A Strong Tailwind for Wind Power

GE's entry--and buy-green laws--have the industry racing ahead

In May, 2001, General Electric Co. (GE ) scooped the assets of Enron Corp.'s wind-power division out of bankruptcy for $285 million. Skeptics wondered why GE was bothering with such small fry. Its own $23 billion Power System Div. was a global leader in heavy power equipment. The wind business as a whole, worth just $6 billion in revenues worldwide, was too small to really matter on the global-energy scene. And even if it did, Enron Wind ranked fourth in an industry dominated by European companies.

Nearly two years later, it's clear that GE grabbed a cheap ticket into the fastest-growing game in the power business. Global wind capacity has nearly quadrupled in the past five years. Better technology has brought prices down. And wind power has also benefited from a growing body of local and national buy-green laws. Now, the industry should get a big boost as GE brings its century-long experience in turbine technology to bear. "The wind business," says Steven Zwolinski, president of GE Wind Energy, "combines a variety of technologies that GE excels at."

Technology has played a key role in this virtuous cycle. Windmill blades have gotten bigger and more efficient, as have turbines, which convert the mechanical motion into electricity. Just two years ago, 750-kilowatt turbines dominated the market. Today, GEWE's best-selling model has twice that capacity. And while first-generation turbines in the 1980s were famously unreliable, "now, they're up 95% of the time or more," explains Randall Swisher, executive director of the American Wind Energy Assn.

This means that new, well-sited wind towers can compete with coal- or gas-fired plants, charging 3 cents to 6 cents per kilowatt hour, versus around 4 cents for coal or gas. So utilities and power developers are starting to see wind as a cost-effective way to diversify their mix of fuel options and not just a way to burnish a green image. "The main driver has been cost. The price [of wind] has come down by 80% over the past 20 years," says Lew Hey, chairman and CEO of FPL Group Inc. (FPL ) The Juno Beach (Fla.) utility--a GEWE customer--has added more than 2,000 megawatts of wind capacity to its portfolio of gas, coal, biomass, hydro, nuclear, and solar plants.

Sweeteners in the form of local and federal wind-tax credits are part of the allure. In 1992, for example, President George H.W. Bush unveiled a set of federal production-tax credits, or PTCs, which now give wind-plant operators a 1.8 cents credit for each kilowatt hour they sell. The PTCs aren't ideal, as they are only useful to companies such as utilities that earn steady income. But they're a step up from earlier investment-based credits, which gave wind producers little incentive to maintain wind facilities after taking the initial credit.

The current PTC is set to expire at the end of 2003. Still, industry execs say that support for wind is greater now than on the past two occasions the credit was renewed. "The industry's at a point where it could probably get by without [the PTC]," says Edwin F. Feo, a lawyer specializing in energy finance at Milbank, Tweed, Hadley & McCloy LLP.

Thanks to the rise of green-energy quotas, GEWE and the wind biz may prosper either way. Concerned about global warming and U.S. dependence on imported oil, more than a dozen states have established so-called renewable-portfolio standards that require power producers to phase in locally generated renewable sources. California, for example, calls for 20% by 2017; Texas producers are ahead of schedule to produce 3% green by 2009; and in New York, the governor just set the bar at 25% within 10 years. A similar set of national quotas--a 10% green-power minimum for all 50 states by 2020--was approved by the Senate last year, and is bound to get more attention.

Accounting for just 0.25% of U.S. power output, wind may still look like a long shot. But developments in Europe give the industry hope. There, high fossil-fuel costs and a steadier commitment to wind power have pumped up wind loads to over 20% of power generation in Denmark and Spain. AWEA expects the U.S. to achieve 6% wind by 2020 or sooner just by letting current growth trends continue.

For many states, wind may be the only cost-effective option. Most state-level renewable quotas demand that the green energy be produced locally. For all but a handful of hydropower-rich states, wind is the cheapest, most flexible, and most abundant option. The cost of power from photovoltaic cells, for example, is five to six times that of wind, though prices for solar have been falling. Biomass and geothermal remain too small to compete for now. And with dams coming under environmental scrutiny, hydropower output is likely to decline.

GE's arrival on the scene could add a lot of momentum. Zwolinski, who also served in GE's medical and power-systems units, talks about turning GEWE into a $1 billion operation by applying the conglomerate's diverse industrial expertise. GE's aerospace engineers can work on the shape of the blades. Generators are a specialty of GE Power Systems. The drive shaft, gearing, and control systems are all staples of GE's industrial controls and power operations. Add in Six Sigma tools that GE itself perfected, and Zwolinski thinks the company could bring the price of wind power down by an additional 20% or so.

Already, GE has unveiled the world's largest commercial wind turbine. At 3.6 megawatts, it has more than twice the capacity of today's standard 1.5-megawatt models. Zwolinski is also focusing on service and maintenance, applying remote diagnostics and other technologies GE pioneered in its medical-systems operations to predict when maintenance is due. "GE'S entry really changes the game. And it means a healthier, more competitive industry," says Terry F. Hudgens, CEO of PPM Energy Inc., which recently installed GE turbines in a Minnesota wind park.

Such customer confidence is a plus. But GE still faces some significant obstacles. In its key U.S. market, uncertainty over the timing of the PTC renewal is causing some developers to delay big deals. And while wind is plentiful, it often blows the hardest where nobody needs it. So until federal rules are revised, it may be costly for new wind projects to get connected to the grid. And once these issues are resolved, wind's price will have to keep falling. After all, notes Zwolinski, wind businesses can only flourish if they deliver power at a price that won't punish customers for going green.

By Adam Aston in New York

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