Wind power will continue to grow worldwide and is well on its way to becoming a mainstream energy choice. The mood at the huge four-day wind power event in Chicago in late March -- the second global conference and exhibition held by the industry and the biggest yet -- reflected a business brimming with confidence and clearly convinced that a great future lies ahead. But it continues to face the same litany of challenges from year to year. It needs to convince the financial world of its credibility, politicians of the need for stable market frameworks, and power sector officials of wind power's right to fair access to transmission lines. Wind is poised to become a top competitor on the world energy stage. "It will only happen if we start thinking and acting like the major world industry we are," Corin Millais, the managing director of the European Wind Energy Association (EWEA) told delegates.
A record 3600 people turned up in Chicago, Illinois, America's windy city, to celebrate advances that have taken the global wind industry from a mere handful of small wind turbines in Denmark, with just 10 MW installed 25 years ago in California, to a global business with a $9 billion turnover last year. And although speakers at Global Windpower 2004 disagreed on the likely rate of growth, they agreed that continued high growth is inevitable as costs come down, natural gas prices rise, environmental constraints grow and policy support in new markets strengthens.
Worldwide, installed capacity grew last year by around 8200 MW to bring the global total to more than 39,000 MW. While that growth could slow this year due largely to a poor outlook in the US, which accounted for about 24% of last year's total, the failure of Congress to extend wind's federal production tax credit (PTC) made no marked dent in industry optimism during the conference's intensive four-track schedule or on the exhibition floor at the huge McCormick Place Convention Center. The reason, speakers agreed, is that wind is well on its way to becoming a mainstream energy choice. "We're here today as one of the primary options for energy. There is coal, there is gas and there is wind," said Randy Swisher, executive director of the conference host, the American Wind Energy Association (AWEA).
Steady global growth leading to wind power meeting 12% of world electricity needs by 2020 is the vision outlined by EWEA in its Wind Force 12 scenario. That means 1200 GW of installed wind generation and an annual turnover of $90 billion, said Millais. He warned, however, that getting there is not a foregone conclusion. The industry needs greater maturity in its business outlook. "The future is not assured. Wind may be the best solution, but that doesn't mean it will inevitably be the most successful," he warned.
The right focus
Wind advocates need to set aside the rhetoric that calls for the end of the oil age, said Millais. Instead the focus must be on the business case for pursuing wind energy development in the short term. "We have all sorts of arguments -- jobs, business and turnover. We have scientifically rigorous numbers," he said. "We also have to sell wind as a major new global growth sector and use business language to do that. Dollar signs and jobs, rather than terawatt hours and megawatts, are the numbers that count."
The purchase of renewable generating equipment accounts for about one-fifth of world expenditures for all energy equipment, noted Worldwatch Institute's Christopher Flavin. With nearly half of that in the wind sector, the "big boys" of the industrial world are starting to get interested. "The entry of GE is one of the most significant business developments in this industry in some years," Flavin said, referring to the entry of General Electric, the world's largest industrial concern.
Another of those big boys is FPL Energy, which has invested around $2.7 billion during its four years in the wind business to become the world's largest operator and owner of wind plant with more than 2700 MW on its books. While wind power will not supplant conventional sources of energy, said Mike O'Sullivan, FPL's vice-president of development, he believes it will play an increasing role in the energy mix. "There should be a place for wind in everybody's portfolio." Underlying the business motives driving FPL's wind investments, he told delegates: "It's good for our shareholders."
If the conference agenda is any indication of the major issues of the moment for wind power, financial matters top the list. There were five sessions on financing, tackling issues ranging from project structures and strategies to lowering the cost of capital. A common theme was the need to gain the confidence of the financial sector.
Wind Force 12's scenario for 1200 GW of installed capacity by 2020 will require $1 trillion in investment. "Clearly we do not have the financial community engaged in this industry at a level that will be required to deliver capital at that level. It will require much greater debt participation to achieve that," said Swisher.
Education will be key to the effort, he told delegates. Despite wind's successes, the technology and business setbacks the industry experienced during the 1980s are still in the minds of investors and lenders. Rapid advances in technology in recent years have also lead to concerns about how well relatively untested turbines will perform beyond their warranty periods. Wind, said GE's Pete Duprey, still has a "credibility gap" to overcome. "There are parts of Europe and Asia where wind forecasts were put together that didn't end up panning out to be what the original investor thought. One bad deal can have a tremendous impact on the rest of the industry."
