Renewable energy is a significant global industry and wind energy in particular is becoming a popular resource. But what are the short and long-term prospects for this industry?
Developments in technology for the renewable energy sector is enabling the industry to grow at an astounding rate. Wind energy is currently the fastest developing renewable in the sector, growing at a rate of 36 per cent per annum in Europe. But the subject of renewable energy presents the average business person or investor with a number of difficulties.
Firstly, it is often associated with ‘new age’ quirky thinking, when in reality renewables are the oldest and most proven form of energy generation. Secondly, the subject suffers from over-extravagant resource-based claims, which are far from being realized. Thirdly, it is full of inconsistency, in definition, description and reporting.
As developments progress over the next decade, a significant number of business opportunities are likely to be presented by renewable energy in general and wind energy in particular. There are four key factors driving the rapidly accelerating developments in renewable energy industries.
- Environmentally driven markets: These generally comprise OECD countries, which, in order to meet emission targets set by the Kyoto Protocol, will sharply accelerate their use of renewable energy. These markets are expected to provide the largest gain in the use of renewables in the short-term and the largest short-term business opportunities.
- Energy driven markets: These are particularly the Asian and developing economies where demands for new energy are being propelled by population growth, industrialization and urbanization. Government and industry in these regions are predisposed to meet new electricity requirements from renewable sources, which are indigenous and have relatively short installation timeframes. The demand from these markets is expected to overtake that of the OECD countries beyond 2002 and become a significant sector by 2007.
- The green consumer: The liberalization of energy policy and the rise of the political and “green” consumer is also driving greater demand.The break-up of state energy monopolies has spawned competition and allowed businesses and individuals to choose their provider of electrical services. In many markets, the options for industrial, business and residential consumers include “green energy” programmes, often with financial benefits. While still a minor part of the mix, green energy options will gradually increase awareness and attention, and cause increased market demand from some customer segments.
- Economic drive: The renewable energy market is increasingly being influenced by traditional market drivers rather than by political forces. In some situations wind is becoming viewed as complementary to ‘conventional’ fuels rather than a replacement. There is also an observable trend among energy producers to consider the use of renewable technologies as an element of their long-term strategic planning.
- Wind energy: Over the past six years wind energy has been the fastest growing renewable energy source with additional output growing at a compound rate of 30 per cent. It is likely to maintain this position for the medium term as some projects have now achieved output and economy ratings comparable with fossil and nuclear power.
Assessing the prospects
Europe and North America have dominated wind energy developments over the past two decades. However, the past five years have seen the European region forge ahead in terms of installed capacity and with the current economic and political situation, it is unlikely that this situation will change.
Although the European sector currently accounts for 73 per cent of installed capacity, European growth has slowed slightly from 40 per cent per annum to 36 per cent per annum. However while other regions have grown faster, the existing installed capacity within Europe has maintained its pre-eminent global position.
Figure 1. Global installed wind energy capacity 1996-2000
At the end of 2000, there was an estimated 17 706 MW of installed global wind capacity, with Germany accounting for 6113 MW and the USA, Spain and Denmark all with in excess of 2000 MW each.
There is now a first division of countries utilizing wind energy. The top five countries represent over 82 per cent of worldwide installed capacity and the top ten represent 92 per cent, even though 45 countries have some installed commercial capacity.
Similarities in the regions
There are key similarities and differences in Europe and North America and therefore in the development of their wind energy industries. Both are economically developed regions with existing power distribution infrastructure and commercial (though not totally unregulated) electricity markets.
In both regions, the wind energy industry has been supported politically and financially through compulsory market mechanisms, incentives (including fiscal) and research and development investments. One important difference has been the development within Western Europe of off-shore wind farms. Western Europe has a higher average population density coupled with a higher offshore wind resource than North America.
Figure 2. Forecast wind energy Capex % by region 2001-2010©
While there is currently about 80 MW of installed capacity offshore, there are also extensive development plans throughout Europe which would lead to a massive increase in installed capacity by 2010. Between the UK, Denmark, The Netherlands and Germany there is the possibility of nearly 6500 MW of installed capacity, which, if realized, would make off-shore wind the fastest growing sector of the wind energy market.
Over the next few years continued technological improvements such as the development of 5 MW turbines should lead to further efficiency and output gains and see wind energy firmly ensconced as a commercial proposition for large-scale subsidy-free power generation.
It is expected that 3 MW and larger turbines will be introduced between 2004-2007 and herald a significant change in the $/MW ratio of wind farm development.
Manufacturing wind turbines is also becoming a significant business. For Denmark, an early pioneer in the sector, they have become the country’s largest engineering export.
Looking forward, Europe and North America are likely to represent the two principal wind energy markets although Asia and its increasing energy demands will represent a growing market by 2010.
The industry is also expecting to see a reappraisal within this time. This will pave the way for new levels of subsidy and covert industrial support, public acceptance and grid integration.
It is indicated that by 2010 the total world wind energy market capital expenditure will grow from $4.3 billion per annum to $8.5 billion per annum with an expected total Capex spend over this period of nearly $72 billion.
A continual growth in Capex across the wind energy regions is expected through to 2004. However, from 2005 it is forecast that the capex expenditure will, for a brief period, effectively level.
A reappraisal of the cost of ‘green’ electricity and a reduction in the renewable energy market’s ability to command premium prices could temporarily slow the rate of growth. As the current mega-turbines under development enter the market, installed capacity increases will be achievable with smaller numbers of machines leading to improved field developments economics.
Although there are variances in the forecast growth across the different regions, the overall trend in expenditure is upwards.
The future of the industry
Renewable energy is a significant global industry with an annual capital expenditure of over $15 billion with wind energy representing over 27 per cent of this.
On-shore developments in the southern USA are close to providing grid-connected installed capacity without subsidy as a cost-effective alternative to gas powered plants.
While these location advantages are not repeated throughout the world, technological developments and larger turbines are greatly improving the economics of wind energy. The proposition of an ever-increasing number of global developments operating at comparable output costs to conventional generation is realistic beyond 2005.
The commercialization of renewable energy is gradually feeding into the energy industry’s planning process. Energy companies are not only more optimistic of the wind energy sector but that medium and long-term cross-sector planning is developing.
The industry is moving away from a project-by-project basis and into output planning within an integrated strategy. Financiers and investors who are looking for a balance of projects and cross-sector risk management are also seeking to include wind energy within their investment portfolios.