Overview of onshore and offshore wind power

www.glgroup.com
March 28, 2010

Potential for Wind
Professor Mark Jacobson from Stanford University recently shared that the potential energy from all wind over land in high-wind areas outside Antarctica is between 70 and 170 TW. To put this in perspective, currently the entire world energy demand is around 13TW and it is predicted that we will be at 17TW by 2030. Of course a lot of the potential is in off-shore wind as most of the prime land in the developed world has been used up.

In their recent report, Credit Suisse concluded that "Wind energy is the second most economical power generation source… However we note its limitation not only as an intermittent source, but the high probability that on peak energy use days (for example, when it is very hot or very cold), wind resource tends to be lower than usual. In addition, transmission investment would be required because wind resources tend to be far from where the electricity is needed."

On-shore Wind
To-date we have an installed a little more than 100 GWs of on-shore wind capacity from a total potential of 1,000GW. For comparison, in 2007 the total electrical generation capacity in the U.K, was 80GW (based on latest IEA data). It is generally accepted that on-shore wind can compete with traditional generation sources, without subsidy, in areas where wind speeds are high enough. However, subsidies in the form of feed-in tariffs have clearly helped increase adoption in many industrialized regions.

Some of the potential problems with on-shore wind is that most of the prime real estate has been used up. Moreover, like most RE projects, the implementation of these sources are capital intensive – requiring substantial up-front investments which makes ROI vulnerable to interest rates. In the current climate, financing projects at a cost that makes economic sense will be challenging absent policy support via subsidies and incentives.

Furthermore, as most of these wind-farms are far from consumers, the cost to connect to the grid should also be factored in. Longer term, blade and turbine supply may challenge the supply chain. Innovation is also required to reduce exposure to volatile commodities (steel/copper) that go into the manufacturing of these systems. When looking at on-shore wind, it is interesting to consider the footprint of various RE generation sources to meet consumption. The following maps shows the footprint of RE sources if we were to power 100% of on-road vehicles and 50% of all US Energy from Wind.

Offshore Wind
As mentioned, a lot of prime land based locations have been exhausted, so the next place to look for wind is off-shore. Wind is stronger and a lot more consistent off-shore which makes it the natural next fit for wind-power. However, it does have some logistical and design challenges such as the high cost of running sub-sea cables to connect to the grid along with the harsh environmental conditions that can exasperate wear and tear on the equipment.

As discussed at the World Economic Forum, significant work by Siemens, Vestas REpower and others have resolved many of the reliability issues by strengthening and improving components and insulating internal mechanisms from salt laden sea air. This has come at a cost though with considerable compromises made on weight and upfront costs.

Just as the oil and gas industry had to master deep water operations to build and maintain off-shore oil and gas platforms, the off-shore wind industry faces similar challenges which will have an impact on the cost to operate and maintain such systems. This reality in effect further increases the upfront capital expenses needed to get such projects going (ROI will be interest rate sensitive) with the potential risk of higher costs during project maturation related to maintenance and repair activities.

Experts at Davos concluded that in the foreseeable future, off-shore turbines will have lower profit margins than onshore turbines, and as long as onshore development continues to be healthy, turbine manufacturers will focus on producing onshore turbines, which may lead to potential bottlenecks for offshore turbine projects.

With this background information, it is important for US Investors to recognize that state tax and financial incentives, as well as state renewable portfolio standards (RPS MetOcean), will have an important effect on this resource. Furthermore, as larger and more efficient turbines erode the grid parity cost premium for wind-power, federal tax incentives and other subsidies will increase new wind installations.

Of the various policy drivers, it appears that State RPS MetOcean may be the most effective driver for this technology in the United States. Of course, each state must direct policy and incentives to address constraints such as the wind resource locations and quality of such locations, cost of traditional generation sources, electricity growth projections, the willingness of power utilities to integrate wind into their network, permitting and siting of wind farm locations, and the rules that govern the transmission system.