Compared with the early days, progress is clearly being made on all fronts to make wind a comfortable rather than risky investment. Instruments like weather derivatives, insurance policies and long term service agreements are evolving to mitigate risk. Interest among banks is growing. James Tynion, a partner at Foley & Lardner, pointed out that at least eight senior lenders were among the standing room only crowd attending the financing session he chaired, a far cry from the single banker that may have shown up just five or six years ago.
Of 23 lenders surveyed by Fortis Capital's Paul Naumann, only one was planning to reduce its exposure to the industry. "There is a solid core of lenders that are ready, willing and able to finance wind projects," he said. "The parameters under which they are prepared to lend are quite well defined."
The industry is also developing new strategies to reach beyond that core, led by FPL Energy's groundbreaking $380 million investment-grade bond issue to finance a string of its wind power developments last summer, followed by an additional $125 million bond sale in December. "We think it validates the business model," said FPL's O'Sullivan.
The deal also brought institutional investors like mutual funds, insurance companies and money managers traditionally active in the oil and gas sector into wind's debt equation, said Emeke Ngwube of Credit Suisse First Boston, which put together the bond deal. "These investors were not familiar with wind at all, but they are now willing to put money into the wind industry on a twenty-year basis. So that was a good achievement."
Plenty of equity
On the equity side, there is "plenty of money" for good projects, said Michael Garland of Babcock & Brown. "In fact, our problem right now is how to manage equity investor expectations with the number of deals that can get done, that the lending side can get done."
Despite Garland's contention, there are still project arrangements emerging in the US to broaden the base of equity investors in the market and allow smaller developers to remain in the picture. Because the PTC can only be used by owners with a large tax-reduction appetite, a "partnership flip" structure allows developers to bring in tax-motivated investors but take back majority ownership after the tax credit runs out in ten years.
"The process not only allows the original developer to stay in control, it broadens the market for purchasers and investors, those who are not necessarily in the energy industry but who hold a lot of reserves to invest," said James Duffy of Nixon Peabody LLP. In a market where tax subsidies like the PTC and depreciation reduce the cost of a project by 65%, however, political risk remains a key stumbling block to attracting new investment.
"The problem with a lot of the institutional investors is that short-term extensions to the PTC lead many to say why invest the time and effort to learn this business because it could go away next year," said Duffy.
The PTC killer
Echoes of Duffy's words reverberated throughout the corridors and conference halls of McCormick Place. On the exhibition floor more than one frustrated industry supplier was bitter about its decision to move into wind power, only to see the investment create a black-hole in company accounts this year. Without a PTC extension, orders for parts are at a standstill for new projects.
As Global Windpower 2004 opened, the US was experiencing its third lull in wind power development in six years caused by the expiration of the federal tax credit, this time at the end of last year. The failure of Congress to renew the incentive is taking its toll on production, financing and jobs.
"Inconsistent policy support has been extraordinarily challenging to our industry," said Swisher. "The fact that we are second in the world in wind development is a testament to our industry."
FPL's O'Sullivan, who said a vibrant and competitive market consisting of many players is important, warned that the PTC roller-coaster is causing some of the smaller members of wind's development chain to drop out. "To grow this business, the pie needs to be larger, not just have the larger guys get bigger."
Kyle McSlarrow, an official within the Administration of President George Bush, described an energy vision consisting of immediate investments in domestic fossil fuel technology and an extension of the PTC for renewables generation. But he did not envision near-term rapid growth or the setting of government targets for the wind industry. Wind is already playing a major role, particularly when it is firmed with gas or hydropower, and that is providing a hedge against volatile gas prices, he felt. "But, ultimately, we are thinking long term," McSlarrow said. "We want game changers with a high payoff."
The Administration's short term focus on fossil fuel investments has drawn criticism in Congress and is largely the reason the PTC, which was one of the few popular provisions of the President's energy bill, was not extended before its expiry at the beginning of the year. Now a PTC extension is unlikely before July, said AWEA's legislative director Jamie Steve. Even then it is likely to be only a temporary one-year fix. "Our urgency is that projects and jobs are waiting," he said. "We need to get it done soon and get you back to work." After asking for a show of hands, Steve found that the jobs of one-third of the people attending the conference's legislative update session depend upon a quick extension of the PTC.
Hopes pinned on states
Increasingly, said Swisher, the industry is turning to the governments of individual states to provide the kind of stable policy it is seeking. Fourteen now have some type of renewable energy standard in place -- legislation setting specific targets for a minimum standard of renewable energy content in state electricity supply. "These state policies have really made a difference in moving the market forward for this technology," he said.
