Wind power has become cheaper and more widespread than most other renewable energy sources. But with growing scale, investments need to be made more carefully to be successful. David Jones, CEO of Allianz Specialised Investments, discusses the risks and looks to the future.
 | David Jones, CEO Allianz Specialised Investments"It is ironic that Germany, which is one of the least windy countries in Europe, has the most installed wind power capacity in the world." (Photo: Allianz) |
What is more important, natural wind resources or government incentives for electricity from wind power?
Both are important. Before making an investment we look at the wind resources, the tariff regime for electricity, the capital and operating costs of the project as well as legal and technology risks. We prefer markets with the lowest regulatory risk such as Germany.
It is ironic that Germany, which is one of the least windy countries in Europe, has the most installed wind power capacity in the world. That is absolutely due to the tariff regime in Germany. The quality and reliability of the regulatory environment gives investors a lot of confidence that their expected returns will be realized over an asset’s operating life. That confidence attracts investment and then prices fall to the benefit of consumers.
In the UK, for example, where the long term regulatory environment is far less clear, investors price in higher investment risks and, consequently, the consumer has to pay more. In Germany a kilowatt of wind power costs roughly half of what it costs in the UK.
So far we have invested in one large wind farm in Italy and nine smaller wind farms in Germany. As a Euro currency investor, we do not operate outside the Eurozone, because it is impossible to fully hedge against currency risks with a production based on an input as naturally volatile as wind. Energy production can vary by at least plus or minus 20 percent year to year depending on how much the wind blows.
Some people say that wind power has reached its limits in Germany. Is that true?
Germany is definitely one of the more saturated markets but I believe that it still has considerable potential, particularly offshore. But there is a technical limit. In Denmark, for example, wind power provides more than 20 percent of the electricity and that is generally the level of penetration where it starts becoming a challenge.
That is when an unpredictable production source starts to make management of the electricity grid system difficult. The wind blows whenever the wind blows and, as there is currently no economically viable method of large-scale electricity storage, electricity has to be generated to exactly match demand.
In Germany, for example, if the wind drops across the country, 20 gigawatts of power suddenly go off the system and that has to be replaced by something else. In a large electricity system that’s well interconnected like Germany, this is manageable. But within a less flexible grid system, if you have unpredictable power contributing much more than 20 percent, the cost of standby capacity starts to become prohibitively expensive.
Wind turbines have grown bigger in recent years. What is the limit?
I don’t think we have seen the end yet, but ultimately there is a materials limitation, namely how long you can make blades before the flexing of the blades becomes a problem. The rotor diameter of a 3 megawatt turbine is as wide as the wingspan of a 747 and the 5 megawatt turbine blades are even bigger.
The second problem is how to deliver the components by road. The blades are so long it can be difficult to get lorries carrying them around corners, particularly in mountainous areas. There are far fewer restrictions offshore. If you have a factory that makes very large turbines in a port, you can simply load them onto a ship and take them out to sea. So there will come a point where the largest turbines are almost only used offshore.
 | Picture Gallery (click on the image to start)Learn more about the evolution of windpower (Photo: Reuters) |
Offshore wind farms could produce a lot more power. Why haven’t you invested yet?
We are looking at offshore. We have bought some 5 megawatt offshore-design turbines located onshore near Brunsbüttel, Germany, close to the sea where they are working almost under offshore wind conditions. If we decide to invest offshore, a key condition would be to do it with a suitably qualified industrial partner, most likely a utility or an oil and gas company.
How does the changing oil price influence your investments? At what price can wind power compete?
Oil price changes daily and we have seen enormous volatility over the last twelve months. The price of oil is half now what it was a couple of months ago. If the price of oil had stayed at 150 dollars a barrel, wind power would probably be competitive in most markets without any subsidies at all.
Short term oil price fluctuations do not change the value of our investments, because we are looking at their performance over their whole operating lives.
However, oil prices do affect tariff mechanisms in the medium and longer term. If governments believe that oil is going to settle at a hundred and something dollars a barrel that encourages more incentives for wind power. But if oil stays at 50 to 60 dollars or less, governments are likely to be more cautious in their incentivisation of renewables.
What are the problems with wind power?
Any sort of rotating equipment has routine maintenance problems. But wind turbines are very reliable, 95 to 98 percent is normal operating availability. That is higher than the availability of gas turbines or other conventional power plants.
Many of the problems are the same onshore or offshore, but the biggest issue with offshore projects is accessibility to the turbines. Minor faults can cause a turbine to switch off. Onshore it may just require someone to drive up there and reset some small control or replace some small component. But if that happens 30 or 40 kilometers offshore in bad weather you might not be able to fix the problem for several weeks, resulting in significantly higher revenue losses compared with onshore for the same problem.
You have to factor this in to your economic analysis; your downtime will be significantly higher offshore. And you need to be able to react immediately. You need ships with sufficient crane capacity and you need to be able to deploy the necessary engineering capability at short notice.
That said, in Germany especially, there are many projects coming forward over the next few years. I think offshore wind is going to be huge in the medium term and our challenge is to find the appropriate structure and projects at the right price to deliver sound investment opportunities to Allianz.
editor: Thilo Kunzemann
publishing date: December 09, 2008
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