On March 1, the Clean Energy Trust of Chicago convened the Clean Energy Challenge, a business plan competition for clean energy ventures from the Midwest. The lunch speaker was Vic Abate, Vice President of Renewables from General Electric (NYSE: GE), who provided his perspectives on the growth of the wind energy business at GE.
Abate noted that everyone knew that GE bought the wind business from the detritus of Enron in 2002, 10 years ago, for a little over $250 million. What most people didn’t know, Abate asserted, was that “GE bought the business again in 2003, and bought the business again in 2004, and bought the business again in 2005.”
In other words, after actually buying the assets of Enron, GE found itself needing to invest a lot of money in technology development and manufacturing quality for their wind products in order to transform what they acquired into something profitable. What were machines that experienced significant downtime became wind turbines with availability levels exceeding 98%, on par with conventional powerplant technologies.
Abate was appointed leader of the wind business in 2005 – and was the third leader that GE installed after purchasing Enron Wind. In other words, it was a challenging turnaround situation.
Now, GE is pretty bullish about the wind business – although it appears that their optimism is more focused on Europe and China than on the U.S. Last year, GE booked more orders from wind turbines outside the U.S. than domestically, with $2 billion of sales in Brazil alone. These countries, unlike the U.S., decide on energy policies that support a sustained commitment to wind energy, and allow the private sector to correspondingly commit to making wind energy succeed in those countries.
In contrast, Abate was cautious in his views about the U.S. wind sector. As the recent past Chair of the American Wind Energy Association (AWEA), he ought to have a pretty informed idea of what’s going on. He expressed concern about the upcoming lapse (again) of the production tax credit (PTC), which if allowed by Federal inaction before the end of 2012, will turn the $10 billion U.S. wind market into something approaching zero for 2013. Already, some of the major companies in the supply chain are beginning to throttle down in anticipation of this event.
Since I have long been associated with the efforts in Northeast Ohio to explore offshore wind deployment in Lake Erie – efforts now led by the Lake Erie Energy Development Corporation (LEEDCo) – I asked Abate what his/GE’s perspectives on offshore wind. He was not especially encouraging.
Abate admitted that Europe is still pursuing offshore wind with some robustness, probably growing to a market of a gigawatt or two annually by mid-decade. However, when Abate reviewed the historical data from the past 10 years, onshore wind consistently beat expectations in volumes and economics (which are, of course, related) whereas offshore wind consistently lagged expectations. According to Abate, this illustrates the significant technical challenges associated with offshore wind. In his view, driving offshore wind economics to competitive levels is not going to happen by incremental improvement, but will require radical breakthroughs, such as new materials technologies to enable upscaling to 15 megawatt turbines.
All this tells Abate that offshore wind will be really hard to financially justify in the near-term, and thus will not be a significant focus for GE – especially in the U.S., given the lack of any forces of urgency to drive the emergence of the sector. This appears to put GE at odds with other multinational conglomerates — such as Siemens (NYSE: SIE), Alstom (Euronext: ALO), Areva (Euronext: CEI), Mitsubishi, Toshiba (LSE: TOS), and Samsung (LSE: SMSN) — who continue to make sizable bets in offshore wind advancement. (Of note, none of these companies are based in the U.S., and their corporate worldview may not be as heavily shaped by U.S. inaction on offshore wind.)
In contrast, Abate was more confident that onshore wind economics would continue to improve, and remain competitive in the U.S. market even with relatively cheap natural gas, attaining 4 cent/kwh economics in some cases even without the PTC extended. With this view, and given GE’s aggressively short-term share performance mindset, it’s easy to see why GE might focus exclusively on onshore wind and come up short in offshore wind relative to its global peers.
Returning to the PTC, and the associated business uncertainties, Abate has promoted the view within GE that “you’re either in or out in wind – buy or sell, but don’t hold”, and that GE has committed to ante up further because the electricity future in the U.S. for the next 10 years at least is “natural gas and wind”. 40% of new U.S. generation installations last year were wind, as was the majority of global additions of capacity. This global market is so sizable – despite U.S. waffling – that GE tells itself it has no choice but to be a major player in it.
And, Abate makes it clear that only a very few companies like GE – with technological expertise, manufacturing excellence, financial wherewithal, and global reach – can be a long-term winner in wind.
Whether the U.S. itself can be a long-term winner in wind remains to be seen.