T. Boone Pickens' Epic Wind Fail

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 |  Includes: FAN, PWND
by: Hard Assets Investor

By Julian Murdoch

It's all over the headlines: T. Boone Pickens' huge wind farm has been scrapped - or at least postponed. After warning last year that he was having difficulty securing financing for the project, and was terminating land leases in March, this week's announcement isn't a huge shock, but it does bring up some things to think about, and for Pickens' detractors, an opportunity for schadenfreude. After all, Pickens reportedly spent nearly $60 million last fall just advertising how awesome his plan was.

Why It Didn't Work: A Perfect Storm

Between the credit crisis, falling oil and natural gas prices, and a general decrease in energy demand due to the state of the economy, it frankly would have been more surprising if the large wind farm in Texas got up and running as scheduled.

Wind farms are expensive to build. The 667 wind turbines that Pickens' company purchased from GE came to a grand total of $2 billion. The total cost for the project was to be $10 billion. With credit tight everywhere and energy prices down, lining up financing just for the turbines was a bit more difficult than expected, but Mr. Pickens said he did it, and will in fact be looking for homes for those 667 turbines. Anyone want a small backyard wind farm? Pickens may be calling.

The next challenge was transmission lines.

Wind farms tend to be out in the middle of nowhere. To get the electricity from the middle of nowhere to the middle of somewhere, transmission lines have to be strung. Without those lines, the power is like a tree falling in the woods - it may make a sound, but who cares?

This has long been brought up as a roadblock to increasing green energy usage - the electrical grid in the U.S. is old and in need of repair and upgrading. New high-capacity transmission lines cost between $2-4 million per mile, according to a recent report by the Pew Center on Global Climate Change. If the goal is to increase wind's percentage of energy production to 20%, the amount of new transmission lines needed to handle the electrical load is estimated to be between 12,650 and 19,000 miles - over $60 billion worth. When I wrote about the stimulus plan in February (Is Alternative Energy Dead?), I mentioned that the U.S. had only $11 billion earmarked for investment in transmission projects.

As far as Pickens' Mesa project is concerned, the Public Utility Commission in Texas had a plan to invest $5 billion in transmission lines, but the lines wouldn't have gone all the way out to the Mesa project. Whoops.

Energy Prices

Oil is sitting around $60, and natural gas is a steal at $3.35. In fact, natural gas is so cheap that coal - the down and dirty go-to fuel for cheap electricity - will likely see a downtick in consumption. The U.S. Energy Information Administration revised its coal demand outlook for 2009 downward, and is now forecasting U.S. power plants will burn 987 million tons of coal.

"The 5.2 percent decline in coal consumption in the electric power sector is the result of lower total electricity generation coupled with projected increases from other generating sources, including natural gas, nuclear, hydroelectric, and wind."

But just because the Mesa project is no more doesn't mean wind is done for, though even the American Wind Energy Association is expecting development to move slowly this year. 2008 saw 8,358 new megawatts come online, but 2009 is forecast to only see around 5,000 megawatts installed. All across the globe, companies are bringing wind farms online. From an offshore Welsh wind project that is scheduled to start this week, to China's push to grow from 12 GW to 20 GW by 2010 - more wattage is coming on line all the time.

But it is not all smooth sailing, and manufacturers are suffering. Guillermo Ulacia, chairman of Spanish turbine maker Gamesa, said, "... the industry will slow its deliveries to match supply with demand and avoid entering a dangerous spiral of price reductions," Reuters reported on Wednesday.

But even with the industry seeing a slowdown, two wind industry ETFs have shown gains since the beginning of the year. First Trust Global Wind Energy (NYSEARCA:FAN) and PowerShares Global Wind Energy (NASDAQ:PWND) both invest in companies across the world that are involved in producing wind energy directly or providing machinery or services related to the generation of wind power. FAN holds 57 companies, including some companies like BP and Royal Dutch Shell that don't, at first glance, seem like wind plays. PWND has more targeted holdings, with 31 companies - most of which are also covered by FAN.

It looks like a more targeted, narrow-focus approach is paying off in the wind industry, with PWND doing about 10 percentage points better than FAN since the end of April. And both ETFs have had a much better time of it than the S&P 500 since mid-April as well.

So even though it doesn't look like Texas is going to get its huge wind farm at this point, as we get through the rest of 2009 and look toward 2010, expect to keep seeing windmills in the distance.