[Posted on March 28, 2008 - 12:00 PM]
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DiggEDP-Energias de Portugal SA's $2.15 billion deal to acquire Horizon Wind Energy LLC of Houston made it starkly clear that U.S. utilities could be left in the cold when trying to add wind assets to their portfolios.
Armed with the strong euro, emboldened with years of experience and liberal wind energy policies and driven by a hunger for growth, European utilities such as Portugal's EdP, the world's fifth-largest wind farm operator, have been crossing the Atlantic to strike a handful of big-ticket deals.
Also last year, Europe's biggest utility, Germany's E.ON AG, shelled out $1.4 billion to acquire the U.S. assets of Ireland's Airtricity Holdings Ltd. "European power companies have become very familiar with operating wind assets and making them as profitable as possible. Now they're kind of snapping up bargains," says William Young, an analyst at London's New Energy Finance Ltd. "They're looking for growth and the U.S. is offering that."
Certainly, the wind market on the Continent has advanced significantly more than it has in the United States, thanks to more than a decade of heavy tax credits and price supports from European governments. Europe is set to get 5.5% of its total energy by 2010 from the massive turbines that dot the countryside throughout Germany, the Netherlands and Sweden. By comparison, the U.S. now generates only 1% of its power from the wind.
The strength of the European wind market--and the roots of the consolidation there--lies in regulations written after 2000 that guaranteed higher wholesale prices for electricity generated from renewable resources. Since local utilities--often government-backed and tied to conservative investment policies--were hesitant to invest in new wind assets, small local companies blossomed, backed by late-stage private equity and other financial investors including Australia's Babcock & Brown Ltd. and HgCapital plc. In the past two years, utilities began rolling up those smaller groups.
Financial investors have been buying these upstarts too. Spain's Eolia Renovables de Inversiones SA has swallowed more than two dozen smaller European wind companies and is planning an initial public offering in Madrid this year with a reported valuation of $1 billion. The company has 37 installed wind farms with a capacity of 1,400 megawatts.
Eolia offers its potential targets a unique proposition. In lieu of cash, small wind park operators are given a stake in the parent and can retain managerial control. More importantly, Eolia promises to inject capital while offering access to new equipment. Since the global wind industry expanded 44% last year and with 28% forecasted for this year, new windmills are difficult to come by and are generally reserved for the biggest customers. A similar model is taking hold at other utilities in countries such as Germany.
With all this creative dealmaking, targets are becoming increasingly rare and expensive. So it's hardly surprising to find European powerhouses searching for deals in the U.S. The strong euro only contributes to this interest.
And the U.S. is providing ample targets. Even without the kind of backing provided by European governments, the U.S. wind energy market is rapidly expanding. Some 30% of all new capacity installed in the U.S. last year was wind-based; this resulted from $9 billion of new investments, according to the American Wind Energy Association.
Yet there are challenges. Last year marked a record for U.S. wind energy: The AWEA says that 5,244 megawatts of capacity were installed, an increase of 45% from 2006. But that was closely tied to the presence of production tax credits, which provide 1.5 cents of credit for every kilowatt hour of electricity produced by wind, and in years when Congress has let the credit lapse, the amount of new wind energy capacity added has dropped by as much as 73%. The U.S. House of Representatives recently passed a bill that extends the PTC, which is set to expire this year, but it has yet to face the Senate, where its odds of passage are longer (see related story, "Blowback").
"To create a stable industry, you have to create the right framework and not just rely on tax rebates that must be renewed annually by politicians," says Gerd Krieger of the German Engineering Federation, known formally as the Verband Deutscher Maschinen- und Anlagenbau e.V. "European politicians in the '90s began setting the foundation for a lucrative industry that is now bearing fruit."
With this kind of backing, European utilities' interest in U.S. wind power assets is not likely to abate soon. - Andrew Bulkeley
Also last year, Europe's biggest utility, Germany's E.ON AG, shelled out $1.4 billion to acquire the U.S. assets of Ireland's Airtricity Holdings Ltd. "European power companies have become very familiar with operating wind assets and making them as profitable as possible. Now they're kind of snapping up bargains," says William Young, an analyst at London's New Energy Finance Ltd. "They're looking for growth and the U.S. is offering that."
Certainly, the wind market on the Continent has advanced significantly more than it has in the United States, thanks to more than a decade of heavy tax credits and price supports from European governments. Europe is set to get 5.5% of its total energy by 2010 from the massive turbines that dot the countryside throughout Germany, the Netherlands and Sweden. By comparison, the U.S. now generates only 1% of its power from the wind.
The strength of the European wind market--and the roots of the consolidation there--lies in regulations written after 2000 that guaranteed higher wholesale prices for electricity generated from renewable resources. Since local utilities--often government-backed and tied to conservative investment policies--were hesitant to invest in new wind assets, small local companies blossomed, backed by late-stage private equity and other financial investors including Australia's Babcock & Brown Ltd. and HgCapital plc. In the past two years, utilities began rolling up those smaller groups.
Financial investors have been buying these upstarts too. Spain's Eolia Renovables de Inversiones SA has swallowed more than two dozen smaller European wind companies and is planning an initial public offering in Madrid this year with a reported valuation of $1 billion. The company has 37 installed wind farms with a capacity of 1,400 megawatts.
Eolia offers its potential targets a unique proposition. In lieu of cash, small wind park operators are given a stake in the parent and can retain managerial control. More importantly, Eolia promises to inject capital while offering access to new equipment. Since the global wind industry expanded 44% last year and with 28% forecasted for this year, new windmills are difficult to come by and are generally reserved for the biggest customers. A similar model is taking hold at other utilities in countries such as Germany.
With all this creative dealmaking, targets are becoming increasingly rare and expensive. So it's hardly surprising to find European powerhouses searching for deals in the U.S. The strong euro only contributes to this interest.
And the U.S. is providing ample targets. Even without the kind of backing provided by European governments, the U.S. wind energy market is rapidly expanding. Some 30% of all new capacity installed in the U.S. last year was wind-based; this resulted from $9 billion of new investments, according to the American Wind Energy Association.
Yet there are challenges. Last year marked a record for U.S. wind energy: The AWEA says that 5,244 megawatts of capacity were installed, an increase of 45% from 2006. But that was closely tied to the presence of production tax credits, which provide 1.5 cents of credit for every kilowatt hour of electricity produced by wind, and in years when Congress has let the credit lapse, the amount of new wind energy capacity added has dropped by as much as 73%. The U.S. House of Representatives recently passed a bill that extends the PTC, which is set to expire this year, but it has yet to face the Senate, where its odds of passage are longer (see related story, "Blowback").
"To create a stable industry, you have to create the right framework and not just rely on tax rebates that must be renewed annually by politicians," says Gerd Krieger of the German Engineering Federation, known formally as the Verband Deutscher Maschinen- und Anlagenbau e.V. "European politicians in the '90s began setting the foundation for a lucrative industry that is now bearing fruit."
With this kind of backing, European utilities' interest in U.S. wind power assets is not likely to abate soon. - Andrew Bulkeley
