Whirlwind of investment

10/24/2008 12:00:00 AM

Sensing opportunity in the air, a handful of St. Louis companies and non-profits are capitalizing on wind power.

Carbon-fiber maker Zoltek and process-controls giant Emerson are selling materials and systems to build and manage wind farms. Developer Wind Capital Group is cultivating the state’s own crop of turbines. The non-profit Missouri Partnership is leading efforts to attract investments in turbine manufacturing and services.

Developer Tom Carnahan expects $1 billion in investment in Missouri in the next eight to 10 years in wind farms alone. Zoltek’s Zsolt Rumy forecasts $500 million in revenue by 2011, with more than half coming from the wind industry. They and others are banking on wind’s fresh appeal, given America’s dependence on foreign oil, environmental concerns about fossil fuels and rising worldwide energy demand.

Proponents say wind power can be part of the solution, spurring new jobs and technology amid a weakened economy.

Power play

American wind farms will be responsible for just over 1 percent of the nation’s electricity supply this year and power the equivalent of about 4.5 million homes, according to the American Wind Energy Association. But a U.S. Department of Energy report published in May concluded wind power could generate 20 percent of America’s electricity needs by 2030 if significant challenges can be overcome.

Tom Carnahan, president of Wind Capital Group, leads the charge here developing the state’s first wind farms. Wind Capital began erecting Suzlon S88 turbines in Gentry County in June 2006. Today dozens of towers rise from the state’s breezy northwestern plains where sleek white blades spin high above grazing cattle and row crops. Four projects totaling about 163 megawatts of capacity are complete. Their high-tech pinwheels generate electricity used by both nearby towns and cities hundreds of miles away. They represent about $200 million in investment by Wind Capital and financing partner John Deere Wind Energy, but that’s just the beginning, according to Carnahan.

“We are pursuing a $400 million project in Missouri that we hope to begin in the next couple of years,” Carnahan said.

In June, Irish renewable energy firm NTR PLC invested $150 million in Wind Capital and committed to supply it with 150 megawatts of wind turbines to accelerate Wind Capital’s projects and expansion beyond the Midwest. Wind Capital has been profitable since it began in 2004, has grown from 20 to 45 employees so far this year and now has branch offices in Madison, Wis., and Chicago. Carnahan did not disclose revenue, but estimated his firm’s value at about $250 million. It boasts a development pipeline of more than 2,000 megawatts under way in eight Midwestern states.

Profit potential

Since 2004, Zoltek, the world’s largest manufacturer of carbon fiber, has formed long-term supply agreements with wind turbine companies that use the material to make large-scale rotor blades. Zoltek projected deals with Vestas Wind Systems of Denmark and Fiberblade S.A. of Spain that would be worth hundreds of millions of dollars in sales over their first few years.

To meet increasing demand, Zoltek is boosting production, including starting up carbon fiber lines at its Abilene, Texas, facility, adding lines at its plant in Hungary, and acquiring a plant in Guadalajara, Mexico.

The wind deals sent Zoltek’s net sales soaring from $55.4 million in 2005, to $92.4 million in 2006, to $150.9 million last year. Today about half of the company’s revenue comes from the wind power industry, said Cayse Thomas, assistant to Zoltek founder and CEO Zsolt Rumy.

Under the Department of Energy’s so-called “20 percent scenario,” demand for commercial-grade carbon fiber used in turbine blades alone would nearly double current global production by 2030. Projections like that have spurred Zoltek’s stated goal of $500 million in annual sales by 2011.

“Reaching 20 percent wind power by 2030 could mean a need for 75,000 new turbines, many of them larger than today,” Thomas said.

Zoltek faces several challenges, however. The company dramatically reduced its net loss of $65.8 million in 2006 to $2.5 million last year, but remained in the red. Accounting errors forced former CFO Kevin Schott to resign in May and shook investor confidence. In August, the company said its third-quarter profit fell 54 percent to $2.3 million due to reduced shipments against its two major wind power contracts and lower technical fiber sales.

The “dearth of significant new contracts” over the past year can be attributed to concerns among wind turbine producers regarding the availability and pricing of the high-performance carbon fibers used in making the longest and most powerful wind turbine blades, the company stated in its most recent earnings report.

“We are working closely with every one of the major wind turbine manufacturers to address their concerns about incorporating carbon fibers in their design and, while we cannot predict the exact timing, we expect to win new contracts,” Rumy stated in the Aug. 11 report.

