[Posted on March 28, 2008 - 12:00 PM]
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DiggAlthough investors are circling the nascent wind power industry, to date only one U.S. company in the sector has gone public. That may be poised to change.
"We're more likely to see more wind power IPOs in this industry in the next 12 months," predicts Edwin Feo, a partner a with Milbank, Tweed, Hadley & McCloy LLP in Los Angeles who heads the law firm's renewable energy team.
The dearth of wind company exits stems largely from the sector's fitful evolution since the energy crisis of the 1970s, rather than from investor aversion to the technology. Indeed, shares of Clipper Windpower plc, a Carpinteria, Calif., developer of turbines and wind farm equipment listed on the London Stock Exchange, have roughly doubled since its 2005 initial public offering.
Yet while Europe has embraced the promise of wind power, wind farms in the U.S. were widely written off as a hippie dream during the 1980s. That view is softening amid favorable tax treatment for wind generators, coupled with vastly improved turbine technology and the heightened competitiveness of wind farms compared with traditional power sources such as coal and natural gas.
Those factors, along with a rising interest in cleaner, homegrown sources of power, coalesced into something of a perfect storm in 2007, helping the country's wind power capacity grow 45% in that year alone. Today the U.S. is the world's second-largest producer of wind power, trailing Germany and leaving Spain, India and China to round out the top five.
Although no wind power companies are scheduled to go public, Feo says that scenario could change quickly.
Ironically, while investors seek to catch up with the recent success of the wind business, they find that large diversified utilities in the U.S. and abroad have already snatched up many of the best companies. For example, FPL Group Inc., the parent company of Florida Power & Light Co., owns wind farms that collectively produce 42% of the country's installed power base.
The U.S. wind energy sector was rife with acquisitions in 2007. Portuguese utility EDP-Energias de Portugal SA bought Horizon Wind Energy LLC, a Texas wind farm developer, from Goldman, Sachs & Co. for $2.15 billion; German energy giant E.ON AG bought Airtricity North America, which operates wind farms in nine U.S. states, for $1.4 billion; and Electricité de France SA bought 50% of wind power operator enXco Inc. in North Palm Springs, Calif.
Utilities view wind acquisitions not only as a way to diversify into alternative energy, but also as a vehicle for earning a wind power production tax credit, which the U.S. established in 1992. Keith Martin, a partner who works in the alternative energy sector for law firm Chadbourne & Parke LLP in Washington, says the tax credit was a key factor in spurring utilities to invest in wind power companies. The benefit is less valuable for IPO investors, he points out, because such earnings are not the same as a bona fide operating profit.
But the investment climate could change as wind companies become more competitive and profitable. The recently passed U.S. energy bill does not extend the production tax credit past the end of 2008. While wind power industry advocates hope the credit will be added back in by year's end, they say industry economics have improved to the point that--at least in some parts of the country--wind power producers can profit without it.
Another major shift that could boost wind players is improvements in turbine technology. Although the basic design of wind turbines has not changed since the 1980s, when hundreds were installed at the Altamont Pass about 60 miles east of San Francisco, today's turbines are significantly larger and more powerful. Some newer turbines have wingspans about the size of a 747 jet and generate about 2.5 megawatts of power when running at full capacity, versus around 0.1 to 0.2 megawatts for the older ones. It would require approximately 25 of the original wind turbines installed at the Altamont Pass 20 years ago to generate what one brand new turbine can produce today.
"It's like the difference between a prop plane and a jet plane," says Christine Real de Azua, a spokeswoman for the American Wind Energy Association. "Modern turbines are equipped with powerful electronics that process over 200 types of data, from wind speeds and direction to voltage dips on the grid. An entire wind farm can be monitored from a laptop computer."
As the generating capacity and profit potential of wind power companies improve, lawyers and bankers who work in the industry say midmarket companies such as Invenergy LLC of Chicago and UPC Wind Management LLC of Newton, Mass., might make strong IPO candidates. They also say there is potential for many more IPOs through spinoffs from larger utilities, especially if utilities decide to cash in on the cleantech hype.
Of course, challenges abound that could prevent wind from becoming a truly ubiquitous source of power. There is such a massive shortage of turbines that wind power is being curtailed more by a shortage of equipment supply than by consumer demand. Transmitting power generated from remote wind farms to more populated areas also remains a problem. "Wyoming has the best wind in the country, but almost no one lives there," says Milbank's Feo.
Although more power transmission lines can be built, that does not solve the problem of losing power en route. Potential solutions could arise from new technologies for storing wind power or for generating it closer to end users.
