Financial Innovation is Blowin' in the Wind

Owning a wind farm is about to become a lot less risky.

Tom Konrad, Contributor
June 06, 2011 | 8 Comments

Wind power is cheap, clean, uses no water, and emits no pollutants. Yet wind is far from a perfect source of electricity, since the wind blows when and where it will.

While wind power will never be as constant as baseload power, geographic diversification and better dispatch procedures can go a long way to mitigate the problems to utilities caused by wind's variability. Yet wind farm developers and financiers are at the mercy of the weather in their particular location. Not only does wind output swing significantly from day to day and season to season, wind output can also vary greatly from year to year. Farm owners also have to worry that some of their turbines might need maintenance just when the winds are at their best. This can lead to unpredictability of wind farm revenues, which in turn makes wind farms more expensive to finance.

Two recent announcements go a long way to solving these problems for wind farm developers and owners.

First, on May 19th, energy risk analysis leader 3TIER and weather risk management firm Galileo announced that they would be offering financial products to hedge the risk of wind variability. With cash payouts based on 3TIER's leading wind resource data, Galileo can offer to mitigate the cost to wind farm developers for a premium which can be expected to be much less than the risk premium charged by project financiers who do not have the expertise to assess wind resource risk as well as Galileo and 3TIER, and who also seldom have large and geographically diverse enough portfolios of wind investments to accept such risks at a price that is affordable for many wind farm developers.

Second, General Electric (GE) announced on May 23rd that they will be offering production based availability (PBA) guarantees as an option for new and existing operations and maintenance contracts on all GE 1.5 and 2.5 megawatt series wind turbines. Not only will this remove a level of risk and make wind farms cheaper to finance, but it is also likely to be a competitive advantage for GE Wind, which recently slipped into third place by market share behind Chinese manufacturer Sinovel Wind Group (601558.SS). While first place Vestas Wind Systems (VWDRY.PK) might be able to offer comparable guarantees, I can't see bankers putting much faith in the strength of a production guarantee from the Chinese firm, especially after their recent dust-up with American Superconductor (AMSC).

Together, these two financial innovations could do as much to reduce the cost of wind power and increase the pace of wind farm development as years' worth of technical innovation developing better wind turbines.

This article was first published on the Green Stocks blog at Forbes.com.

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8 Comments

Michael Keller
June 16, 2011

The "right locations" are very limited. Claiming parity is not supported by Pro Forma analysis done in an even handed manner, i.e. direct $/kWh subsidies and renewable mandates are ignored.

Please note I am stating Wall Street is the real welfare queen, not "green" energy. Those financial gamblers took utterly stupid risks and were bailed out by the taxpayer.

The wind business in particular and energy business in general need to get off reliance on Washington and reduce costs through innovation, better efficiency, etc. This needs to occur relatively rapidly (next few years) as the Obama administration is doomed and a much more austere federal government is inevitable.

Bob "The Clean Energy Guy" Mitchell
June 16, 2011

Keller: In the right locations, wind power is getting pretty freaking close to grid parity with fossil fuels and as far as the industry (which I'm not in, btw) goes, it has nothing on the fossil fuel industries in terms of being "welfare queens"!

Bob "Free As The Wind" Mitchell

Michael Keller
June 16, 2011

Wind is not cheap. The limited hours of operation cause the required price to be quite high to pay off the debt, unless you can foist the costs off on someone. Oh, I forgot, that is exactly what has occurred.

Credit default swaps? That worked really well when the global financial system nearly imploded.

While the financial wizards of Wall Street (aka welfare queens constantly bailed out by the US Taxpayer) may attempt more flimflam financial innovations, the fact is wind energy has little intrinsic value when compared to conventional resources. Further, the impact on CO2 emissions is inconsequential.

Tom Konrad
June 12, 2011

Bob,
That's a good observation. Such risks are worth paying attention to. Fortunately,if a company like GE is the backer, there are already financial instruments available to hedge that risk: Credit Default swaps.

Bob "The Clean Energy Guy" Mitchell
June 8, 2011

My concern with these sort of instruments is how do you make sure that the company issuing the guarantee has the ability to pay up in the event that a large number of claims are made at the same time?

It's all fine and dandy as long as the wind keeps blowing, but as was found out in the mortgage industry, companies still have to have the financial wherewithal to buck up if things do go wrong.

I'm not saying that the financial risk couldn't be dealt with through reinsurance and other means, but I'd like to see the details before I would take a company (even one as big as GE)at it's word that it's not going to oversell it's ability to pay off in a worst case scenario.

Bob "Free As The Wind" Mitchell

Tim Gard
June 8, 2011

Wow,only $55 a gallon? I am sure you mean a barrel, but hydro electric will be well below $10 per barrel in the equivalant, and much more than what is needed to replace all fossil fuels as well as wind, thermal, solar and cow flatulance. And it will easily convert to pressurized air for easy, safe long term storage and transportation. The only down side is the money others have wasted on other concepts soon to be sent to the garbage heap.

David Doty
June 8, 2011

There's a much better option in the works than CAES, and that is Windfuels – use the excess, off-peak wind energy to make standard liquid fuels, like gasoline, jet fuel, and diesel, from CO2 and water. The science and engineering are well understood, and much has been presented in 8 peer-reviewed technical papers that are available for download from the DotyEnergy website. The development will be straightforward. The fuels produced will be carbon neutral and sustainable. They will compete when oil is as low as $55/gal in some cases (with favorable incentives and cheap off-peak wind prices). It's the only really big solution being proposed. There is more than sufficient off-peak wind potential in the U.S. (to be developed) and sufficient CO2 from point sources (hence, cheap) to make twice as much liquid fuels as we currently consume. With support of Windfuels, the U.S. could go from being the largest importer of oil to the largest exporter of carbon-neutral fuels. It looks like we at Doty Windfuels are only three months away from demonstrating most of the key processes in the lab. Perhaps at that point others will begin to take notice.

Tim Gard
June 8, 2011

Storing wind energy is simple and cheap ... except for those who have already spent a fortune doing it the wrong way ... the last thing they want however is a new cheap answer. Stop generating electricity with wind turbines and use them to compress air. Then use the stored air when demand requires it to generate electricity. Now you can use every ounce of wind pressure to generate energy in spite of present load demand. Unless there is a better way to compress air naturally without turbines, then this whole wind turbine thing is basically useless ... oops ...

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Tom Konrad

Tom Konrad is a financial analyst, freelance writer, and policy wonk specializing in renewable energy and energy efficiency. He manages green stock market portfolios. He writes articles about investing in clean energy for Forbes.com AltEnergyStocks.com....