this market," says AES's Meghan Dotter. "Depending on how things recover, once we've met all [debt] maturity, which is very manageable, we do want to take advantage of any dislocations in the market." Crotty adds that he cannot say if AES intends to participate in acquiring wind projects, but says he believes there will be more attractive deals in the market.

The company's core strategy remains to focus on countries where it already has a footprint in terms of staff and resources, leveraging its existing presence where possible and partnering with established players with a deep pipeline of development projects. "We are pursuing wind opportunities in the United States, Europe, China, India, and Latin America, with an emphasis on countries with existing AES businesses," it says.

"If you take a centralised wind business, it's a bit more challenging to be clued in to all the market drivers," says Crotty. He cites Brazil as a recent example. AES is yet to directly own or operate any wind projects in the country, but has provided a convertible loan to bankroll 210 MW of projects being developed by Siif Energies do Brasil under the Brazilian government's federal incentive program for wind power, Programa de Incentivo às Fontes Alternativas de Energia Elétrica (Proinfa).

"When you have 7000 people in Brazil, they understand what the market is like and they can help the wind business to participate in that market, whether through Proinfa or through price auctions," says Crotty. The first of the Siif projects, all using Suzlon turbines, are currently under construction.

The convertible loan agreement gives AES the option to eventually buy the projects. "If we do convert that loan to equity and build those projects between here and next year, we would be the top three wind presence in Brazil. That, along with several other platforms, can give us a very significant presence in Brazil," adds Crotty, who took over the wind helm at AES from Ned Hall, now vice president of the firm's entire operations in North America, earlier this year.

The biggest potential

The firm has also focused its strategy in China over the past 18 months, all too aware of the growing significance of the country for the global wind power industry. "We've been in China since 1994, and we started developing wind in China in the last year and a half," says Crotty, who expects China to surpass Europe as the biggest annual wind market by 2010 or 2011. "We see that as an excellent opportunity to get in on the ground floor and make sure that we have the right relationships and partnerships to be able to participate in that growth opportunity."

AES' wind business in the country is so far limited, but involves some of China's biggest domestic players, notably Guohua Energy Investment Company, a leading wind developer, and turbine suppliers Dongfang Steam Turbine Works (DSTW) and Sinovel, ranked as the third and second biggest domestic manufacturers in the country, respectively. AES has recently acquired 49% of the 49.5 MW Guohua Hulunbeier wind farm, a project registered under the Kyoto Protocol's Clean Development Mechanism (CDM) initiative. It began commercial operation in September 2007 in Inner Mongolia using 1.5 MW machines produced by DSTW under a licence agreement with Germany's Repower.

The project is AES's second with Guohua in the wind sector, the other being phase one of the Huanghua wind farm in Hebei Province, currently under construction and due online in late 2009, using Sinovel 1.5 MW turbines, based on technology from Germany's Fuhrländer. Guohua and AES, which again owns 49% of Huanghua, have recently agreed to proceed with the 49.5 MW second phase of the project to bring its cumulative capacity to 99 MW when completed in 2010. Sinovel's 1.5 MW unit is again the turbine of choice.

strategic learning

Forming partnerships in this way in China is not just to take advantage of a local firm's experience and domestic contacts. Taking a minority interest in Chinese-led ventures, rather than developing and owning projects alone or acquiring projects outright, also makes financial sense, says AES. Part ownership means projects qualify to sell carbon emission credits under the CDM program, making them profitable. Foreign owned projects in China cannot quality for CDM status. "Part of our reason for participating in China is to get exposure to the various turbine manufacturers in China," says Crotty. This kind of "strategic learning" is one of the guiding principles for AES as it forges ahead with its wind plans, he notes. When China's wind turbine makers start to aggressively export, AES will know which turbine manufacturers to work with, he explains. Crotty acknowledges industry concern about the quality of Chinese produced turbines, but diplomatically says it is a "fair concern with any new turbine manufacturer, whether Chinese, US or Indian."

Elsewhere, AES continues to ramp up its ownership of wind capacity. In the US, where it owns or operates 958 MW of wind plant, it has just completed the third phase of its Buffalo Gap project in Texas to bring the development's cumulative capacity to 524 MW. The 121 MW initial phase, completed in 2006 using Vestas machines, was the company's first wind farm construction. It secured the project through its 2005 acquisition of Seawest, which gave AES operational control of 500 MW of wind capacity in California, Wyoming and Oregon, as well as 1800 MW of development sites in ten states in the western United States (Windpower Monthly, February 2005). The 233 MW Buffalo Gap second phase comprises GE units, while the most recent 170 MW is made up of Siemens turbines.

Using a mix of units from the top tier suppliers at the same site "will also play into our future strategies," says Crotty. "When it becomes a buyers' market and we have more choices on which turbine suppliers to work with, we're going to have a much better understanding of which ones to work with."

The company hopes to expand Buffalo Gap further, with two more phases planned, but these are waiting for transmission upgrades throughout the state. "We're slow playing some of the areas while waiting for new transmission, but there are other areas where we think we can be more aggressive," says Crotty. AES has signed two power purchase agreements for its 100 MW Armenia Mountain wind project in Pennsylvania, yet to be built, and it has a small footprint in California's San Gorgonio Pass, where it hopes it can expand.

Meantime, in Europe the company is active on the wind scene in the UK, France and Bulgaria. In Scotland, AES has a majority interest in 640 MW of projects at various stages of development bought from private developer Wind Energy Ltd in 2006. Of these, site permits have been lodged for a 108 MW project and for the 22 MW Northrin project, for which turbine supply is arranged. Northrin is expected online in late 2009. In France, AES holds a minority interest, secured in 2006, in InnoVent SAS, an independent and privately owned French wind farm developer with more than 600 MW of projects in development. So far, just 6 MW is online having started operation in 2007, while two wind projects totalling 102 MW are now under construction and due for completion next year. The 34 MW Saint Patrick wind plant is the first expected online, with a target date of the third quarter of 2009.

In Bulgaria, in eastern Europe, where AES is the largest foreign investor in the power sector, the company owns a minority stake in the 156 MW Kavarna wind project, one of the largest wind developments in Southeast Europe to date. Originally planned to be 120 MW, the project is close to the site where AES is building a $1.4 billion, 670 MW lignite-fired thermal plant through its traditional power plant division. The project's target completion date has slipped from mid 2009 to the end of the year. Vestas is supplying the turbines. Bulgarian-German company Geo Power is the main shareholder in the project.

"We are on track for all our projects we started in Europe," says Crotty. "But, given current market conditions, things could change daily or weekly, so we reserve the right to change course. But as of today, we are still on target for what we intended to complete in 2009," he insists.