US Wind Power Development

Earlier this week, Bloomberg reported that GE Energy was gaining ground on the world’s largest wind turbine manufacturer, Vestas.  Denmark-based Vestas lost market share from 2007-2008 of 3% declining to 19.8%.  GE was the principal recipient moving from 16.6% to 18.6%.  Bloomberg’s report was based on the latest study by BTM Consult, an independent renewable energy consultancy.

BTM indicated that the top 10 wind turbine suppliers account for 85% of 2008 global supply.  Just this year, two Chinese companies, Sinovel and Goldwind, have made the top 10 “cut.”  The fastest growing markets have been China, France, the US and the UK.  Growth in Asia and the Americas is expected to continue at a very high rate.

US Market Wind Manufacturers

In the US, slightly over 50% of projects developed use turbines developed by non-US companies.  Outside of major US manufacturers GE and Clipper, companies in Denmark, Germany, Japan, India and Spain provide the majority of key components.  Of the 22.5 GW of capacity referenced above, 12.1 GW were sourced by non-US companies and 1.9 GW of capacity under construction is non-US.  In the Texas market (largest growth 6.9 GW), US companies provided only 42.2% of the installed capacity.  Germany, Denmark, Japan, Spain and India contributed the most GWs.

Bringing competition closer to US companies, foreign manufacturers are setting up shop close to the US markets as Vestas recently broke ground on two new turbine factories in Colorado worth almost $300 million.  Vestas’ CEO Jakobsen has indicated that he is keen to take advantage of the US Stimulus package. Siemens has also announced the development of a wind turbine research center in Boulder.

More competition brings better projects and ultimately lower prices.  However, the “traditional” wind turbine companies are expressing concern when the large Chinese manufacturers set their sites on markets away from home.

Both the House and Senate are moving forward with draft legislation to craft a National Renewable Portfolio Standard (RPS or RES) that will dramatically increase the amount of generation produced from defined renewable technologies.  The RPS will be incorporated as a change to PURPA.

Draft Senate RPS

Of the ~113 Twh of renewable generation produced in 2008, California provided 25.5 Twh and Texas 13.7 Twh.  Together they accounted for almost 50% of all US renewable generation.  Given that Texas consumes almost twice as much power as California, there will need to be significant increases in Texas based renewable generation to meet future compliance levels.  On a regional basis, the South Atlantic (increase of 169 Twh) and East North Central (increase of 143 Twh) states will contribute the greatest total renewable generation to meet the 2021 Senate generation levels (40% of the total increase of 824 Twh).  The map is available in a larger and dynamic format.

With this lead in, he then proceeded to describe how Kansas (one of the windiest states) had gone from less than 5 MW a couple of years ago to now over 1000 MW.  Instead of working a Renewable Portfolio Standard (RPS) or other mandatory incentives through the State Legislature, he worked with the developers, utilities and regulators to develop a plan to put Kansas on the “map.”  He explained that both he and the Governor did not feel confident they could get something through the Statehouse.  So instead, they took a non-traditional approach of working with the most important stakeholders (amazing).  Kansas is now one of the largest producers of wind power.

Parkinson also provided some insights into what he sees are some of the biggest needs for achieving real scale in renewable energy.  Specifically:

• National RPS
• Definable cost for carbon
• Significant increases in technology research (He thought we spent more on Halloween candy and costumes than what had been committed by DOE’s Renewable Energy and Energy Efficiency group
• Much more transmission.

He also made the point that he thought it would be enormously difficult to institute a “cap and trade” system.  Despite Obama’s call for this type of emissions scheme, he said Democratic and Republican resistance is too great.

US Ethanol Plants

The Ethanol Producer Magazine reports over 12 billion gpy of installed capacity (204 plants) with another 1.5 billion gpy in construction (15 plants). Of the existing capacity, 2 billion gpy (33 plants) are fully idled and those running are producing less than nameplate capacity. The locations and status are shown in the map below (interactive map). It should come as no surprise that most of the idled plants and ultimately those delaying construction are at a greater distance from the Midwest corn belt.

The extent of the ethanol expansion in recent years has been impressive. In 2007, ethanol production was approximately 6.5 billion gallons. In 2008, the Renewable Fuel Standard allowed for 9 billion gallons and will increase to 10.5 billion gallons in 2009. Ultimately for traditional biofuel, this reaches a plateau of 15 billion gallons in 2015.

USDA corn planting statistics and its use for ethanol underscore the magnitude of the expansion. In 2001, 75.7 million acres of corn were planted. By 2007, corn plantings had increased to 93.5 million acres. This increase is roughly equivalent to an area one half the size of Iowa. The percentage use of corn for ethanol increased from 9% in 2001 to over 30% in 2007/2008. By 2008, almost 100% of the increase in corn production from 2001 was due to the needs of the ethanol business. Interestingly, there was also a 10% decrease in the use of corn for feed and 20% decrease in its use for corn syrup over the same period. In effect, corn for syrup and feed was diverted to the production of ethanol.

Ethanol Returns

Don Hofstrand at Iowa State university has developed a model where he projects the profitability of ethanol plants. The graph below shows the changing profitability of ethanol production given his assumptions. For plants currently running, a small contribution margin is available for fixed costs. For newer, more expensive plants (2007 onwards) with high leverage, debt service is generally not possible. Consequently, ethanol plants are either being forced into bankruptcy by their lenders or at the very least going through some serious restructuring. To make matters worse, some of these later stage plants were not as well designed and therefore are “structurally” and “financially” challenged. Expect to see more distressed sales. As a additional point, the USDA graph below on current and historic ethanol prices underscores the effect of overcapacity and the resultant drop in spot ethanol prices.

Historic Ethanol Prices

As evidenced by Valero’s recent bid for Verasun’s ethanol assets (representing approximately 30% of initial capital costs), second owners stand to gain a competitive operational advantage with lower cost capital structures and in some cases, renegotiated corn contracts. Only last March, Valero was still dead set against ethanol. But with distressed assets available, a petroleum refiner is a prime candidate to purchase assets given their blending requirements and likely cash reserves. Ultimately, this further drives consolidation and better professional management of the plants. Expect to see more competition for assets geographically well situated and very low bids (scrap value?) for plants further afield.

Ethanol is here to stay, but just as in other markets (merchant generation ca. 2000), initially strong economics drove over expansion. Only time will allow for the installed base to be fully used. Cellulosic ethanol is still on the horizon and the industry is yet to see if full scale plants can be run profitably.

Main Takeaways:

• The magnitude and extent of renewable energy incentive provisions are unprecedented.
• While extraordinary gains have been made in funding and support, much more is on the way (in the near term) in the form of a national RPS and a CO2 “cap and trade” scheme.
• Governmental support should spur the industry even with substantially less private funding capacity as a result of the distressed credit markets.
• The main limiter to achieving significant physical gains in renewable power generation is the weak grid system.
• Generally, the federal government is going to drive massive increases in renewable energy and while not said, but implied, the Feds will be able to overcome resistance at the State level and by individual utilities and regulators.

Not discussed…

• What impact will all of these provisions have on the ultimate price of energy and how might this affect businesses and/or residential customers?
• No mention (at all) of nuclear power, despite there being a renewed interest in Sweden, Germany and Italy and that many US utilities are already proceeding down the nuclear permitting process.
• Challenges (counter incentives and time) in working with a multitude of utilities and regulators to spur renewables and to upgrade the grid systems.