The obstacles spell opportunities for young companies, and several startups are hard at work trying to solve some of these problems. If they succeed, a robust IPO market in the U.S. may finally lift off. - Andrea Orr
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"We're more likely to see more wind power IPOs in this industry in the next 12 months," predicts Edwin Feo, a partner a with Milbank, Tweed, Hadley & McCloy LLP in Los Angeles who heads the law firm's renewable energy team.
The dearth of wind company exits stems largely from the sector's fitful evolution since the energy crisis of the 1970s, rather than from investor aversion to the technology. Indeed, shares of Clipper Windpower plc, a Carpinteria, Calif., developer of turbines and wind farm equipment listed on the London Stock Exchange, have roughly doubled since its 2005 initial public offering.
Yet while Europe has embraced the promise of wind power, wind farms in the U.S. were widely written off as a hippie dream during the 1980s. That view is softening amid favorable tax treatment for wind generators, coupled with vastly improved turbine technology and the heightened competitiveness of wind farms compared with traditional power sources such as coal and natural gas.
Those factors, along with a rising interest in cleaner, homegrown sources of power, coalesced into something of a perfect storm in 2007, helping the country's wind power capacity grow 45% in that year alone. Today the U.S. is the world's second-largest producer of wind power, trailing Germany and leaving Spain, India and China to round out the top five.
Although no wind power companies are scheduled to go public, Feo says that scenario could change quickly.
Ironically, while investors seek to catch up with the recent success of the wind business, they find that large diversified utilities in the U.S. and abroad have already snatched up many of the best companies. For example, FPL Group Inc., the parent company of Florida Power & Light Co., owns wind farms that collectively produce 42% of the country's installed power base.
The U.S. wind energy sector was rife with acquisitions in 2007. Portuguese utility EDP-Energias de Portugal SA bought Horizon Wind Energy LLC, a Texas wind farm developer, from Goldman, Sachs & Co. for $2.15 billion; German energy giant E.ON AG bought Airtricity North America, which operates wind farms in nine U.S. states, for $1.4 billion; and Electricité de France SA bought 50% of wind power operator enXco Inc. in North Palm Springs, Calif.
Utilities view wind acquisitions not only as a way to diversify into alternative energy, but also as a vehicle for earning a wind power production tax credit, which the U.S. established in 1992. Keith Martin, a partner who works in the alternative energy sector for law firm Chadbourne & Parke LLP in Washington, says the tax credit was a key factor in spurring utilities to invest in wind power companies. The benefit is less valuable for IPO investors, he points out, because such earnings are not the same as a bona fide operating profit.
But the investment climate could change as wind companies become more competitive and profitable. The recently passed U.S. energy bill does not extend the production tax credit past the end of 2008. While wind power industry advocates hope the credit will be added back in by year's end, they say industry economics have improved to the point that--at least in some parts of the country--wind power producers can profit without it.
Another major shift that could boost wind players is improvements in turbine technology. Although the basic design of wind turbines has not changed since the 1980s, when hundreds were installed at the Altamont Pass about 60 miles east of San Francisco, today's turbines are significantly larger and more powerful. Some newer turbines have wingspans about the size of a 747 jet and generate about 2.5 megawatts of power when running at full capacity, versus around 0.1 to 0.2 megawatts for the older ones. It would require approximately 25 of the original wind turbines installed at the Altamont Pass 20 years ago to generate what one brand new turbine can produce today.
"It's like the difference between a prop plane and a jet plane," says Christine Real de Azua, a spokeswoman for the American Wind Energy Association. "Modern turbines are equipped with powerful electronics that process over 200 types of data, from wind speeds and direction to voltage dips on the grid. An entire wind farm can be monitored from a laptop computer."
As the generating capacity and profit potential of wind power companies improve, lawyers and bankers who work in the industry say midmarket companies such as Invenergy LLC of Chicago and UPC Wind Management LLC of Newton, Mass., might make strong IPO candidates. They also say there is potential for many more IPOs through spinoffs from larger utilities, especially if utilities decide to cash in on the cleantech hype.
Of course, challenges abound that could prevent wind from becoming a truly ubiquitous source of power. There is such a massive shortage of turbines that wind power is being curtailed more by a shortage of equipment supply than by consumer demand. Transmitting power generated from remote wind farms to more populated areas also remains a problem. "Wyoming has the best wind in the country, but almost no one lives there," says Milbank's Feo.
Although more power transmission lines can be built, that does not solve the problem of losing power en route. Potential solutions could arise from new technologies for storing wind power or for generating it closer to end users.
The obstacles spell opportunities for young companies, and several startups are hard at work trying to solve some of these problems. If they succeed, a robust IPO market in the U.S. may finally lift off. - Andrea Orr
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