Passage of a federal renewables portfolio standard (RPS) -- a policy instrument which employs market forces to stimulate purchase of wind power and drive down its price -- is highly unlikely in today's political climate, said Steve. The apparent problem is that the concept of requiring electricity retailers to acquire a growing number of green power credits is regarded by the Bush Administration as a mandate on consumers.
For other reasons, not all of the industry's major players are convinced that an RPS is the right nationwide policy. FPL's O'Sullivan has doubts about whether a federal RPS will achieve the "right commercial balance." He is concerned that without proper implementation, a national standard can penalise states with little wind potential. He also worries that an RPS could lead to "overbuild expectations." Although FPL supports the concept of state renewables standards, it is the PTC that is helping make wind competitive in wholesale markets, he said. "In the next few years, ongoing political decisions unfortunately will drive the business."
On the other hand, Robert Klein of PacifiCorp, a large electric utility owned by Britain's ScottishPower with customers in six western states, argued that an RPS would lessen US fossil fuel dependence, cut the cost of wind energy and reduce regulatory risk for utilities. Steve Zwolinski, head of GE Wind, is also keen to put a monetary value on wind power's environmental attributes. "We want to move from political support to a market mechanism like green credit trading," he said. "We want more of a market-based industry than a policy-based industry."
getting the rules right
One dimension of a stable market for wind could be carbon trading, added Zwolinski, although he cautioned that if the market rules are not right, other technologies could benefit at the expense of wind. "We need to make sure we have a large enough trading pool and a level enough playing field so at the end of the day you have a liquid, fungible asset that can be traded and counted on as cash flow in a project pro forma. We're very, very close to making this happen."
Delegates learned that some European countries have provided the consistency sought by US wind advocates, but not through green credit trade. Germany's Renewable Energy Act mandates minimum prices for wind energy that utilities must pay, a policy that has made that country a leader in installed wind capacity, said Rainer Hinrich-Rahlwes, Director-General of the German Environment Ministry. He said that to sustain growth, policy matters. "Political target setting is important to decision makers who must make the decisions on where to invest."
Getting wind power to the customer was another conference theme that highlighted the need for political action. Access to the transmission grid is a global problem for wind power projects, delegates quickly learned, with the possible exception of Germany, the largest wind market, which again contrasts sharply with America, the second largest. In Germany the local grid is overbuilt, with 90% of wind generation integrated into the distribution system, not the transmission system. Developing countries have other issues. In India, said Sarvesh Kumar of the Indian Wind Turbine Manufacturers Association, the grid has such severe reliability problems that day and night voltages differ.
Much of the discussion during the conference sessions, however, focused on the US transmission system where technology is helping wind generation become more grid-friendly, but where policy problems continue to limit access and increase costs. While wind generators were once considered to be "bird whacking VAR suckers" by transmission operators, said Tim Poor of American Superconducter (AMS), technology like AMS's voltage regulating D-VAR system and GE's low voltage ride-through has made wind generators much better grid citizens. Poor was referring to the utility requirement for generators to provide "volt amps reactive" power to support the grid, something that earlier wind turbines were unable to provide.
Improved forecasting is also helping lower the costs of integrating wind generation into power systems. Kristin Larson of the 3-Tier Environmental Forecast Group said the use of wind measurement stations upstream of projects has improved short term output predictions by 6-16% compared with no forecasting. Delegates heard about potential to improve those figures even further.
A FRIEND IN FERC
A large part of the work still to be done on access to the wires is in the policy arena. That task should fall to the Federal Energy Regulatory Commission (FERC), said AWEA transmission consultant Chris Ellison. "It is one of the friendliest for wind development we've had in a long time and we need to capitalise on that, but the bad news is that FERC is under assault," due to a debate in Congress over whether states or the federal government should have jurisdiction of the transmission system.
FERC's Standard Market Design, which has been set aside for several years until it garners more Congressional support, would have set the rules for open access to US transmission, facilitated wholesale competition and removed imbalance penalties levied against intermittent resources that fail to deliver power as scheduled.
Progress has been made despite the difficulties, however. In California, the cost of delivering energy across transmission lines to the customer is down to about $2/MWh, said Terry Hudgens of PPM Energy, which like PacifiCorp is a division of Scottish Power. At that level it is the lowest in a country where transmission costs can go as high as $20/MWh. PPM Energy is a leading US power marketer and owner of wind projects and currently markets or owns 830 MW of wind and has a goal of pushing that to 2000 MW by 2010.
