The US wind power industry might be midway into an unprecedented three-year growth spurt, but any self-congratulatory backslapping among the 5000 delegates gathered for the annual American Wind Energy Association (AWEA) conference in Pittsburgh last month was short lived. Never mind that the current bout of development is set to result in a collective 8500 MW of new wind generation through the end of next year, bringing the national tally well beyond 15,000 MW. Or that the numbers are primed to get even bigger for 2008 and beyond. What concerned delegates, whe-ther attending tract after tract of daily seminars, milling between rows of displays on the convention floor, brokering deals in private meeting rooms or rubbing elbows at after-hours hospitality events, is that the boom times are unlikely to continue without a widespread and concerted effort to hammer away at the industry's small and middling problems before they morph into a suffocating mix of big time trouble.
Foremost among the problems is a timid turbine supply chain that is failing to provide enough machines to sate the growing hunger of an expansive worldwide industry -- of which the US still represents only 15%. While the cost of components heads upward, causing overall prices for the finished product to jump, turbine shortages continue and all sides complain of slim profit margins, at best.
The problem of getting the power to the people was again a dominant theme of AWEA's annual conference. While wind farms are usually built in windy areas and away from where most people opt to live, the nation's transmission infrastructure is inadequate, woefully out of date and exasperatingly slow to expand, especially in the sprawling directions that wind has taken.
Next is the matter of help from government, which is tied in large part to a temporary federal production tax credit (PTC) that perpetually threatens to disappear and causes the maturing industry a terminal case of the jitters. In addition, at state level, renewables portfolio standard (RPS) legislation, setting minimum standards for the volume of renewables in electricity supply portfolios, has still only been adopted in less than half the states and still provides little uniformity or state-to-state reciprocity. That murky inconsistency hampers the development of a market for trade of renewable energy credits (RECs). RECs, essentially sold as offsets to polluters, add to profit margins for wind, but can be as difficult to accurately calculate as they are to cash in -- especially when questions of unbundling arise, or when crisscrossing state borders as wind power projects and transmission lines regularly do.
This set of problems needs tackling in a market of rapidly changing dynamics. Utilities are moving in as wind farm owners in addition to their historic role as mere purchasers of wind output. The new trend threatens to change the face of the game. With fewer multi-year power purchase agreements on offer, smaller independent players may start finding themselves pushed aside. As more than one delegate expressed it, wind could be caught up in some new approximation of energy-industry Darwinism.
Nevertheless, such a head-scratching set of problems would never exist if not for the massive and growing potential of the US wind power market, which in 2005 became the most prolific in the world.
"It's time for this industry to step up and go head to head for market share," was the call to action issued by AWEA executive director Randy Swisher as he kicked off the conference. "This is the big time." Serving to underscore his robust proclamation, the opening days also included Andy Karsner, a former wind power company executive now serving the Administration of President George Bush as the US Department of Energy's assistant secretary of energy efficiency and renewable energy, along with a pair of wind-friendly Democratic governors, Iowa's Tom Vilsack and Pennsylvania's Ed Rendell.
"Make energy independence the number one priority," proclaimed Rendell, touting Pennsylvania's job growth from wind development in addition to its goal of reaching 4000 MW of wind power by 2020. "Health care and renewables are our two key challenges. The states that capture renewable energy will be leaders for 50 years." Spanish turbine supplier Gamesa has opened one factory in the state and has announced it will build three more.
Yet, in keeping with the Bush Administration's toothless recent nod toward the notion of wind power eventually supplying 20% of the nation's electricity (next story), there seems to be little movement toward any semblance of a forward-thinking national renewables policy, much less anything approaching a bold and visionary energy plan that might begin to equate with landing a man on the moon in less than a decade.
Lack of unified policy
The hard truth remains that wind power still accounts for less than 1% of the nation's electricity -- and getting from here to there will almost certainly continue to be a protracted, complicated matter. Moreover, the at-large industry appears to be mostly on its own as far as taking significant and unified steps: the only true policy at present seems mostly to be one of making things up as the industry goes along.
