U.S. Windpower: Now the Bad News

In my last post, I covered the good news and the great news about US windpower: how growth is surpassing the most optimistic projections, and, based on an extrapolation of Department of Energy figures, wind power is poised to replace 37% of the electricity from our coal plants.

But alongside the good news and the great news, there's

THE BAD NEWS

Prices

Turbine prices are going up and up, in part due to the large increases in commodities like steel, copper and oil, as well as the weakness of the dollar. There's also a growing backlog of turbine orders, stretching out at least two years. That kind of supply and demand imbalance means the manufacturers have the pricing power, which usually leads to price increases.

The average installed cost in 2007 was $1,710/kW, up about 9% over 2006. The Berkeley Lab's early take on 2008 was that the cost will go up another 12% to $1,920/kW. Since turbine deals and prices are typically set long before installation, we haven't yet seen the price increases from deals made last year, but we can expect far more price increases in the near future.

PTC Is Still Expiring

The Renewable Energy Production Tax Credit (PTC), which offsets a tax liability at a rate close to 2 cents/kWh, is set to expire at the end of this year.

Yet another bill to extend the tax break was introduced by Montana Senator Max Baucus this week and was blocked once more by the Senate Republicans. By way of background, the PTC also lapsed in 2000, 2002 and 2004, and new projects dropped in these years by about 75%. So yes, the incentive really does make a difference.

We're Number 13!

Although America leads the world in new wind power added last year and now lead in actual generation, when you look at wind power as a percent of total electrical generation, the U.S. is trailing, using wind to generate about 1.2% of its total electricity. That puts America at number 13 on that list. The world leaders are:

Denmark -- 20%
Spain -- 12%
Portugal -- 9%
Ireland -- 8%
Germany -- 7%

If the U.S. were to develop all of that 225 GW mentioned earlier -- assuming overall generation doesn't change -- about 18% of America's electricity would be wind generated.

Financing

However, that 225 GW is not going to come cheaply.

If you use the projected average 2008 costs, the result will be in the ballpark of: 225GW times $1,920/kW times 1,0000,000kW/GW, which comes out to about $432 billion.

About half a trillion dollars in round numbers. Developers might need to borrow some money for this. Much of the financing in recent years has come from large institutional investors sheltering profits from other investments, but this might dry up for a couple reasons. One: the collapse of the mortgage securities prices has caused a general credit crunch on Wall Street. Two: the institutional investors have a lot less in the way of profits, and if you don't have profits, well, you don't need to shelter them.

Transmission Infrastructure

There is a serious lack of electrical transmission in the breezy areas that are best-suited for wind power. These windy places tend not to be close to the major population and manufacturing areas of the nation. Furthermore, the intermittent nature of wind power makes investment in the needed transmission towers and cables less appealing. There is some good news though: utilities and other companies are planning to increase transmission spending dramatically. For instance, just last week a large transmission project was approved in Texas specifically to reach wind farms.

Personnel Shortage

While not mentioned by the authors of the Berkeley Lab report, it's hard to imagine that an industry can grow by 50% a year -- and then perhaps 1,300% in the next few years -- and not run out of trained people. This could slow down expansion of manufacturing' slow down the wind studies needed to do site selection; slow down installation; and make it harder to find operational staff.

There you have it, the good news, the great news and the bad news. The bottom line is that wind power is starting to pick up some real speed, and if the current plans are executed, it will make a real dent in America's CO2 production. It's also crystal clear that Washington's support makes a huge difference, and that the PTC needs to pass both houses of Congress and get signed into law by December 2008.

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