GE Has Wind At Its Back Due To Alternative-Energy Demand

GE Has Wind At Its Back Due To Alternative-Energy Demand Tuesday August 8th, 2006 / 17h43

By Frank Byrt Of DOW JONES NEWSWIRES General Electric Co. (GE) is finding big profits just blowing in the wind.

With oil now in the area of $77 a barrel and electric power demands setting new records in the Northeast, more power companies are eager to add wind-generated electricity as an energy source. However, they are likely to find it may be years before they'll be able to get a system in place.

"It's a very significant issue" for wind farm developers and utilities eager to boost their alternative energy capacity, said Randall Swisher, executive director of The American Wind Energy Association, the trade association of the U.S. wind energy industry.

GE, one of the world's largest makers of wind turbines, is sold out through 2007, and it's now filling orders for 2008 deliveries.

The trade group expects a 36% rise in wind-generating capacity in the U.S. in 2006, or about 3,000 megawatts, a record increase. The U.S. is currently the world's fastest-growing wind-generated energy market, having passed Europe within recent years, Swisher said.

Growth is spreading. GE just installed a wind-turbine assembly plant in Shenyang, China, its first in Asia.

Competitors of GE include Vestas Wind Systems A/S (VWS.KO), a Danish company that's the world's largest manufacturer of wind turbines, with over 10,000 installations. GE has over 7,000 turbine installations worldwide. Germany's Siemens AG (SI) is the third-largest manufacturer. Robert Gleitz, general manager of GE Energy's wind segment said the industry has matured in the past few years and is now accepted by utilities as a cheap, reliable source of energy. And the sight of wind farms, which may include dozens of spinning turbines on high towers, have found wider acceptance from the public.

The wind power industry has also benefited from a federal tax credit, and although it is scheduled to expire in 2007, most in the business believe it will be renewed, said Swisher.

A typical, GE 1.5-megawatt wind turbine sells for about $2.2 million, installed.

GE got into the wind-turbines business by buying Corp.'s (ENE) wind-generation business in 2002 for about $358 million in a bankruptcy auction.

GE told analysts July 26 that for all of 2006, it expects "wind" business revenue to rise 47.8% to about $3.4 billion on the sale of 2,000 units. That would be up from $2.3 billion, on 1,580 units, in 2005.

Keith Sherin, GE's chief financial officer, said the company is seeing strong profit margins on its wind turbines, after "double-digit price increases," which should result in operating profit of about $260 million for the second half of this year. "Wind has been profitable all year and it really ramps up in the second half and the fourth quarter specifically," as it records more sales, Sherin said.

GE has forecast roughly 20% growth in wind turbine shipments, resulting in 30% growth in revenue in 2007, along with a $200 million improvement in operating profit.

Its production target for 2008 is 3,000 systems or more. Mary Anne Sudol, a Caris & Co. analyst said GE's wind business success is evident in its order backlog, but she said that in terms of profit wind is not likely to outstrip GE's aircraft and railroad engine businesses.

"The attractive aspect of the wind turbines business is you have sales very quickly, but they don't generate the big after market business you get from locomotives, aircraft engines and gas turbines," as they require regular service and rebuilds every few years, which is a particularly high-margin business, Sudol said.

Sudol, who has GE shares rated buy, said she owns some stock. Her firm does not provide GE with investment banking services.

Here is a compilation for you. Nothing is as easy as it seems sometimes on FR.

Grid operators do get anoyed with wind farms supplying power at odd hours. What usually happens is that the wind farm operator has to sign a contract with the grid operator and agree to sell a certain amount of power to the grid at a certain time. If the wind farm can't supply the power then the grid operators have to scramble to find that power and end up paying a premium for it, that premium is then billed to the wind farm who had promissed power but did not deliver.

The other scenario is that the wind is blowing but there isn't a contract to sell power to the grid. When this happens wind farms have to sell their power at big discounts.

Conventional turbines are shut down at around 23m/s, equivalent to a class 1 hurricane. When wind power produces a significant part of the electricity to the grid (as is the case in Denmark), it can be a very real problem when suddenly all of the turbines drop from 100% production to zero during an accelerating storm.

