Despite all the hot air coming out of Washington on the need to bolster the renewable energy sector, much of the recent investment in American wind technology and wind farms stems from places like Japan, China, and Europe. New wind energy projects, it seems, are having difficulty locating funding and gaining traction in the U.S. With an unemployment rate hovering at ten percent, it’s a wonder that a sector with such promise for growth and job creation has to go overseas to get a helping hand. What gives? Three elements stand out: frozen credit lines, regulatory and legislative uncertainty, and risk aversion to new projects.


Illiquidity
It’s no secret that small and medium businesses, which make up half of the nation’s workforce and create the most new jobs, are having difficulty getting loans from banks to invest in new infrastructure, more labor, and new research and technology. Banks are holding their cards close for now, but it’s not as if the finance sector is holding out on the energy sector specifically; the same holds true no matter which industry these mid-size companies work within.

Nevertheless, according to the Union of Concerned Scientists (UCS), hundreds of billions of dollars in new capital investment and 300,000 new jobs could be created with the enforcement of a Renewable Energy Standard (RES). UCS reports that in 2007 and 2008, “more wind power was installed in the United States than in the previous 20 years combined, representing a $27 billion investment. More than 70 wind turbine component manufacturing facilities opened, expanded, or were announced. Moreover, according to their respective trade associations, the U.S. wind industry employed 85,000 people in 2008, up 35,000 from 2007.” Despite these arguments, strong winds behind this sector in the U.S. are coming from foreign rather than from Washington or American banks.

Billions of investment dollars are floating around, yet someone like Tom Carnahan of Missouri could not get a single American bank to invest in his $240 million, 150-megawatt wind farm project. Instead, European and Japanese banks stepped up to the plate. In October, Renewable Energy Group and Cielo Wind Power announced a joint venture agreement with the Chinese Shenyang Power Group to construct a 600 megawatt wind farm in Texas. On November 6th, AES Corporation announced that China Investment Corporation (CIC) was purchasing a fifteen percent stake in the company for $1.58 billion. Moreover, a recent report by the Investigative Reporting Workshop finds that 84 percent of $1.05 billion ($849 million) in energy grants have gone to foreign wind companies, with Spanish firm Iberdrola S.A. receiving the bulk of the funds. (Iberdrola employs about 800 people in the U.S.).

(Investigative Reporting Workshop)

The Obama Administration allocated about $80 billion of its economic recovery act to stimulate the renewable energy sector. According to the Department of Energy, as of November nearly $17 billion has been authorized for allocation to companies in the renewable energy sector. Of that, $10.6 billion has been awarded, and of this amount, a mere $348 million has been spent. According to the DOE, of the over 130 projects awarded funds, only three relate directly to wind energy, and even then these projects focus on research and technology rather than manufacturing.

Wind power, one part of a multifaceted energy generation future, shows no sign of slowing down—indeed the sector is growing rapidly. Illiquidity, unfortunately, is putting the brakes on its promising future. Despite the known risks (below), banks should ease up and start doling out cash for these hungry wind projects.


Regulatory Uncertainty
Uncertainty in Washington toward climate and energy policy has put the brakes on any major investments in renewable and new energy technologies. Investors are waiting to hear from Congress which way tax breaks will lean, which industries will be saddled with more stringent regulations, and so forth. “The process of passing climate change legislation that would explicitly encourage investment in low-carbon and alternative energy production has stalled in the Senate, amid opposition from Republicans as well as Democrats from coal and agricultural states,” says the Financial Times. The ball is very much in Obama’s court.

Or is it? Barron’s reports that three sectors of the economy look promising for the next six to twelve months: technology, health and energy. The hullabaloo surrounding potential health care reform at the federal level does not appear to dissuade investors in that industry. Yet debate in Washington, Brussels and Copenhagen about climate change legislation at domestic and international levels seems to instill a sense of “wait and see” amongst alternative energy investors. Considering the broad diversity of the energy sector, however, such stall tactics are possible. Oil, natural gas and coal markets are rather more predictable than untested carbon trading schemes and alternative energy investment sectors, thus providing an outlet for energy investment funds that might otherwise sit idle.

Meanwhile, local governments like those of Maryland, Virginia, and Delaware aren’t waiting on Washington, choosing instead to team-up to incentivize investment in offshore wind development in the Mid-Atlantic. For now, though, state and regional efforts appear to have a minimal effect on overall wind project investment patterns.


Risk Aversion
Perhaps the biggest obstacle—or obstacles—to getting wind projects up and running lie in the difficulty of surmounting and mitigating the myriad of risks associated with this wind energy. A number of financial, social and political risks immediately spring to mind:

• windmills are unsightly;
  
• windmills maim and kill birds while underwater transmission lines disrupt sea life;
• wind is not cost-effective when compared to other energy sources (e.g., natural gas);
• wind farm construction is cost-prohibitive (esp. when it comes to constructing transmission lines);
• wind farms lower nearby property values;
• wind energy is inconsistent (i.e., dependent on the weather);
• regulatory permits are difficult to obtain

Yet these are not insurmountable hurdles. Many claim, for instance, that offshore windmills will be unsightly and will ruin pristine ocean views. But of the proposed offshore wind farm in Maryland, “on the clearest of all days ... [the windmills] may appear as a slight toothpick on the horizon”—hardly a landscaping disaster. And in regards to avian mortality rates, it appears that more birds are killed by cars, birds running into windows, transmission lines, feral cats and a whole host of other sources than are slain by wind turbines. And a new study by Lawrence Berkeley National Laboratory finds that “proximity to wind energy facilities does not have a pervasive or widespread adverse effect on the property values of nearby homes.” And while wind energy is not a constant force, intermittency problems can be mitigated by mixing other energy resources into the grid to compensate for non-breezy days. Nearby hydropower turbines could be opened up, for instance, when the wind dies down.

Yes, it is true billionaire T. Boone Pickens abandoned a plan to build the world’s largest wind farm in Texas when natural gas prices dropped. Likewise the lack of transmission infrastructure was problematic (in the U.S., the wind blows hardest in the most remote places, including offshore). But it’s also true that Pickens didn’t abandon investing in wind altogether, and big companies like GE Energy and Iberdrola continue to invest in wind energy technology and infrastructure in the U.S. and worldwide. The joint Texas-Chinese venture mentioned above also lends to the idea that funding wind projects is an investment that is sure to pay off.

So, yes, there are many risks, but none seem to be particularly or individually dissuasive to wind energy investing. Taken as a whole, however, the list of risks is formidable. (But is this a sentiment based more in psychology than reality?)


For now…
For now though, it appears we will have to wait for legislative initiatives coming post-Copenhagen before a surge in wind energy investment materializes in the U.S. Yet even the slightest breezes off the mid-Atlantic coast, in California, Missouri and Texas indicate the winds are a-changin’. Senator Charles Schumer, for one, has called for a halt to the deal between REG, Cielo and Shenyang, claiming the money received from the government’s stimulus plan for manufacturing wind turbines should stay in the U.S. This could be a shot over the bow that Washington is getting ready to throw its weight behind this burgeoning power sector.

Readers: what other reasons and risks are there for a slow embrace of wind energy investment?

Posted by Shaun Randol at 10:59 AM