Nanalyze

Wind Power Quietly Leads Solar Power

America’s political polarization is particularly dangerous because it forces those who participate to be corralled into a corner and then spoon fed what they want to hear. You’ll often hear each side chant some generic mantra that telegraphs their adoration for the elephant or the donkey. Thankfully, capitalism continues to plods forward as it always has, ignoring politics and doing what’s profitable. Renewable energy is profitable, or at least that’s what we’re led to believe when the biggest electric utility company in the world generates more wind and solar energy than any other company in the world – 15 GW wind and 2 GW solar.

In other words, this single company produces more than 15% of all wind energy generated in the United States, an amount that only 7 countries currently exceed. Next Era Energy (NEE), the biggest utility company in the world, now generates 67% of their electricity using the wind. Let’s talk a bit more about wind power.

The History of Wind Power

Wind is a form of solar energy, caused by the uneven heating of the atmosphere by the sun, the irregularities of the earth’s surface, and rotation of the earth. Wind flow patterns are defined by variations in terrain, bodies of water, and vegetation, as depicted in this neat forecast visualization by supercomputers. The motion energy of winds can be captured by turbines and converted to mechanical power or electricity. According to the World Energy Council, there are one million gigawatts (GW) of wind energy available from the total land coverage of the earth, and 1% utilization at current efficiencies would cover global electricity demand.

Wind power has been used since the invention of sails as far back as 5500 BC, and wind-powered machines including windmills and wind pumps were developed in the 9th century. The first windmill that generated electricity was built in Scotland in the late 1800s and powered the lighting of a cottage. Things have progressed quite a bit since the early days. The largest wind turbine called Haliade-X 12MW, currently being developed by GE, is as tall as a skyscraper and can power up to 16,000 European households with its 12 MW capacity.

The largest offshore wind turbine in the world

Source: General Electric

The amount of energy produced by this one wind turbine is equivalent to 97.2 acres of solar panels. You can’t farm 97.2 acres of solar panels, but you can farm the land around wind turbines. You can also place wind turbines offshore where they won’t pester anyone. More on that in a bit, but first let’s look at wind vs. solar.

Wind Power vs. Solar Power

Remember how we talked about how political renewable energy has become? That means there are loads of “statistics” out there which can provide alternate view of the same reality. We settled on a report published by British Petroleum (yes, the big bad capitalist oil company) because none of the leading authorities on energy data we looked at could be asked to update their numbers beyond 2016. The BP report talks about the growth of the energy mix from 2016-2017, and what the final numbers look like at the beginning of 2018. Here are some interesting metrics relating to renewable energy.

  • 8.4% of global power generation comes from renewables
  • 1.7% of global power generation comes from solar
  • 4.4% of global power generation comes from wind

Even though solar gets lots of attention, it’s wind that takes the lead when it comes to total power being generated across the globe. Is this because wind energy is cheaper to produce than solar energy? Let’s take a look.

The Cost of Renewable Energies

Compared to other energy sources, onshore wind power is the fourth cheapest to produce following coal, geothermal, and natural gas. That’s if you take into account regulatory factors. The price of fossil-based, and particularly coal-based electricity, can nearly double due to government-imposed costs on CO2 emissions or the use of Carbon Capture and Sequestration (CCS) methods. On the other hand, renewables like wind are subsidized by corporate tax credits in the US amounting to 1.9-2.3 cents per kilowatt hour produced, making onshore wind one of the cheapest new alternatives to power generation. For investors, all these subsidies reflect regulatory risks. Therefore, we want to see a cost comparison of all electricity generation sources – both renewables and non-renewables – with the subsidy effects removed. That’s exactly what an investment bank called Lazard has done in the below chart.

Unsubsidized levelized cost of energy comparison

Source: Lazard (Levelized Cost of Energy 2017)

In the chart, we can see that wind power leads the cost comparison with the cheapest possible cost while solar and wind share similar costs. The exception is off-shore wind (the beige “diamond” on the line for wind) which costs almost four times as much as the cheapest onshore wind. With onshore wind farms so much cheaper, why would anyone consider developing offshore projects?

