Renewable Energy Investor Says Wind Industry Ripe for Innovation

2/18/10Follow @bvbigelow

You could say I blew into the wind power event that Cleantech San Diego organized here last week. The canapés were gone by the time I arrived, but the show was just getting started. I got there in time to hear keynote speaker Jim McDermott of energy investment fund U.S. Renewables Group describe a somewhat stormy outlook for renewable energy companies developing wind projects.

In surveying the windswept landscape, McDermott sees plenty of opportunities for wind energy developers. “There’s a huge amount of class 3 wind out there,” he says, referring to the basic level of wind energy required if providers want to pour power into the electrical grid. “There’s even still some class 4 and 5 out there, particularly in the offshore markets.”

In the United States, McDermott says about 300 megawatts of wind power were under development in 2008—which dwarfs the amount of biomass, geothermal, solar, and every other type of renewable energy under development. But with the collapse of the capital markets and the massive downturn, McDermott says there’s also been a tremendous amount of carnage.

About one-third of the projects under development—representing about 100 megawatts of renewable energy—were effectively wiped out. “Not that these were bad projects,” McDermott says. “There was just no money. For about six months, there was no money for any project at any price.” He estimates that major utilities stepped in to acquire another 100 megawatts of project assets—at cost.

Wind developers have little choice because the number of major financial firms willing to finance such projects has plunged by two-thirds, the amount of capital available has substantially shrunk, and financing terms have become much more stringent. McDermott says USRG sees what’s left as an investment opportunity because project valuations have fallen dramatically.

Nevertheless, wind power remains the dominant renewable energy technology. McDermott says 75 percent of all renewable energy assets that are built in the United States are wind-powered. In short, the market is ripe for innovation.

“There is a lot of innovation that remains to be done in terms of the blades, turbines, gear boxes, and everything else,” McDermott says. As an example of some of the latest out-of-the-box thinking, McDermott says USRG is among the institutional investors backing General Compression, a four-year-old startup based in Newton, MA, that has developed a system of 1.5 megawatt compressor/expander modules that use the excess electricity generated by a wind farm to compress air and pump it into tanks or underground storage caverns (i.e. a salt dome) beneath the turbines themselves. At times when the breezes falter, the system operates in reverse by releasing the compressed air and using it to generate electricity. McDermott says General Compression has partnered with two electric utilities, a natural gas energy company, and a wind developer—and plans to begin construction of its first commercial project late next year.

McDermott is a co-founder and managing director in the Los Angeles office of USRG, one of the largest investment firms to focus exclusively on the renewable energy industry. He says USRG raised $590 million in its first two funds, and is now raising $1 billion for its third fund. Investments in renewable energy projects represent about 40 percent of the firm’s total portfolio, according to McDermott.

To McDermott, the issues clouding the prospects for wind energy include government policies that blow hot and cold in supporting loans and tax credits, as well as local political opposition to particular wind projects and transmission lines. He also noted that the “intermittency” of wind power remains “fundamentally unattractive to utilities.”

Inconsistent tax incentives, in particular, stalled U.S. wind energy development in past decades, according to Rob Gramlich, who oversees public policy at the American Wind Energy Association, the wind industry organization in Washington DC. Gramlich tells me that in the early 1980s, California alone had more than 80 percent of the entire world’s installed wind energy capacity.

The gist of his argument is that Europe’s wind energy industry overtook California and the rest of the U.S. because of inconsistent tax incentive policies. This point was underlined by McDermott, who says USRG was founded in 2003 primarily because so-called “renewable portfolio standards” set in California, Massachusetts, and other states are requiring utilities to develop renewable energy projects. The regulations require that a significant percentage of their power from renewable energy by specific deadlines. In California, for example, utilities are required to generate 20 percent of their power from renewable sources by this year, and 33 percent by 2020. Before that, if I understood McDermott correctly, USRG was not involved in the U.S. market because, as he put it, “it was a tax-motivated market.”

That has changed. By the end of 2009, Gramlich says the total installed wind energy capacity of the United States was about 35,000 megawatts—less than half the 76,000 megawatts of Europe’s installed wind energy. The depleted base of the U.S. wind industry helps to explain why so much federal stimulus funding—more than 75 percent of $2 billion awarded to create green jobs in the U.S.—went to foreign-owned wind energy companies, according to recent press reports.

Gramlich and the American Wind Energy Association took exception to the reports, arguing that the stimulus funds awarded to foreign wind companies was still spent on developing wind projects in the United States.

U.S. wind manufacturing is up 12-fold in four years, and Gramlich says the domestic content of U.S. wind turbines is over 50 percent—which approaches the domestic content of Chrysler cars. By domestic content, Gramlich says he means the percentage of the machinery in wind turbines that comes from U.S. manufacturers. “It is calculated by weighting each of the 8,000 components by [a] percentage of overall turbine cost,” Gramlich says.

With U.S. wind energy capabilities expanding, McDermott says sees a couple of attractive areas for wind energy investors:

—Over the next three to five years, McDermott says, “you’re going to see some opportunities where people are going to develop wind power in the middle of the country, and then there are going to be some interesting opportunities to wheel that energy to the east or west.”

—The other opportunity addresses more of the long-term issues facing wind energy and other renewable energy sources. McDermott says it means funding companies with technology innovations that help address such problems as the intermittency of renewable power generation. It means investing in sensors and software for the grid, as well as industrial-scale battery storage, flywheels, fuel cells, and even technologies for compressed air storage.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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