CleanBeta

Cowboy Capitalists Driving Wind Power Sector Growth

Wind power is blowing up, especially in America. In 2007, the world connected 20,000 MW of wind power capacity to electricity grids. The U.S. claimed the lion’s share with 5,243 MW of installed wind capacity, the largest amount ever added by a country in a single year, according to a new study of the wind power industry by the U.S. Department of Energy.

The report, the second annual survey of the U.S. wind power industry, reveals how financial innovation has propelled wind power from a boutique industry into a major new energy source. The report, released late last week, reinforces the growing recognition of wind power’s strategic significance for America’s near term energy needs.

“During the past four years, wind power has surged from just under 2% of new generating capacity added in 2004, to 35% of the entire new generating capacity added in the country in 2007,” said Christine Real de Azua, Assistant Director of Communications for the American Wind Energy Association.

Natural gas, which added over 7,000 MW of new capacity added last year, remains the leading source of new energy supplies, but has lost much of its lead in the last three years to wind power.

The credit crisis coupled with the relentless rise of energy prices has raised serious concerns about the wisdom of America’s signature style of creative capitalism. Despite its flaws, financial innovation has quietly galvanized the once anemic U.S. wind power industry into a renewable energy heavyweight.

In the past decade, several states have enacted a diverse range of renewable energy laws that made the economics of wind power intensely local. A business strategy that makes sense in New Jersey may not make sense in Wyoming. More than techno-wizards or daring entrepreneurs, creative capitalism propelled the U.S. wind power industry from the proverbial puddle to the pond.

U.S. Energy Consumption

The U.S. wind-power industry has pioneered novel ownership and financing structures to ensure equity investors have access to federal and state tax incentives. In the past three years, two particular investment models have become wind-power industry standards. FPL Energy fashioned the “corporate balance-sheet finance” model and Babcock & Brown developed the so-called “flip” structure financing model to attract institutional investors with “tax equity” incentives. While neither of these structures typically issue debt at the project level, a growing number of project developers have tweaked the flip financing model with “back leverage” features used to debt-finance their own equity stake in the project. Meanwhile, FPL Energy and others have expressed interest in financing portions of their balance sheet with debt.

The credit crisis has chastened the financial community and raised doubts about the wisdom of America’s signature style of creative capitalism. To make matters worse, a growing number of critics seem convinced that the same financial cowboys have created a speculative bubble in oil prices. Whither capitalism? The answer might be blowing in the wind - literally.