On windy, light-load days in certain regions of Denmark, Germany, and Spain, windpower can exceed 100% of load, foreseeably and manageably. Yet windpower’s grid integration costs are proving negligible or very modest. The corresponding costs of integrating other resources, all with nonzero forced outage rates, are of course already borne unnoticed. Nor are “reliable duplicate sources” proposed for nuclear plants, which in 2003 suffered prolonged large-scale curtailments in Europe’s heatwave, restart after the USA/Canada blackout and Tokyo Electric’s safety shutdown. Yet, there are thousands of small utilities and large end-users that could be utilizing these amazing distributed power sources. Yet, very few of them do. If the economics are so compelling, where are the buyers? Guess what? Those aren't the days that customers care about. Consumers want 100% capacity regardless of the relative load and whether or not the wind is blowing.

There are a lot of giant wind turbines being built, but they almost never produce more than 25% of their nameplate capacity over the course of a year, while the average capacity factor of nuclear plants in the US (and a number of other nuclear power generating countries) is more than 90%. Watch the scramble every two years when the incredibly generous production tax credit (remember, credits are direct cash from the government; they are far more valuable than tax deductions) for wind energy - 1.8 cents per kilowatt hour, more than the total average cost of nuclear generation in the US - gets close to expiration; no wind projects move if that credit is not available.

Capacity Factor of any power source includes down time. So a US nuclear plant, over the course of a year, will typically put out electricity equal to 80 - 90% of its maximum rating (what it would generate if it ran 24/7 for a year. The 10 - 20% loss is from downtime for maintenance and other factors. Even in a year with a major refueling outage and other work, plants are finishing the year around these numbers. (As you've noted, wind energy tends to be 30% CF or less because you not only have downtime but also wind speed to constantly contend with.)

Electricity demand is variable but generally very predictable on larger grids; errors in demand forecasting are typically no more than 2%. Because conventional powerplants can drop off the grid within a few seconds, for example due to equipment failures, in most systems the output of some coal or gas powerplants is intentionally part-loaded to follow demand and to replace rapidly lost generation. The ability to follow demand (by maintaining constant frequency) is termed "response." The ability to quickly replace lost generation, typically within timescales of 30 seconds to 30 minutes, is termed "spinning reserve." Nuclear power plants in contrast are not very flexible and are not intentionally part-loaded. A power plant that operates in a steady fashion, usually for many days continuously, is termed a "base load" plant.

What happens in practice therefore is that as the power output from wind varies, part-loaded conventional plants, which must be there anyway to provide response (due to continuously changing demand) and reserve , adjust their output to compensate; they do this in response to small changes in the frequency (nominally 50 or 60 Hz) of the grid. In this sense wind acts like "negative" load or demand.

The maximum proportion of wind power allowable in a power system will thus depend on many factors, including the size of the system, the attainable geographical diversity of wind, the conventional plant mix (coal, gas, nuclear) and seasonal load factors (heating in winter, air-conditioning in summer) and their statistical correlation with wind output. For most large systems the allowable penetration fraction (wind nameplate rating divided by system peak demand) is thus at least 15% without the need for any energy storage whatsoever. Note that the interconnected electrical system may be much larger than the particular country or state (e.g. Denmark, California) being considered.

It should also be borne in mind that wind output, especially from large numbers of turbines/farms can be predicted with a fair degree of confidence many hours ahead using weather forecasts.

The allowable penetration may of course be further increased by increasing the amount of part-loaded generation available, or by using energy storage facilities, although if purpose-built for wind energy these may significantly increase the overall cost of wind power.

Operational issues include operating reserve, unit commitment and economic dispatch, system stability, and transmission and distribution system impacts.

Operating Reserve: "Utilities carry operating reserve to assure adequate system performance and to guard against sudden loss of generation, off-system purchases, unexpected load fluctuations, and/or unexpected transmission line outages. Operating reserve is further defined to be spinning or non- spinning reserve. Typically, one-half of system operating reserves are spinning, so that a sudden loss of generation will not result in a loss of load, with the balance available to serve load within 10 minutes. Any probable load or generation variations that cannot be forecast have to be considered when determining the amount of operating reserve to carry. . . . At current wind plant penetration levels in California, the variability of wind plant output has not required any change in operating reserve requirements. The exact point at which the integration of intermittent generation such as wind begins to degrade system economics is unclear, but the technical literature suggests that it is at penetration levels in excess of five percent. Intermittency is becoming an increasing concern to utility operators in California, particularly during low demand periods, since wind plant penetration is beginning to reach this level. . . . As markets for electricity become more competitive, the ability to forecast and control the wind resource will increase the value of wind energy to utilities.