“All the major wind turbine producers are designing longer blades and at some length ... carbon fiber reinforcement becomes necessary and economically competitive. The fundamentals of alternative energy generally — and wind energy in particular — are strong and growing, and we expect that growth will continue for many years to come.”

Thomas said purchasing from key customers started to pick up during the second half of this year, but he declined to provide specific details.

Meanwhile, Emerson, St. Louis’ largest public company with $22.6 billion in revenue last year, sells wind power generators, and last December introduced a monitoring, control and diagnostic system to optimize wind farm operations. The company won a contract last year to supply Npower Renewables of the United Kingdom with a data monitoring system connecting 19 wind farms across Britain with the firm’s headquarters.

State sales pitch

The Missouri Department of Economic Development and the non-profit Hawthorne Foundation of Jefferson City want to capitalize on Missouri’s central location along the edge of America’s Great Plains, home to the country’s most consistent and harnessable winds. In November 2007 they created The Missouri Partnership, a non-profit backed by public and private money to market the state as a place to do business.

Missouri Partnership Chief Executive Christopher Chung has focused his first-year agenda and $3 million budget on wind power. Missouri’s location, large and well-educated work force, and existing manufacturing capacity make it ideal for wind turbine manufacturing, maintenance and support systems, he said. Its proximity to all points within the Great Plains wind corridor also would limit costs associated with transporting heavy and oversized windmill components from production lines to wind farm sites.

As General Electric Co. of Fairfield, Conn., Suzlon Energy Limited of India and leading European wind energy players such as Vestas, Siemens Power Generation and Nordex AG of Germany, and Gamesa Corporacion Technologica of Spain look to the Midwest as a growth market, Chung wants them to invest here.

Missouri has some catching up to do. As of 2004, about 90 companies in the United States directly manufactured components for utility-scale wind turbines, according to a non-governmental organization study published that year. None of them operated in Missouri.

Challenges ahead

Most areas where the wind blows are far from population centers that need the electricity supply, so analysts project billions of dollars would have to be invested to upgrade the nation’s transmission system. Winds tend to blow more during cooler months when electricity demand is lowest and less on hot days when demand from air conditioners is high. Also, achieving the 20 percent wind scenario would require growth in the turbine manufacturing supply chain and continued reductions in wind capital costs, according to the Energy Department report.

Now, severely tightened credit markets and a weakening economy coupled with the recent drop in oil prices threaten some investments in alternative energy production, including wind power.

Nevertheless, wind power’s credibility received a boost in recent months, thanks in large part to backing by Texas oilman-turned-wind farmer T. Boone Pickens. The billionaire’s Mesa Power LLC is constructing the world’s largest wind farm near Pampa, Texas, and proposed a national plan in July to develop domestic wind energy along the Great Plains. He described the United States as the “Saudi Arabia of wind power.”

“Building wind facilities in the corridor that stretches from the Texas panhandle to North Dakota could produce 20 percent of the electricity for the United States at a cost of $1 trillion,” Pickens stated on the Web site for his plan. “It would take another $200 billion to build the capacity to transmit that energy to cities and towns. That’s a lot of money, but it’s a one-time cost. And compared to the $700 billion we spend on foreign oil every year, it’s a bargain.”

Tax credits, Proposition C

Wind Energy Production Tax Credit (PTC)

Federal income tax credit of 2 cents per kilowatt-hour applies to production of electricity by utility-scale wind farms and other sources of renewable energy. Created in 1992, the credit has encouraged private investment and helped developers get better interest rates on financing. Short-term extensions to the PTC and industry uncertainty have led to boom-and-bust cycles for development in recent years. On Oct. 3, Congress extended the credit through 2009. The American Wind Energy Association is seeking a longer term extension.


What is Proposition C?

Prop C, backed by a mix of environmental groups, labor and businesses, will ask Missouri voters in November to require investor-owned utility companies such as Ameren Corp. to “generate or purchase electricity from renewable energy sources such as solar, wind, biomass and hydropower with the renewable energy sources equaling at least 2 percent of retail sales by 2011 increasing incrementally to at least 15 percent by 2021.”
The initiative would cap consumer rate increases for this renewable energy at 1 percent. Twenty-six other states already have adopted similar “renewables portfolio standards,” according to the American Wind Energy Association (AWEA).

St. Louis Business Journal
Friday, October 24, 2008