Wind Energy

1
Wind Energy

• Energy Advancement Leadership Conference
• November 17, 2004

2
Outline

• Market
• Cost of Wind Energy
• Turbine Technology
• Wind Resource
• Financing

3
Market
4
Global Overview of Wind Energy

• More than 39,000 MW of wind worldwide
• 5 year average growth of 32
• Growth widely forecast to continue in
  double-digits into next decade
• Europe and U.S. dominate market, accounting for
  90 of new installations
• Worlds fastest growing energy source

Source American Wind Energy Association
5
U.S. Market

• Wind power capacity increased 36 in 2003
• AWEA projects that wind will be 6 of electricity
  supply by 2020
• Currently, less than 1 of U.S. electricity is
  generated from wind
• Market fundamentals are strong, but inconsistent
  policy support
• Less than 350 MW in 2004?

Source American Wind Energy Association
6
National Wind Energy Status
California, Texas, Minnesota, Iowa and Wyoming
lead the market
TOTAL INSTALLED U.S. WIND ENERGY CAPACITY
6,373.8 MW as of Jan 12, 2004
Source American Wind Energy Association
7
Near-Term Growth Opportunity
Source Platts Analytics
8
Factors Affecting Industry Growth

• Federal Production Tax Credit
• PTC provides 1.8 cents per kWh
• Allowed to expire and then renewed late or
  retroactively several times
• Recently extended to December 31, 2005
• Renewable Portfolio Standard
• RPS requires a certain amount of energy to come
  from renewable sources
• RPSs in 14 states, but no U.S. national standard
  yet
• Transmission constraints in certain states
• Remote locations of wind farm
• Intermittent not continuous
• Cost of power

9
Cost of Wind Energy
10
Rapidly Decreasing Costs
Source American Wind Energy Association
11
Competitive Posture
Near-Term Opportunity
Long-Term Competitiveness
Challenge Period
Wind without PTC
Wind with PTC
New Coal-Fired Generation Cost
New Gas-Fired Generation Cost
Source Platts Analytics
12
Fuel Price Hedge

• Platts conservatively estimates that generating
  electricity from renewable sources can ultimately
  save consumers more than 5/Mwh by eliminating
  fuel price risk.

Source Power Price Stability Whats it Worth?
13
Wind/Natural Gas Compatibility
WIND Low Operating Cost High Capital
Cost Non-Dispatchable No Fuel Supply/Cost Risk No
Emissions
NATURAL GAS High Operating Costs Low Capital
Cost Dispatchable Fuel Supply/Cost Risk Smog,
Greenhouse Gas Emissions
Wind and natural gas power plants are a winning
combination on the grid and in a utilitys power
portfolio because of their complementary
characteristics.
Source American Wind Energy Association
14
Turbine Technology
15
Modern Turbines

• Power 1-3 MW
• Rotor 55-90 meters diameter
• Nacelle 100,000-150,000 pounds
• Tower 60-80 meters

16
Turbine Sizes
Todays average wind turbine Wind turbine with
80 meter rotor diameter superimposed on a Boeing
747 jumbo jet
17
Wind Resource
18
Wind

• Variable
• Site specific
• Terrain
• Height
• Ground cover
• Atmospheric pressure
• Region Wide
• Seasons
• Diurnal
• Annual
• Measurable and Predictable

19
Uncertainty Analysis
The long term average production estimate has a
significant impact on cost. More data and
geographical coverage less risk.
20
Measurement

• Multiple approaches to resource assessment and
  site characterization
• Significant improvement with increasing investor
  sophistication and improvement in technology
• Uncertainty can be reliably quantified if data
  are available
• Strong correlation of data quality/quantity to
  accuracy of forecasts

21
Financing
22
Debt

• Up to 15 year amortizing term loan facility
• Average debt service coverage ratios of 1.4-1.5x
• Leverage both cash and PTCs
• Need good wind data, credit worthy off-takers,
  and well developed projects

23
Equity

• Strategic Investors include PPM, FPL, Shell, AEP
• Institutional investors include Bank One, Goldman
  Sachs, Key Bank, Union Bank
• Target rates of return of 10-11 unleveraged
• Tax driven deals are usually unleveraged and
  incorporate flip structures
• Need good wind data, credit worthy off-takers,
  and well developed projects

24
Cost of Capital
Typically 10-11 after-tax unleveraged IRR
25
Investment Attractions

• Stable revenue from long-term contracts
• Proven technology with strong warranties
• Low operating costs
• No spark spread risk
• Predictable wind resource
• Tax incentives
• Attractive risk/return

26
Investment Challenges

• Heavy tax component
• PTC ownership requirements
• PTC uncertainty
• Tax market very specialized
• Transmission constraints

27
Conclusions

• With the aid of tax incentives, wind energy costs
  have fallen from 45 /kWh in 1980 to less than 3
  /kWh
• As technology improves, costs are expected to
  continue to decline
• US wind market expected to grow from 6.2 GW to
  over 10 GW over the next two years

28
Conclusions (Contd.)

• Due to high gas prices, wind should enjoy strong
  growth in the near term
• In the mid-term, as fossil fuel prices decline
  and as premier wind sites are developed, growth
  may plateau
• The long-term view is strong as wind becomes more
  economically advantageous relative to fossil fuel
  alternatives