FERC's call for transmission owners to form Regional Transmission Organisations (RTOs) to help facilitate markets and take responsibility for building out the nation's under-built transmission system is seen as another good sign. Because most US wind projects are located in remote areas at the ends and weakest parts of transmission grids, bottlenecks are a problem everywhere, but few wires owners want to spend the money to fix them. The RTO system would help solve this problem, said PacifiCorp's Klein. "It would produce visible price signals and cost allocation for expansion of the transmission system," he said.
It will take years before the capital is available to make the transmission improvements needed, said Elliot Mainzer of the Bonneville Power Administration. A short term fix for getting larger amounts of wind power onto a weak system could be the use of long term non-firm transmission products. "When you get curtailed only 20 to 30 hours per year over a cutplane [bottleneck], then there is small risk and you still should be able to get financing," Mainzer said.
AWEA is considering a regulatory proposal similar to Mainzer's concept, which accepts that output from a wind plant is occasionally curtailed, except that the product would be for firm transmission that can be curtailed when the transmission system is overloaded. Ellison, however, recognises that neither idea will work without assurances that financing for wind projects that cannot always sell their generation will still be available. In addition, both products would require further changes to FERC rules, which now allow contracts for such products under a one year scheme, which falls far short of the ten years or more of certainty needed by financiers.
Broadening the market
On the broader global development theme, delegates heard that wind power's significant growth rates cannot be sustained unless the industry widens its penetration into the developing world and to new markets in the developed world. "We believe timing is everything," said Frederic Schmuck of GE Capital Markets Services. Some developed markets are softening, either because they are reaching maturity or lack policy stability. "We see a shift towards markets where you have good wind regimes and fairly high generating costs, which are trademarks of emerging markets. We're very bullish when it comes to emerging markets." In particular, Schmuck points to Brazil, China, India, North Africa and Mexico.
The developing world, however, has its own challenges. Political and regulatory risk, limited grids, lack of resource data, longer development timelines and the ability of consumers to pay the green premium are all issues. Credit quality -- the financial stability of project purchasers in the developing world -- is also a concern, as is the ability to attract private capital. Bilateral institutions like The US Export-Import Bank and multilateral organisations like the World Bank's International Finance Corporation have a different risk profile than commercial banks, said Schmuck, so debt is "fairly simple" to get. "Equity is really the issue. Most of the players that you are familiar with in the developed market truly are staying on the sidelines."
The potential of the carbon trade market for wind came up again. One way to boost investment, said Ian Mays of Renewable Energy Systems, could be to take the obligation that has been placed on developed nations to reduce CO2 emissions and "turn it around" to require some to partially meet those commitments through renewable energy projects in developing countries.
Ecoenergy International's Clean Tech Fund, which is targeting equity investments in Latin America, is hoping carbon trading will be enough to help drive development. "Can we get a pop from the carbon credits? We are betting that we can," said John Paul Moscarella. The fund has about 40 deals in the pipeline, ten to 12 of which it hopes to close in the next two or three years.
As wind's reach widens, siting conflicts are growing. "There are many more folks out there talking about problems with wind power, not solutions," said EWEA's Millais, in a reminder to the industry to think positive. As part of his plea for the industry to have the courage of its convictions, Millais called for more a pro-active stance. Developing best practice guidelines for project planning and construction and reaching out to influential interest groups will be essential for creating a broad "can do" attitude to wind power in the public arena rather than the current feeling that wind is more trouble than it is worth.
In Australia, where the pro-wind governments of the states are battling indifference to wind by the Commonwealth government, there is considerable focus on all the benefits that wind power can bring to an economy. The Australian wind industry has teamed up with the Australian Council of National Trusts to look more closely at landscape values and how wind developers deal with them. In the UK, the government has launched a campaign urging the silent majority who support wind development to make their voices heard.
Thomas Priestley of CH2M Hill, a global engineering and construction firm based in Colorado, suggested the industry take a lesson from architects and urban planners and conduct "perception research" to understand better how the public perceives the visual effects of wind power installations. The results would not only lead to better site design, he said, but also provide regulators with empirical data they could use to separate fear from fact when projects are challenged.
"In many ways we are the lightening rod and will blaze the trail. But in general every technology, like every coin, has two sides," said Zwolinski. "It is something we have to manage every day and take the lead on, especially with the public. Everything starts and ends with the public." In the final analysis, however, dealing with these and the many other challenges facing wind development, could just be an inexorable part of the industry's evolution, said Millais. "None of these issues have easy solutions and I think we are going to have to see problems as a continuing part of being a major industry."