Wind Energy

Wind Energy

Wind Energy: Wind Profits Are Blowing In

Renewable energy has taken center stage across the globe.  The media has jumped on solar and hydroelectric power.  Even geothermal is starting to grab some attention, but one of the most up and coming forms of green energy is definitely wind power, and where renewable energy goes, the footsteps of government subsidies can be heard close behind.

The problem here in the U.S. is that we are behind the ball on wind energy.  Wind energy currently makes up less than one percent of total U.S. energy production.  The remarkable thing is that North Dakota alone has enough potential wind energy to supply the U.S. with one third of its total energy consumption.

Once a form of renewable energy becomes closer to mainstream, it experiences a subsidy-based boom, like that of ethanol.  The key is to be ahead of that boom and to experience gains in your portfolio before everybody else catches on.  The renewable energy train hasn’t quite left the station, but they’re yelling all aboard, and wind energy is one of the last ways to get a ticket to huge profits.

An example of a country that has very quickly realized the importance of wind energy is China.  Being that in China, 750 thousand people a year die from air pollution, a form of energy creation such as wind cannot be over looked.  The air pollution in China is a direct result of a booming economy and the use of fossil fuel based power plants to keep the growth going.  Public officials have come to realize that they cannot go on with the huge production of carbon-based power plants and have turned to wind as a solution.   China has just finished their first year under the new Renewable Energy Law, and what a year it was.  They added 1040 MW of wind capacity, making them the 5th largest user of wind energy.  By 2010, they are expected to have a wind capacity totaling 8 GW.  Energy legislation, like the one in China, is becoming more and more commonplace around the globe.  More on that in a second, first let’s take a general over view of wind energy.

Wind Energy vs. Carbon Based Energy

When most people think about the “energy industry,” the model inside their head doesn’t necessarily consist of large wind farms supplying electricity.  Instead, the common notion of energy production is one of private enterprises, in many non-U.S. venues, and national companies extracting reserves from the geologic column. That is, the current energy paradigm involves big businesses using big machines to recover oil, natural gas, tar, heavy oil, coal and other of what are called “energy minerals” from the crust of the earth. Call it Big Oil, Big Coal or Big Whatever. When most people think about where their energy supplies come from, they think of some sort of big rig drilling or digging a hole in the ground.

The energy minerals that fuel the world today were, for all intents and purposes, formed in the geologic past, and reflect what many commentators call “ancient sunshine.” Whether it is the plant life that formed Pennsylvanian Age coal, or the marine life that was the source of Jurassic Age oil or even the primordial nuclear fission and fusion that led to uranium, we have ancient sunshine to thank for our current daily energy supply.

But this “extractive model” of energy resources is already undergoing a dramatic alteration. Looking forward, much of the world’s energy industry will revolve not around “extracting” ancient energy stored in the geologic column, but instead will focus on “capturing” the current energy that surrounds us all in the form of sunshine and wind and falling and moving water. As many of the readers of Outstanding Investments probably know, two industries with the greatest potential for growth in the coming years include wind power and solar capture.

Let’s take a look into the precision-engineered products on both ends of the demanding market for energy resource exploitation, extraction of ancient energy sources and capture of current energy supplies. And these markets are — it is not too strong to say — venues for which design or mechanical failure is simply not an option.

To set the stage, let’s think about how a drilling rig, whether onshore or offshore, is similar to a windmill farm.

“Huh?” you say? “Why are we making comparisons between those massive structures that drill oil and gas wells and those other far more aerodynamic structures that perch atop high towers and capture the energy of blowing wind?” Let us count the ways.

Whether we are talking about drilling rigs or windmills, both tend to be located in distant, relatively inaccessible locales. Both kinds of structures are certainly exposed to the elements, from water and salt (not just offshore; onshore rigs routinely are covered with the salt residue of the brine waters that come up from the depths below), to blazing sun, temperature extremes and oft-high winds up to and including hurricanes and tornadoes. Both drilling rigs and windmills have as their mission the requirement to support rotating machinery for many hours per day, and in fact, if the critical machinery does not rotate, then both drilling rigs and windmills are worse than junk. They are junk that is costing the owner or operator a lot of money.

Think about it. Dayrates for large drilling rigs, certainly the big, offshore behemoths, can be as high as $500,000 and much more for the largest of them. Do the math on that. Figure that the rig lessee is paying more than $20,000 per hour, which translates into more than $330 per minute just to lease the rig. (Drill bits, tubular goods, labor and diesel fuel supplies are all extras.) So if you are the operator that has a very costly drilling rig under agreement, downtime is immensely expensive. And as the operator whose money is paying that costly dayrate, you will simply not accept downtime that is caused by mechanical failure, no matter what the ultimate cause. Your instruction to the rig manager is, “Don’t let anything break.” Another way of saying it is, “Use the very best equipment. Pay whatever it costs.” Hold that thought.