The US industry's perennial call for some kind of stable policy environment, usually in the form of a longer term extension of the $0.019/kWh PTC, takes on a new urgency this year as developers struggle to secure the turbines they need to move projects forward before the credit expires at the end of 2007. "Purchasing turbines has recently become one of the most substantial challenges facing the wind development community," said Robert Sims of AES Seawest, which worldwide is aiming to install 1000 MW of wind a year within five years. Dennis Welch of American Electric Power, a major US utility looking to increase the level of wind in its supply mix, agreed. "We are seeking opportunities, but the problem is the turbines aren't available to us. I think the earliest is 2008 if we sign something here at this conference."
The core of the problem lies in bottlenecks along the component supply chain, specifically in the production of gearboxes and the casting of large components like the hub, bedplate and gearbox housing. Clipper Windpower's Robert Gates pointed out that global foundry capacity has been declining since World War 2, and the ability to cast large pieces out of steel and ductile iron is becoming something of a lost art. "If you look at a hub casting for a wind turbine, it is very big and it is very thin. And getting something very big and very thin to come out very perfect every time is not that easy."
Getting foundries and other suppliers to add new production capacity to meet growing demand is hard. "Our suppliers are unwilling to invest in factories unless we give them commitments for five or seven years. For us to do that, we need to have some policy that is predictable as to where the industry is going to go and what the demand is going to look like over the long term," said Vic Abate of GE Energy. Once a stable supply chain is in place, he added, cost reductions can follow. "Currently every incremental part that you get out is at a premium, so that is the fundamental shift we are going to need, the ability to invest in an infrastructure that needs to be, for a long period of time, producing wind turbines."
Meantime, said Keith Hays of consultant company Emerging Energy Research, turbine manufacturers are employing a variety of strategies to deal with supply chain issues, ranging from sourcing more components in-house to the outright takeover of key suppliers. The recent purchase of Belgian gearbox manufacturer Hansen Transmissions by Indian turbine manufacturer Suzlon and the acquisition by Siemens of specialist gearbox supplier Winergy AG of Germany are two high-profile examples. Gates expects the consolidation trend to continue. "I think you will see more of that; if not direct acquisition of key suppliers then longer term strategic alliances. Because of the shortage and because the components are not that widely used in other applications in the industrial world, securing key supply helps the turbine manufacturer provide surety to its customer."
Big players only
The supply situation is changing the face of the US industry in other ways, forcing a concentration of the market in large players with the financial wherewithal to lock up turbines years in advance. "You have an increased advantage to large buyers, obviously, but you also increased the financial risk to them because many of them bought turbines beyond what they could put in during the PTC period," said Gates. "They are exposed to buying tens and in some cases hundreds of millions of dollars worth of equipment that would not be economic if the PTC is not renewed."
Already a secondary market is starting to emerge as companies look to unload turbines they can't use. "We have heard that is occurring and perhaps have seen some evidence of it," said Gates. "Exactly what the reason will be varies, but I think it was always anticipated that turbines bought in advance would shift around to some degree."
The market shift towards larger players is coming at a time when interest in small scale, community-based wind is growing. Some manufacturers emphasised the need to foster that part of the market, which could help carry them through any future down cycles. "Let's dedicate some capacity to small scale as an industry. We need to help them get established," argued Suzlon's Leif Andersen.
The unease over rising wind turbine prices and supply shortages was never far below the surface in Pittsburgh. The PTC, as always, was a prime candidate for blame as the supply chain struggles to operate with confidence when walking the edge of a perpetual cliff. Next up was the rising cost of steel and copper, followed by the fact that most machines are still built in Europe, where the dollar does not stack up well against the euro. In reality, as the US industry scrambles to secure its share of a limited supply in a global market, turbines are being delivered wherever projects are secure.
"We believe there are a lot of turbines out there," said Mike O'Sullivan of FPL Energy, which, with 3246 MW and more than 6000 turbines installed, rivals Spain's Iberdrola as the world's largest wind plant owner. "We need to attract them to the US with good projects." Yet O'Sullivan is unabashed when pointing out what he sees as the overriding problem. "The elephant in the room is higher equipment and installed costs."
