'Genned' by the wind

Nov. 23, 2009
What fluctuates faster than crude prices in a nervous market? Apparently the RPMs of wind turbines powered by the whims of Mother Nature.

What fluctuates faster than crude prices in a nervous market? Apparently the RPMs of wind turbines powered by the whims of Mother Nature.

For 90 min. on Nov. 8, an unusually strong wind set Spain's wind turbines to spinning like pinwheels, generating 53% of that country's electricity needs. Unfortunately, that power peak occurred on a Sunday between 4:30 a.m. and 6 a.m., when Spain's power demands are minimal. According to a Nov. 10 report in the Wall Street Journal, "Spain had never gotten more than 43% of its juice from wind power before. It suddenly had so much wind power, it had to export some electricity."

Spread over the remaining 22½ hr of that blustery day, power from windfarms dropped to 39% of the country's electricity needs—yet still far above Spain's annual average of 12% and the 2% of US electricity generated by wind in 2008.

The extreme variability of wind and solar power has for years kept those renewable resources on the perimeter of the market for sustainable energy. Wind is especially vulnerable since—as the Spanish incident demonstrated—it often generates the most power when it's least needed. Moreover, Spain's 18 Gw of installed turbines produced little more than 11 Gw of electricity—a production rate of about 60%. "That means that in the absolute best-case scenario, two out of every five gigawatts of wind power are essentially sitting idle," WSJ said.

The paper quoted Luis Atienza, chairman and chief executive officer of Red Electrica de Espana, as saying, "The risk that on these very windy mornings there isn't enough demand to offload all the wind production, a risk that will increase in step with installed wind capacity, should be alleviated by increasing energy storage capacity and export capacity. Furthermore, it would be convenient to shift part of the electricity demand to those off-peak hours. In that sense, electric cars, since they can recharge overnight, seem destined to facilitate the integration of more renewables into the electricity system."

Although long a leader in wind power, Spain still hasn't managed "to clean up its economy and meet all of its obligations under the Kyoto Protocol; the country has one of the worst compliance records in Europe," WSJ reported.

The day after generating a record amount of power by wind, Spain agreed to buy Poland's excess greenhouse-gas emissions permits for $37 million.

Corn ethanol withers

Besides being hard on oil producers and refiners, the last couple of years have been economic hell for corn ethanol. Just 18 months ago, Raymond James & Associates Inc. was tracking five producers of corn ethanol. Since then, the brokerage's analysts reported, "US BioEnergy was acquired by VeraSun, and not long thereafter (November 2008), VeraSun—the largest US ethanol producer at the time—filed for Chapter 11. It was followed into bankruptcy court in short order by Aventine (March 2009) and Pacific Ethanol (May 2009). Ironically, the smallest of the group, BioFuel Energy, has survived the longest. It's still in business, albeit trading around $1/share and facing a heavy debt burden. This list, by the way, does not include the numerous bankruptcies and liquidations of smaller ethanol producers, including farmer co-ops."

Nevertheless, plants owned by bankrupt ethanol companies are still operating—"run either by their original owners or acquirers (e.g., Valero bought most of VeraSun's plants for about 30% of replacement cost)," said analysts in Raymond James' Houston office. "But it's safe to say that this is hardly a conducive environment for investment in the industry. Given the overcapacity (within the context of depressed gasoline demand), along with corn prices that are still lofty (though no longer egregiously high), ethanol cash margins were near zero (turning negative in some weeks) for much of the first half of 2009."

Crude's recent escalation to $80/bbl helped restore ethanol margins to "decent levels" of 30-40¢/gal, but that's "still slim" compared with their heady 60¢/gal levels in the 2006-07 boom. "This needs to be seen alongside the fact that capital for new capacity remains practically frozen. After all, if banks are still uncertain about lending to, say, solar farms, how likely are they to finance new ethanol plants?" analysts said.

Corn farmers in key political swing states still reap ethanol subsidies. But analysts said corn ethanol no longer is seen as a "game-changing" solution to the imbalance between oil supply and demand.

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