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The wind turbine generation industry is setting a blistering development pace. An annual compounding growth rate of 30 percent is leaving everyone standing in awe. Reports from the Pacific Northwest describe “land rushes” for any and all reasonable locations for wind turbine parks. This unbridled rush to erect is being fueled by two motivations. One is the “stick” of regulation, which mandates that “green” energy must amount to a specified proportion of total energy consumed by set dates. Two is the specter of “peak oil” and the attendant prospects of political tensions between those with and those without crude oil.
An industry caught up in such explosive development is inevitably going to stumble in the rush to build out fast. Marginal turbine sites are deemed acceptable. Manufacturers focus on increasing production volumes at the expense of quality control and design excellence. Developers generously exaggerate expected productivity. Operators, often new to the industry and inexperienced in the nurturing of machinery, enter the business with expectations of great riches, emboldened by government subsidies, tax incentives and talk of high electricity revenues from hard pressed energy consumers.
Global hydrocarbon energy prices are providing the wind generation industry an incredible opportunity to move onto energy Main Street. Hydrocarbon resources (particularly oil and natural gas) are finite on earth and after widespread denial, ever more people are confronting this reality. Recent actions by oil and natural gas producers/producer countries demonstrate the willingness to withhold supply to extract economic and political premiums from consumers. Electricity generation plants using hydrocarbons as input energy have recently had to either pass on sharp increases in primary energy prices or shutdown if cost increases could not be passed on. This new reality is concentrating the minds of institutional investors who are grappling with the unpleasant lesson that uncontrollable direct operating cost increases (coal, natural gas, uranium, oil) can render fixed production assets worthless. Electricity generation assets using energy inputs from finite resources are eventually going to be turned into stranded or lost capital. Energy from hydro, wind and solar resources, by contrast, are infinite making them far less risky for investors.
Opportunity Must Not be Wasted
The trick now for the wind turbine generation industry is to use this “perfect storm” condition to become much more important in the global generation of energy. This terrific opportunity will not be secured by the reckless endangerment of the large pools of vital investment capital. In recent times investor capital has been squandered by poor site selection, by turbine design compromises and by careless operations leading to premature catastrophic equipment failures. These are the symptoms of a juvenile industry that unless modified will serve to marginalize it indefinitely.
Site selection presently is done with two factors in mind; the presence of wind (almost anecdotally) and the proximity of transmission lines. All aero dynamists understand the degree of productive difference between “dirty” and “clean” air. Wind turbine parks in or near mountains have to be in some of the “dirtiest” air possible. It is no mystery why there is a special checkout for all pilots wanting to operate aircraft in mountainous terrain; it is just plain rough and more dangerous. “Dirty” air is also very hard on transmissions/gear boxes and blade feathering mechanisms. Turbines operating in “dirty” air suffer an inordinate amount of breakdowns twisting the expected financial results out of all recognition. In the absence of specific “dirty” air turbine designs, investment success will elude the unwary.
Most business models for wind turbine parks project useful operating lives of about 20 years. Implied in these models is the expectation that turbines will faithfully do their jobs over the same period. Recent operating experiences suggest otherwise. Dramatic growth in demand for new turbines has tended to camouflage this inconvenient truth. The most dramatic evidence of the presence of less robust equipment is the roll-back of manufacturers’ warrantee periods from 5 years to 2 years. Compromising design and engineering excellence should be expected when an industry is confronted with buyer frenzy, but shoddy goods all too rapidly destroy capital.
Developers and operators new to the wind turbine industry seem to like self-delusion. After all it is just a simple matter of erecting a turbine on a tower, tying into the grid and start collecting the generous revenues from a “green” energy operation. This operating model might work for an industry doomed to the margins of global energy production but large institutional investors will have no truck with it. Operators wishing to attract the support of large pools of capital need to think as “owners” of that capital. This means that the turbines they have charge over are paramount. Nurturing operating equipment is a well established first principle in many industries; a reality the wind turbine industry has yet to learn. Fortunately there are as always a few striving to correct omissions of ignorance or laziness. Turbine condition monitoring (full time and real time) is now a technological fact that allows operators to intervene before catastrophic failures. This practice is so beneficial to the protection of invested capital that insurers are comfortable in providing affordable loss of revenue insurance as well coverage from accidental damage.
Industry self-discipline in the location selection, design and the operation of wind turbines will win the support of large investors as it will convince them their capital is in safe hands. It is not good enough for the wind turbine industry to let its present good fortune spoil a wonderful and financially rewarding future.
By Erik Andersen, Economist
5 December 2007
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