Onshore vs. Offshore Wind Power

The main benefit of offshore turbines is their increased efficiency due to more consistent offshore wind speed and direction. Hence, fewer turbines are needed to provide the same amount of electricity. It is also easier to have offshore projects green-lit as they don’t interfere with private land use. A 2017 Stanford University paper compared the average cost of onshore and offshore wind turbines in 2015, and has concluded that offshore electricity costs almost three times as much as onshore to generate. Offshore turbines’ capital and operating expenses both had a roughly 3x multiplier compared to onshore projects at the time, which wasn’t offset by the somewhat higher rate of energy production. This is in line with our cost comparison table above. While offshore wind is expensive, project costs have fallen 45% since 2015 in Europe, and by 75% since 2014 in the US thanks to competitive tendering, larger turbines, and more capacity.

On the other hand, more recent research shows offshore project costs have decreased significantly. A February 2019 study of the Netherlands Environmental Assessment Agency puts the 2018 cost of Dutch offshore electricity at 0.069-$0.08 $/kWh, much closer to the global average of onshore wind. The study confirms that there are large differences between wind farms because installation and operational costs, and connection to the electricity grid depend heavily on sites’ characteristics. The Agency expects costs to decrease continuously because of the increasing competition in wind farm tenders, the development of new, larger turbines, and the favorable financing parameters available in the market.

Current growth trends confirm this theory with increasing offshore generation growth (32% in 2017) and record investments ($15 billion in 2017). In the European Union, tender auction results indicate cost reductions of 30%-50% over the medium term. It seems offshore wind is at the cusp of becoming economically viable, and for further evidence of that look no further than the biggest offshore wind farm in the world.

The Biggest Offshore Wind Farm

The Walney Extension Offshore Wind Farm, located off the Western coast of the UK in the Irish Sea, opened in September of 2018. The project is an extension of the Walney 1 and 2 farms nearby and is made up of 87 turbines with a total capacity of 659 MW, powering 590,000 homes in the UK, and representing close to 3% of global offshore capacity. The turbines are seven and eight-megawatt models from leading manufacturers MHI Vestas and Siemens Gamesa, installed over an area of 145 km2, about the size of Miami.

Walney Extension is located off the Western coast of the UK, near Blackpool, in the Irish Sea

Credit: Walney Extension

The farm was built and is operated by Ørsted (CSE:ORSTED), a Danish renewable energy company that develops offshore wind and bioenergy projects and runs energy supply and distribution channels. When the project contract was signed in 2014, Ørsted was guaranteed a minimum electricity price of 0.195 $/kWh for 15 years by the UK. Costs have dropped significantly since then and such fixed-price agreements are becoming increasingly rare. This is what prompted Danish pension funds PFA and PKA to buy half the – yet unfinished – project for $2.56 billion in November 2017. The acquisition was part of the pension funds’ larger 2015-2020 strategy promoting private equity investments into infrastructure and energy. Ørsted has a strong partnership with PKA on three other offshore wind farms as well. At the moment, Walney Extension is owned 50% by Ørsted, 25% by PFA, and 25% by PKA. Detailed financials on the Walney Extension project are not available, but a little back-of-the-napkin math using the assumptions of the aforementioned Stanford paper tells us the guaranteed minimum price is on par with the project’s development cost of $5.12 billion.

Walney Extension will not hold its leadership position for long, and the future is looking bright for offshore wind. The largest offshore wind farm under development, also built by Ørsted in the UK, and planned for 2020, will be nearly double the size of Walney Extension and power over one million UK homes with renewable electricity. The UK is set to remain the global leader in offshore wind projects with its ambitions to cover one third of its electricity needs from the renewable source by 2030. China, Germany, Denmark, and the Netherlands are set to follow.

Going back to that report by BP, the country which generates the most renewable electricity as a percentage of total consumption is Denmark. Around 68% of power in Denmark comes from renewables. And guess what? The company that’s building all these offshore wind farms we’ve talked about – Ørsted – happens to be the largest energy company in Denmark. Coincidence? Who knows, but we’ll take a closer look at Ørsted in a coming article to see if they merit a place in our portfolio alongside Next Era Energy.

Conclusion

The two biggest takeaways from this article are that wind and solar can compete with traditional methods of electricity generation and that wind energy is a cheaper source of electricity than any other method of electricity – all without any subsidies taken into account. The fact that the world’s biggest utility company – Next Era Energy (NEE) – is now generating 67% of their electricity using onshore wind energy further confirms that the economics make sense. We’ve been longtime shareholders in NEE because they’ve managed to increase their dividend for 25 years straight now with a 10-year dividend growth rate of 9.6%. That’s a utility company that behaves like a growth company, and it’s easy to conclude that a key driver behind those returns is wind energy – regardless of what side of the political spectrum you happen to lean towards.

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