Wind Energy

Energy Advancement Leadership ConferenceNovember 17, 2004

Outline• Market

• Cost of Wind Energy

• Turbine Technology

• Wind Resource

• Financing

Market

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

• World’s fastest growing energy source

Europe74%

U.S. 16%

Rest of World 10%

Source: American Wind Energy Association

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

National Wind Energy Status

TOTAL INSTALLED U.S. WIND ENERGY CAPACITY: 6,373.8 MW as of Jan 12, 2004

California, Texas, Minnesota, Iowa and Wyoming lead the market

Source: American Wind Energy Association

Near-Term Growth Opportunity

Source: Platts Analytics

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– RPS’s 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

Cost of Wind Energy

Rapidly Decreasing Costs

Source: American Wind Energy Association

Competitive Posture

Source: Platts Analytics

Near-TermOpportunity

Wind without PTC

Wind with PTC

New Coal-FiredGeneration Cost

Long-TermCompetitiveness

Challenge Period

New Gas-FiredGeneration Cost

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: What’s it Worth?”

Wind/Natural Gas CompatibilityWINDLow Operating Cost

High Capital Cost

Non-Dispatchable

No Fuel Supply/Cost Risk

No Emissions

NATURAL GASHigh 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 utility’s power portfolio because of their complementary characteristics.

Source: American Wind Energy Association

Turbine Technology

Modern Turbines

• Power : 1-3 MW

• Rotor : 55-90 meters diameter

• Nacelle: 100,000-150,000 pounds

• Tower : 60-80 meters

Turbine Sizes59.6

80

Today’s average wind turbine:

Wind turbine with 80 meter rotor diameter superimposed on a Boeing 747 jumbo jet

Wind Resource

Wind

• Variable– Site specific

• Terrain• Height• Ground cover• Atmospheric pressure

– Region Wide• Seasons• Diurnal• Annual

• Measurable and Predictable

Uncertainty Analysis

Uncertainty Example

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

200 225 250 275 300 325 350 375 400 425 450 475 500 525 550 575 600 625

10% Uncertainty 20% Uncertainty

P25 446.8 GWh$24.25

P25 475.1 GWh$21.35

P75 390.4 GWh$31.20

P75 362.1 GWh$35.55

P50 418.6 GWh$27.50

The long term average production estimate has a significant impact on cost. More data and geographical coverage = less risk.

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

Financing

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

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

Cost of Capital

Typically 10-11% after-tax unleveraged IRR

Cost of Capital vs. Cost of Power

$15

$17

$19

$21

$23

$25

$27

$29

$31

$33

$35

5% 6% 7% 8% 9% 10% 11% 12% 13%

Cost of Capital

Co

st o

f P

ow

er (

$/M

Wh

)

(6%,$18)

(7%,$20)

(8%,$22)

(9%,$25)

(10%,$28)

(11%,$30)

(12%,$33)

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

Investment Challenges

• Heavy tax component

• PTC ownership requirements

• PTC uncertainty

• Tax market very specialized

• Transmission constraints

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

Conclusions (Cont’d.)

• 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