The European Union has taken the lead on many climate change issues – from ratifying the Kyoto Protocol to passing laws to require and encourage the development of renewable energy. Why, then, are so many European energy companies looking to invest in the United States?
For António Mexia, the chief executive of Energías de Portugal, the answer is simple. “The United States is the fastest-growing market in the world for wind power,” he said. “If we want to be a leader, we have to be here.”
In July, Energías paid nearly $3 billion to buy Horizon Wind Energy from Goldman Sachs. The purchase, Mexia’s first foray into the United States, doubled the amount of wind power in Energías’s portfolio, giving the once sleepy Portuguese utility the fourth-largest wind-farm capacity in the world, behind Iberdrola of Spain, FPL Energy – an affiliate of Florida Power and & Light in the United States – and another Spanish company, Acciona Energía.
All the biggest players in wind power are focused on the United States.
This year, Acciona bought the wind farm development rights of EcoEnergy of Elgin, Illinois, and Iberdrola bought CPV Wind Ventures of Silver Spring, Maryland. Iberdrola also added the wind development company PPM Energy of Portland, Oregon, to its business through its acquisition of a British company, ScottishPower, in April, and in 2006 it bought Community Energy of Radnor, Pennsylvania.
BP, based in Britain, also added to its green portfolio in 2006, buying two U.S. wind developers, Greenlight Energy and Orion Energy. In October, the German company E.On bought the North American wind farms of Airtricity of Dublin for $1.4 billion.
“In America you can put up a 200- or 300-megawatt wind park,” Mexia said. “You can’t do that in Europe” because of the lack of open space for such large wind farms.
There is also more potential for growth in the United States, where wind farms account for barely 1 percent of installed generating capacity. In some EU countries, that figure is as high as 10 percent.
The biggest incentive, however, is not the strength and speed of the wind blowing across some states, but a number of laws put in place in about half of the states to encourage the development of renewable energy.
At the national level, energy legislation calls for subsidies for wind power producers, in the form of a tax credit. Meanwhile, 25 states now have laws that require utilities to obtain a certain amount of power from renewable resources. This puts the United States at the top of a ranking of countries by Ernst & Young on the best renewable energy markets.
For many U.S. companies, however, the patchwork of laws and regulations adds up to a headache. Things are much simpler in Europe.
Spain, for instance, sets electric rates once a year, and many European Union countries have simple “feed-in tariffs,” under which producers are paid at fixed rates for electricity generated from renewable resources. But in the United States, “regulation is a daily event,” said Edward Tirello, a senior strategist at Berenson, a consulting firm.
Until recently, Tirello said, many European energy companies were state-owned, and they still enjoy the legacy of their monopoly positions, including rich cash flows.
For Mexia, the mix of state and national laws in the United States provides Energías de Portugal with “regulatory diversity.” It also provides an investment field unfettered by legacy issues. It does not hurt that European utilities are used to lower margins. They are usually happy to receive a 9 percent return on equity, whereas utilities in the United States commonly receive rates of return of about 11 percent, and unregulated power-generation assets, including many wind farms, have no caps on their profit.
European power companies are not just looking at the United States. They are considering projects in Asia and in Europe as well.
“The U.S. is a bridgehead in a global market for renewable assets,” said Jonathan Johns, head of renewable energy at Ernst & Young.
Bolstered by the bulk and visibility of its U.S. acquisitions, Iberdrola plans to spin off its renewable energy business in an initial public offering before the year end of this year.
Energías de Portugal, which has already demonstrated a willingness to pay up to stay in the game, is unlikely to be far behind.
“We are studying an IPO of our worldwide wind business in 2008,” Mexia said.
By Peter Maloney
6 November 2007
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