Now let’s consider a windmill, perched, often as not, atop a 250-foot tower that is constructed on some remote mountaintop or in some distant prairie, or even offshore, certainly far from the nearest machine shop or high-lift crane. Its massive blades may be spinning thousands of revolutions per hour, 18 or 20 or more hours per day, every day of every week, every week of every year, generating megawatts of electricity flowing into the power grid. But consider the rigors of that elevated environment. The wind may gust up, from a very low speed to powerful blasts, within a matter of seconds, and then the wind may die down, and soon thereafter repeat the process all over again. So the mechanical workings of the windmill have to absorb and transmit immense stresses, with the rotating machinery gearing up and gearing down, again and again, over the very long haul. But the windmill is almost never attended by a human maintenance worker. In fact, maintenance is intended to be intermittent, and visiting the top of a windmill tower is certainly expensive for the owners and dangerous to the workers.

So the windmill system has to be designed and built with these very significant electricity-generating constraints in mind. And the customers for that electricity, the electric utilities, are under legal mandate from numerous regulatory bodies to keep their electric grid powered up. So again, the instruction to the windmill operator is, “We need consistent levels of power from your windmill farm, so don’t let anything break.” And not uncommonly, someone is also saying, “Use the very best equipment. Pay whatever it costs.”

These costs can be reduced greatly when subsidies and tax credits are taken into effect.  They come in all different shapes and sizes and can greatly increase market production.

Wind Energy Legislation

Subsidies in this market can be found both domestically and globally.  In simple microeconomics, they allow the marginal producers into the market that normally wouldn’t be able to bring their project online otherwise.  Let’s look at some specific examples of a couple different pieces of legislation that have and will continue to really push the wind bull market.

The movement to greener forms of energy is definitely taking place on a global level.    The United Nations recently passed an amendment to the international on Climate Change called the Kyoto Protocol (KP).

As of 2006, 169 countries had agreed to the Kyoto Protocol.  The idea of the KP is to reduce green house gas (GHG) emissions.  The 169 countries that agreed to the KP make up account for 55% of total GHG emissions.  Annex 1, or developed, countries are expected to reduce their GHG emissions by 5% from their 1990 levels.  The date set for the reduction standards varies from 2008-2012.  Some countries, like those of the EU, will have to reduce their emissions by 15% from their current levels due to the growth in GHG emissions from 1990.  The KP also includes a form of tradable emission credits.  This is a market that is very similar to that of tradable carbon credits.

Countries like China are not considered Annex 1 and are not a part of the Kyoto Protocol, they are taking their own steps to achieve greener energy.  It doesn’t necessarily require an amendment like the KP to urge the usage of wind energy.  Another country who doesn’t happen to be one of the 169 countries currently using KP standards happens to be the U.S. of A.

Like China, Washington has had its own contributions to the wind energy industry.  As previously mentioned, when renewable energy goes, the footsteps of government subsidies can be heard close behind.  The reasons for this idea of government intervention can and have been argued time and time again.  This is not going to be an argument for or against these subsidies and tax breaks.  But good or bad, they are here to stay.  As shown in the market for ethanol, these subsidies have an enormous impact on their particular market of influence.  On that note, let’s see how the government is going to send the currently dossal wind market into a roaring bull.

The Production Tax Credit (PTC) Extension is a 2-cent/KW hour of electricity produced.  This tax credit can only be applied to utility size windmills and is not used in smaller turbines for individual homes or businesses.  The PTC was set to expire on Dec. 31, 2007, but in December 2006 the tax credit was given an extension of 2 years.

Although this piece of legislation has been extended several times, this particular extension of the PTC marks the first time that the extension came before expiration.  This is significant because it gives some more consistency for windmill producers and the job market that goes along with it.

The very last piece of legislation to be discussed is the Small Wind System Tax Credit.  This is for you smaller producers like a windmill on a house or for a small business.  This piece hasn’t actually been signed in yet, but it is a clear sign that more and more attention is being put on the wind market.  Essentially, this bill would give a tax credit for of $1500 per ½ KW of mill capacity up to 100 KW.  It encourages windmill usage on a smaller scale, but as the minor windmill users begin to accumulate, they use less and less energy from other sources of production.

Bills like this one are strong signs of what is to come in the market.  They compliment GHG emissions restrictions like the Kyoto Protocol and more specific wind subsidies like the Production Tax credit very well.

The government has played a very significant roll in the advancement of the usage in renewable energy, and will continue to do so for the wind market.  Even without the government, wind energy would still thrive.  It is becoming more and more apparent that it will be essential in supplying electricity both on a commercial and a residential level.

Wind energy, and the companies involved in its production, haven’t yet experienced the gains that we have seen with ethanol and solar.  The time to enter this market is right now, and we have a stock pick that is set to profit off of the coming bull market in wind.

The Daily Reckoning