Arguing the turbine supply question from a different stance is GE's Abate, whose company supplied 60% of the machinery used in US projects last year. He pointed to the last 18 months, which have seen a 28% increase in steel prices and copper prices soaring 120%. At the same time, he said GE's prices may have risen, but his company is helping the cause in other ways. "Efficiency of the gearbox is key," he said, "Along with technology and more energy per turbine." Abate points to increased reliability with GE turbines -- from an availability of 88% to 97% -- as a hidden money saver that is easily overlooked. "For good economics, you need good wind and you need turbines to operate."
The rated capacity of individual turbines installed in the US these days averages a shade over 2 MW and a little more muscle would help. But, at least for GE, plans for the US do not include straying from producing the company's workhorse 1.5 MW machine in high volumes. According to Abate, the company intends to build 2100 of the 1.5 MW model for 2007. "Logistics can be 10% of the cost of a project and the 1.5 fits the market," he says, while noting the rollout of bigger turbines in Europe. He adds that in the US, existing road and railway systems have a difficult time handling bigger machinery.
"But as we allocate blocks of capacity, if the best deals for developers are in Europe, we'll build them in Europe. You have to figure out what you're going to do. You can't be everything to everybody. We sell our equipment to make our customers money and the competitive advantage is technology. We have 5000 engineers in energy and there's not a problem we can't solve."
How to make money
With turbine and project costs rising, discussion in Pittsburgh inevitably turned to the ability of wind power producers, their investors and their utility buyers to continue to make money. "At some point the cost increases will cause demand destruction. You cannot deliver a commodity that keeps going up in price," said FPL's O'Sullivan. "We have passed that inflection point. We've gone up close to 50% in the last couple of years." Returns to investors have come down to absorb about half of the increase, said O'Sullivan, while power purchase agreement prices have gone up modestly to absorb the other part of it. "But if you keep that trend going up, there is going to be some confluence of events that I don't think will be good for the industry."
For even the most enthusiastic utility buyers of wind power, cost is also a concern. Xcel Energy, the nation's largest buyer of wind with 1100 MW under contract and plans to reach 2500 MW by the end of next year, sees a lot of economic value in wind. "It has been a hedge against natural gas prices and against potential environmental regulation," said the utility's Frank Prager. "Interestingly, that doesn't appear to be the case anymore. The price of renewable energy, the price of wind, is actually going up substantially and our contracts with wind providers are no longer as cost-effective as they were before. This is a little bit troublesome."
Xcel buys almost all of its wind through competitive procurement processes, said Prager. Also troubling for the utility is the industry's track record in delivering wind projects at the prices bid. "It is difficult to do that in this market, but it is a problem for us going forward. We need to be able to maintain our credibility with our regulators and the wind providers need to maintain their credibility with us. This is going to be a bigger and bigger deal as Congress grapples with the production tax credit. It is pretty clear to us, at least, that Congress would like nothing more than to get rid of the PTC and they are trying to find a way to do that with a soft landing. At some point, wind is going to have to be able to compete without that subsidy," said Prager.
American Electric Power, said Welch, now owns or buys 684 MW of wind and has dropped from having the second largest wind power portfolio in the US to seventh or eighth. "Our financial models show that the wind generation wasn't paying back as well as what some of our investments would," he said. That could change as the US, and AEP, become more serious about dealing with carbon emissions. "Within the last three weeks, myself and some others went to our board and talked about this, that we need to price carbon into our financial models so that we view wind and other renewables as an important part of what we are doing."
Despite the challenges, delegates heard that utilities are not only increasingly interested in adding wind to their mix, but in owning the projects. The trend has some independent producers wondering whether a level playing can be maintained. "It gives us concern not only because they can make up the rules with regard to procurement, but they also control the transmission in a lot of the country," said Terry Hudgens of PPM Energy, America's second largest wind developer after FPL. "So we worry a lot about making sure that there is reasonable access for our projects to the marketplace."
