Will Ocean Power Be This Decade's Version of Wind Power?

by: David Gross

With their portfolios backlogged with solar manufacturers, venture capitalists are increasingly complaining about the industry's “capital intensity.” And in spite of recent investment rounds for FloDesign and Nordic Windpower, our research shows that venture capitalists account for less than 3% of the financing raised by wind turbine manufacturers. Many of the limited partners in investment funds would rather take the cash flow offered by a wind farm, than take on the risk of financing a turbine manufacturer.

Unlike solar or wind, ocean power (from waves or tides) requires limited capital and its economics are closer to what venture capitalists are used to in information technology or biotech. Without outsourced assembly and production, wave power manufacturing is far less capital-intensive than wind or solar manufacturing. Ocean Power Technologies (NASDAQ:OPTT), for example, has spent just 1% of its invested capital on property, plant and equipment, much lower than the 35-50% rates seen among PV suppliers like Evergeen Solar (ESLR), SunPower (SPWRA) and First Solar (NASDAQ:FSLR). But the industry will need to grow faster than wind did in order for investors to make profits on it this decade.

After the first commercial wind farm went into service in 1981, it took another 18 years for wind to reach one tenth of one percent of domestic electricity generation. It then took another nine years for it to reach one percent. But it is going to take only two years for it to reach two percent, as it will likely cross that barrier this year. (In October 2009, wind accounted for 1.89% of total domestic electricity supply, up from 1.35% in October 2008).

Like wind, it could take years of prototyping and testing to get ocean power past the government-financed research projects that define the sector today. Private financing requires an operating history, regardless of the Production Tax Credit, which is available for ocean power projects as it is for wind. But like wind, the ocean power industry could accelerate its development if it signed PPAs (Power Purchase Agreements) with municipally-owned co-operatives, universities, and others who will buy electricity directly, instead of with large publicly-traded utilities.

Too Big to Fail, or Too Small to Succeed?

In 2008, Finavera Renewables tried to commercialize wave power in the U.S. with a 2 MW project off the coast of California that was to sell electricity to PG&E. Unsurprisingly, the California Public Utilities Commission was not excited about putting this project into the rate base considering its very small size and lack of operating history. This was not unlike the many wind projects of the 1980s that could not get financed because of their sub-megawatt turbines and limited ability to prove that they would not need significant repairs once in service. Based in rural inland locations, the wind industry ultimately got around these operational concerns by selling to municipally-owned co-ops, in addition to the Federal government through the Bonneville Power Administration.

While presented with a geography that favors interconnecting with traditional utilities, wave power will need to prove itself with direct buyers and smaller, muni owners, and let providers like PG&E stick with wind for the time being. Moreover, the extremely low variable costs of renewables relative to fossil-fuel technologies provide an incentive to self-generate. PPAs with direct buyers and co-ops would move the industry from government-financed to government-subsidized, an important step it will need to take to move beyond prototypes and test projects.

Disclosure: No Positions