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United States

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European power companies are demonstrating a voracious appetite for wind power assets in America. Ever since Shell took its first step back in 2001 with a 50 MW purchase and French state utility EDF snapped up Enxco in 2002, companies from Scotland to Italy have been joining the table, with Spain's Iberdrola helping itself to the biggest portion yet. But the past six weeks have revealed that appetite to be not so much voracious as insatiable. A further 12 GW or so of US wind project prospects, plus 1.5 GW of plant in operation or under construction, have disappeared down the gullets of two European utilities -- one a minnow and the other a monster and both, coincidentally, hailing from the Iberian peninsula.

Of the two, the purchase of Horizon Wind Energy, the third most active wind plant developer in the US, by Energias de Portugal (EDP) attracted most interest (page 29). It was a good first mouthful for the relatively small Portuguese national utility. In contrast, Iberdrola's snack on CPV Wind Ventures (page 31) was no more than a light supper following completion of its takeover of ScottishPower last month, which leaves it feasting on the entire wind power assets of PPM Energy, the second largest wind owner in the US (page 29). Combined, the two portfolios of project prospects held by EDP and Iberdrola alone reach a staggering 25 GW, if the numbers are to be believed. That is a third of all the world's wind power built so far. At this rate, Florida's FPL Energy must be wondering for how long it can stay undisputed wind market leader in the United States.

The attraction of the US market for European companies keen to expand their wind businesses is not hard to understand. Prospects in Europe are drying up fast. The heat is on. Aside from some pockets of greenfield development potential here and there attracting sky-high prices, especially in France, the huge pipeline of projects lined up for building across Europe over the next several years is spoken for. In comparison, America is a growth opportunity. Less easy to understand is why America's power companies with stated interest in wind, the likes of FPL, Mid-American and AES, are not more aggressively elbowing their way into the steamy kitchen. That Horizon should be swallowed by EDP for nearly three times the price Goldman Sachs paid for it three years ago was not an outcome many had foreseen.

Some of the explanation lies in how hot the kitchen has become. Prices being paid for wind development prospects are rocketing -- and not just in Europe. EDP openly tells us that it paid a premium for Horizon. It is not the first time the utility has waved a big cheque. The sum it offered 18 months ago for the Spanish wind assets of Dutch power company Nuon to become Spain's fourth largest market player is still described as "astronomical" in inner circles. But this is a small European utility on the outer edges of the power business looking for a role for itself. Becoming chief chef in the renewables business is its recipe for staying independent. By 2010, it expects 54% of its power sales to be from renewable energy. Perhaps it is not so surprising that EDP's asset-chasing rivals, faced with that level of determination in an already overheated market, chose to cool it and withdraw. For EDP to build shareholder value at the same rate as its wind assets requires hitting impressive development targets. That will not be easy in a market of component shortages where just getting hold of hardware has brought the industry to boiling point.

America's power companies also have competition on another front for wind plant ownership: American investors looking to offset large tax burdens. Buying into a wind station gains them access to wind's federal production tax credit (PTC), worth $19 off a tax bill for every megawatt hour produced for the first ten years. As America gets richer and other tax equity markets, like housing, shrink, a growing number of tax-equity investors are only too pleased to help Europeans, with no tax burden in the US, access the PTC. Project ownership flips when the ten years are up, or the investor's targeted return is hit. Even the likes of John Deere are getting in on the act (page 37), further turning up the heat.

The risk of getting scalded

Right now there is more money chasing investment opportunities in wind than there are opportunities for investment, largely because market growth is capped by hardware shortages. The hot competition among investors means their returns are being driven down. But in a wind turbine seller's market, the cost of building wind farms is going up, manufacturers are offering weaker warranties, and huge "framework" contracts are being signed for turbines not in commercial operation. All in all, owners are paying higher prices for taking greater risk while accepting lower returns.

As if that was not risk enough, despite the cheaper finance, wind power's selling price is still rising. Wind is on the very edge of what is sustainable in the market place, warns more than one project developer (page 55). Given that the greatest risk of all is that wind could price itself out of the energy market, concern about who owns what becomes secondary to the job of persuading equipment suppliers that costs must be contained. There is a limit to the premium customers will pay for wind's advantages. If the pot boils over, the entire wind sector gets scalded.

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