AWEA's Swisher labelled transmission as the wind industry's greatest restraint. Solutions are to use more of the existing grid and get more grid to use, he said. Beneath the rhetoric, however, lies an inadequate, antiquated transmission system. Lack of grid availability has long plagued the wind industry. Many see the situation in terms of the chicken or the egg. "The North American transmission system is gridlocked," said Mark Smith of FPL Energy. "But does generation get built first, or does transmission?"
One problem is that wind projects are likely to take less than two years to complete, while transmission expansion can take five years or more. "It's easier to site wind than transmission in today's world," said Welch of AEP, which has more than 200,000 miles of transmission lines.
A case in point is the upper Midwest, where five of ten states with the largest wind potential are located. Yet most of it is far from load centres. "The Midwest has to deal with the unique challenge of both eastern and western interconnection," said ICF Consulting's Jimmy Glofelty, while adding that the area also has to deal with multiple types of utilities, along with issues regarding lines that run through two or more states. "The result is no new construction," he said.
Glofelty points to 20 recent studies that have all reached the same obvious conclusion: more transmission is needed. At least in the short term, he says, grid technology improvement is the primary key to some sort of resolution. "Congress must fund new materials research," he said, adding that solutions like high-capacity conductors are now being tested. "There are ways to solve this problem, but we need to continue to push them."
Herb Schrayshuen of National Grid offers the reminder that transmission is a market enabler and not a market product. "We need to develop timelines that take all these complications into account," he said. Ron Lehr, an attorney who serves as AWEA's western representative, agreed. "Different circumstances call for different actions and various parts of the country are different. But the thing we're going to need to crack the transmission nut is a lot of people power." Backing Lehr's view was David Wooley of the Energy Foundation: "The message means the most when it comes both from the non-profits and the developers. It can be as simple as showing up when an expert is needed at a hearing."
With several speakers following Swisher's lead in believing that an extension of the PTC beyond 2007 is a done deal, the stage was set for an unusual amount of PTC-bashing for a wind industry conference. At least for some, the federal subsidy is seen less and less as a magic wand and more as one of the many integers to the formula for turning a profit from the wind. "Let me assure you the production tax credit will be extended in 2007. I have no question about that. We have strong political support on both sides of the aisle," said Swisher. Had the extension seemed less certain, PTC critics may have been less outspoken.
Some see the PTC as essential and note that other forms of energy have their artificial governmental props, too. The PTC is even viewed as an instrument of stability that, if extended well into the future, will offer confidence to all segments of the wind industry, from supply chains to developers to investors. "Without a PTC the industry can be vulnerable," said GE's Abate.
On the other hand, there are those who see a long-term PTC as a crutch that can go so far as to stall production by allowing utilities and others to become complacent. Many believe the renewables portfolio standard concept, whether implemented by individual states or in a yet-to-be-seen national version, is the better long-range life preserver of wind. "The PTC is not a policy, it is simply a cost reduction," said Michael Polsky of Invenergy. Formerly from the independent power producer (IPP) industry, he argued strongly for a radical new look at wind power as part of national infrastructure, rather than a power technology in need of support. "It is not just another IPP," he said. "Public policy will protect wind from its development bringing down prices of other sources. Without meaningful public policy we're really going nowhere."
Moving the scrum
As is America's way, in the end most everything related to the current market situation boiled down to profitability. "Our shareholders are not willing to take it on the chin," said AEP's Welch. "Renewables have to make money." To do that they need a robust market, structured for exploitation of America's own renewable energy resources rather than energy imports. The key selling point for wind power, said Andrew Garrad, has moved from the environmental argument to security of supply. A national energy policy recognising that fact, however, is still not in sight.
"Being 1% of the industry or less, we can't compete with the big dogs unless we leverage our support," said AWEA's Rob Gramlich. "Still, help from outside the industry is likely only to come in bits and pieces."
From the Department of Energy, assistant secretary Karsner stressed that the role of government was no more important than the role the wind industry must play. "We can enter the scrum and move the scrum down the playing field," he said. Implied is the notion that any victories will probably be small, the setbacks are never likely to vanish and perseverance will probably remain the real key to the game.