Few people around the world know how to put up wind farms in the U.S. as well as Hunter Armistead.
A financier with a background in fossil fuel power development and finance, Armistead now holds a high-ranking “green collar” job as the chief developer of a flotilla of 20 wind farms in the U.S. for Babcock & Brown, the Australian-based infrastructure, airplane leasing and asset management firm.
Even with today’s credit crunch and falling energy prices, money continues to flow for new U.S. wind farms, Armistead says, as major wind developers race to build the nation’s first offshore project.
While facing a shortage of turbines and equipment, a phalanx of government regulations, and testy opposition from coastal communities worried about turbine-obstructed views of the sea, the stormy Atlantic and other locations nevertheless beckon with the promise of some of the richest rewards in the business.
Offshore wind promises clean, ample energy in areas that fetch some of the highest electrical rates in the U.S. So while offshore turbines are expected to cost 50% to 70% more to build than land-based systems, they may generate 100% more revenue, wind advocates point out.
Besides Babcock & Brown, most the other major onshore wind developers are also diving into the offshore wind craze in some capacity: Energias de Portugal (EDP Group), Iberdrola Renewables, FPL Group.
“The U.S. is kind of like a lumbering giant that’s waking up to the fact that they need to come into the world of energy independence,” said Armistead, head of Babcock & Brown’s North American Energy Development Group. “In the U.S., there’s tons of wind.”
Investing in wind
While no pure-play wind companies trade in the U.S., there are a few ways for investors to tap into any future success in the emerging business.
The American Wind Energy Association lists utility giant FPL Group Inc.
Vestas, the world’s leading manufacturer of wind turbines, and Nordex, another turbine maker, both trade on the Copenhagen Exchange. Mitsubishi, which trades in Japan, makes some of the largest turbines now in use.
Several environmentally-oriented mutual funds and exchange traded funds also provide exposure to wind energy. One such vehicle is the First Trust ISE Global Wind Energy.
Babcock & Brown bundles up wind farms assets for its Babcock & Brown Wind Partners, a publicly traded wind energy fund in Australia.
Industry proponents also point out that the most convenient way for Americans to support wind power development is by participating in green power programs offered by utility companies.
Usually more expensive now, green energy rates could become more competitive if the environmental costs of carbon emissions from coal-fired electric plants and other sources get factored into rates under cap-and-trade programs now underway in parts of the U.S.
The cost of alternative energy will also come down as it gains in economies of scale.
Plenty of challenges face wind development, including a lack of transmission lines, the at-times intermittent nature of wind power, and uncertainties over production tax credits.
Rich prospects off shore
In the global race to build offshore wind turbines to feed a power-hungry grid, Europe leads the U.S. by a score of 1,110 megawatts to zero.
With the potential to supply as much as 20% of the U.S.’s growing and critical electrical power needs, proponents often refer to America as the Saudi Arabia of wind.
But while giant turbines star in political ads this fall, the U.S. still gets only about 1% of its electricity from breezes.
That’s starting to change as Texas, California, and many other states complete new land-based wind farms, prodded along by state-enforced renewable portfolio standards.
With carbon emissions now auctioned off under the 10-state Regional Greenhouse Gas Initiative, wind power could soon offer an additional value as a carbon offsetting vehicle.
So far, U.S. offshore wind projects have been scuttled by community opposition, such as the notorious Cape Wind development about five miles off the Massachusetts shore, stymied for years by opponents that included some of the wealthiest residents along Nantucket Sound.
Despite the chilly reception, Babcock & Brown moved to leverage its sizeable presence in the onshore market and moved to buy offshore wind developer Bluewater Wind of Hoboken, N.J., for an undisclosed sum in 2007. At the time, Bluewater Wind had been selected to negotiate a contract to provide power in Delaware.
“We became convinced that the offshore technology had been maturing in Europe and there was good market fundamentals in the Northeast for offshore wind,” Babcock & Brown’s Armistead said. “The time is arriving for offshore wind in the U.S. and the Bluewater team had a head start.”
The effort paid off this summer as Bluewater Wind inked the nation’s first offshore power purchase agreement in a pact with Delmarva Power, a unit of Pepco Holdings Inc.
With the project’s 440-foot towers planned for construction some 12 miles out at sea, Armistead said the wind turbines will be much less visible than others already proposed around the country.
The Delaware project and others will take another step forward after the end of the year, when the U.S. Minerals Management Service completes leasing rules for offshore energy projects.
Armistead said Bluewater Wind is now working to draw bids from turbine developers and vendors, in the face of a backlog in equipment.
“We’re concentrating on the East Coast because the shallow sea floor makes it ideal for offshore wind development,” Armistead said. “The continental shelf goes out pretty far and that’s really attractive. The wind is strong and the visual aspects are negated.”
Other projects off the Atlantic coast are also under review in New York and elsewhere, with participation from Bluewater Wind and others.
Last month, the State of Rhode Island chose Deepwater Wind to develop a $1 billion wind farm off its coast. Deepwater Wind lists deep-pocketed investors such as First Wind, asset management giant D.E. Shaw and Ospraie Management, an alternative energy asset manager.
Babcock & Brown’s Armistead maintains that the economics of offshore wind development continue to make sense, although the cost of construction could range 50% to 70% higher than on-shore development.
Babcock & Brown’s biggest land-based project, Gulf Wind in Texas, will cost about $600 million to build 118 giant turbines to generate 283 megawatts of electric power.
Factoring in the current U.S. production tax credit, and a cost of about $5 million for each giant turbine, Babcock & Brown will recoup its investment within seven to nine years, he said.
The demand for such projects remains relatively strong, with the value of the electricity and power purchase agreements with utility companies forming the foundation.
With offshore wind, similar economics could make the business viable, especially when factoring in the significantly higher price and demand for electricity on the Eastern Seaboard.
Brian Uhlmer, senior analyst with Pritchard Capital Partners, said traditional oil and gas drilling rig operators may try to sell their wares to boost the offshore wind, since the industry plans to build in areas less than 400 feet deep — already in the realm of the shallow water jack-up rig market.
Uhlmer noted that General Electric bought oil services firm Vetgo Gray Inc. with plans to develop patents and methods for installing wind turbines on offshore oil rigs.
“A lot of oil service firms have old rigs that could possibly hold a wind turbine,” he said. “The jack-up rigs can go in up to 400 feet of water. Some of the proposed offshore wind farms are only in 200 feet.”
Even if the old jack-up rigs aren’t used, the offshore wind turbines will require some drilling to lay down undersea foundations, he pointed out.
Down the road, the offshore wind business could provide a lift for Hercules Offshore with lobbying efforts in Washington picking up from the likes of Google
Boone Pickens and others, Congress finally moved ahead with plans to renew a production tax credit to fuel industry growth.
Still, the U.S. has a long way to go to catch up to Europe, led by Britain and Denmark, which both boast more than 400 megawatts of offshore wind power.
For Armistead, the wind energy business continues to draw him in with its potential.
“Wind is very fascinating,” he said. “It’s very capital intensive. It requires a background in finance to arrange capital and get the construction done, but projects come quickly on the development side. For me, it’s an excellent combination of development and finance that happens relatively quickly.”
Article by: Steve Gelsi
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