Unit Commitment and Economic Dispatch: Unit commitment is the scheduling of specific power plants on the utility system to meet expected demand. Units are committed to the schedule based on "generation maintenance schedules, generator startup and shutdown costs, minimum fuel burn requirements, and seasonal availability of intermittent resources such as hydro and wind. This schedule is usually made at least 24 hours in advance. . . . The most conservative approach to unit commitment and economic dispatch, and the one adopted by PG&E and SCE, is to discount any contribution from interconnected wind resources . . . In fact, wind plant output may be fairly predictable as in the case of the Altamont Pass region of California, due to seasonal and diurnal wind resource characteristics observed over many years of wind farm operation or as a result of wind resource monitoring programs. Further research is needed to develop the capability to accurately forecast wind plant output on an hourly basis over time periods ranging from one day ahead to one week . . . "

System Stability: " . . . Large wind turbines typically have low-speed, large-diameter blades coupled to an electric generator by a high-ratio gear box. This feature results in a large turbine inertia and low mechanical stiffness between turbine and generator [which] gives large wind turbines excellent transient stability properties. Operating experience with wind power plants in California confirms that wind turbine transients due to speed fluctuations or network disturbances have not resulted in system stability problems."

Transmission and Distribution System Impacts: Wind systems can affect transmission and distribution systems by "[altering] the design power flow or [causing] large voltage fluctuations . . . " Also, "islanding," in which a wind plant might energize a line that otherwise would be dead, has been a concern. "Operating experience with wind power plants in California has not shown system protection or safety to be an issue. Circumstances that may have led to islanding in the past have been identified, and hardware and detection schemes have been tested and approved. In PG&E's case, for example, the installation of direct transfer trip equipment is designed to trip the wind farms to prevent them from islanding."

Great post sefarkas.

It's probably fair to say that grid operators have been somewhat resistant to wind power due to the problems of variability. They are having to change their ways of working to accomodate it, and change always breeds resistance. Looking forward though, I expect these problems to subside. European experience seems to indicate that wind penetration of 10-20% is not problematic though some grid strenghtening may be required due to production/consumption locality mismatch.

For example, here in the UK the majority of the wind power resource is in Scotland, but the grid interconnects to the main demand centers in England are not big enough to carry the load. A similar situation exists in the USA where the main wind resource is in the great plains.

Personally I feel it is unfair to expect new wind build to carry the entire financial burden of this grid strenghtening, the current grid (in the UK at least) was built using taxpayer funds and I would be happy for the government to subsidise further grid improvements if it helps improve our energy security situation.

To answer the original question, some other problems with wind power are

1. As the article implies the cost of wind power has been increasing for the last year or so. This is a complete reversal of the historical situation, where declines of 4% per new machine design were occurring. It's a supply-and-demand issue; wind is booming on a global basis and the demand for turbines outstrips manufacturing capacity. The situation is predicted to persist for 2-3 years before new manufacturing capacity (much of it in the USA and China) comes onstream.

2. Wind turbines are rather intensive of materials, the amount of copper and steel needed per MW of output is high compared to other forms of generation. Given current worldwide commodity price rises, this is also helping push up the price of wind power. Your guess is as good as mine as to whether this commodity price peak will persist; history says not but then again no country has ever boomed like China is booming.

As to alaskan oil going to japan, china, wherever; that's a no brainer, of course it's going to the highest bidder, whoever that may be.

When first built the pipeline oil could not be exported; that was part of the deal to get the pipeline approved through congress. The ban against exporting Alaskan North Slope was lifted in 1996 yet 100% of Alaskan North Slope oil is kept in America. This has been the case for all but 4 years of the nearly 3 decades of Alaskan oil production. Between 1996-1999 5.5% of North Slope oil was exported to Asian countries. These exports were overwhelmingly supported by the US Congress and by the Clinton Administration to offset an oil glut in California at the time. In June 2000 Alaskan North Slope oil again ceased to be exported, and 100% of Alaskan North Slope production has stayed in America.

You can look at the export history from this area since the ban was lifted.

Exports, US West Coast including Alaska and Hawaii

Here you can see data from the California Energy Commission. They track the amount of oil brought into California from Alaska.

CALIFORNIA CRUDE OIL PRODUCTION AND IMPORTS

Here you can see from the Washington Government that 74% of the oil used in Washington State refineries comes from Alaska.

Washington State, Petroleum FAQ

As for being a no-brainer, why would would Alaskan oil travel the much longer distance from Valdez to Japan or China when there is a huge market importing oil about half the distance on the US West Coast?

When I center the map on Beijing, I find Indonesia much closer than Valdez. I suspect they also are more likely to be the economical source of oil for China.

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