The Wall Street Journal: BREEZY TALK: A Big Energy Gamble Shell, Others, Pile In Despite Regulatory Risk

BREEZY TALK
The Texas Wind Powers
A Big Energy Gamble
Shell, Others, Pile In
Despite Regulatory Risk;
Poke Arnold’s ‘Rib Eye’
By JEFFREY BALL
March 13, 2007; Page A1

SILVERTON, Texas — Deep in the heart of Texas, multinational giants are gambling on a new supply of energy. The prize isn’t oil. It’s wind.

In this pancake-flat country, where the wind blows so relentlessly that the sagebrush and mesquite are permanently bent, Royal Dutch Shell Group, BP PLC and a wind-development company owned by Goldman Sachs Group Inc. are racing to lease vast expanses of ranchland. In a bet on wind power’s long-term viability, they’re planning to erect what would be some of the biggest wind farms in the world, with thousands of wind turbines costing some $2 million apiece.

HEATING UP
 
•  What’s Happening: Energy companies are investing in wind power, notably in Texas, for profit as well as a chance to polish their green credentials.
 
•  The Gamble: Most wind projects aren’t viable without government subsidies and big infrastructure spending by local authorities.
 
•  What’s Next: Shell and Horizon are waiting to hear if Texas will build power lines to connect their planned projects to the appropriate power grid.
 
But generating power from wind isn’t profitable without government tax breaks, which in the past have been offered and taken away. The big proposed projects in Texas, like those elsewhere in the country, are dependent on regulators approving transmission lines to connect remote and windy regions to major power markets. If the new lines aren’t built, the projects are doomed. Such uncertainty has dashed hopes for fossil-fuel alternatives before, creating a boom-and-bust cycle not unlike the one that typifies the oil industry itself.

Energy companies investing in wind power are expecting governments to toughen rules relating to traditional energy sources, part of long-term efforts to reduce global-warming emissions and reliance on Middle East oil. As a result, they’re hoping renewable energy will become a profitable niche, not merely one that allows them to burnish their green credentials.

Few places exemplify the gamble as vividly as Briscoe County, a 900-square-mile patch of ranchland in the Texas Panhandle with more cows than people. It’s one of the windiest spots in Texas, which already cranks out more wind power than any other state. Texas regulators won’t decide for months whether to authorize a new line to connect this isolated county to Texas’s network of high-voltage power lines. But in Austin, the state capital, energy companies are lobbying hard, and on the ground they’re scrambling to lock up acreage. What happens here is being watched closely in other states trying to promote wind development, such as California, Colorado, Kansas and New Mexico.
 
It’s “a land rush,” says Mark Wilby, a petroleum engineer who once developed natural-gas power plants for Enron Corp., and now develops wind projects for Shell. In Shell’s storefront office in the largely abandoned courthouse square of Silverton, the county seat, Mr. Wilby pulls out a color map showing how the Texas wind blows. The windiest areas are in red, and Briscoe County is bloody. Shell hopes to build an approximately 120-square-mile wind farm here, which would be several times larger than any in the world today.

Local landowners who grew up cursing the wind can’t believe their new luck. The county’s windiest stretch is a curving ridgeline where the flat terrain of the Texas high plains ends and suddenly drops as much as 1,000 feet into the rocky, rugged Tule Canyon and onto the lower plains. The topography causes the wind to accelerate as it approaches the edge. The land at that edge was once good only for grazing cows, but now residents liken the ridgeline to a good steak, calling it “the rib eye.”
 
Poke Arnold’s land includes a piece of it, and the rancher has hired a lawyer to negotiate with energy companies. “They started getting in a dog fight,” he says, “and the leases started going up tremendously.”

Wind power accounted for 0.5% of global electricity production in 2004, the most recent data available, according to the International Energy Agency. Although that contribution is expected to grow fast in coming years, by 2030 wind is projected to account for only 3.4% of the total. If governments adopted more-aggressive policies to promote renewable energy, the IEA predicts, wind’s share of total energy in 2030 could rise to 4.8%.
 
The wind doesn’t always blow, and when it does, the amount of land required to catch meaningful amounts of it is vast. Shell’s planned wind farm here would cover an area about five times the size of Manhattan, yet it would crank out, on average, only about as much electricity as a single coal-fired power plant. Even with subsidies, the return from wind projects tends to be lower than that from oil and gas.

But the risks are lower, too. Putting up antennae to measure wind speed is vastly cheaper than drilling a well to look for oil. Turbine manufacturers often will essentially guarantee that their machines will produce a certain amount of power.

Moreover, unlike most other green-energy options, wind power doesn’t require any technological breakthroughs. The soaring pinwheel turbines that turn wind into electricity are manufactured by a growing cadre of mainstream companies, including General Electric Co. and Mitsubishi Heavy Industries Ltd., and are getting more reliable and efficient.

So far, wind power has taken off in states with favorable regulatory environments, in particular those with rules requiring utilities to generate a certain percentage of their electricity from renewable sources. Capital spending on new wind projects in the U.S. rose to $3.65 billion last year, up from $3.19 billion in 2005 and just $420 million in 2004, according to a study being prepared for the Department of Energy by its Lawrence Berkeley National Laboratory.

Steve Westwell, head of the alternative-energy unit at BP, expects governments to toughen rules governing energy production, especially those relating to emissions of carbon dioxide, a gas linked to global warming. That will boost viability of alternative sources such as wind. “In the future, there will probably be a very different discussion of the economics of these technologies,” he says. BP has announced plans to start building five wind farms in the U.S. this year.

Exxon Mobil Corp., the biggest publicly traded oil company in the world, remains unconvinced. Exxon is bankrolling research on clean-energy technologies, but says renewable energy isn’t yet viable on a large enough scale. In addition, the company says, it doesn’t want to get into a business that depends on subsidies.
 
“People are still going to need a hell of a lot of oil and gas” in the future, “and that’s what we’re good at,” says Rex Tillerson, Exxon’s chairman and chief executive. “I prefer to stay with what we know.”

Texas, the heart of the oil patch, shows how far wind energy has come and how far it has to go. One of the state’s first big wind-energy projects began producing electricity in 1995, three years after a federal tax break came into effect. Under that provision, the company that owns a wind project can reduce its tax bill by 1.9 cents for every kilowatt-hour of electricity that the project produces during its first 10 years of operation. That’s often the bump that makes a project viable.

Congress has authorized the credit only for short bursts. Wind development tends to screech to a halt when the credit is about to expire and ramp up when it’s renewed.

The early Texas wind project has a generating capacity of 35 megawatts, a tiny fraction of a coal-fired power plant. Because of the wind’s unpredictability, the Texas project produces on average only about one-third of its capacity, a typical rate. It produces enough power for about 7,800 households.

Even with the federal tax credit, wind development didn’t really pick up until after 1999, when Texas passed a requirement that utilities buy a certain amount of renewable power. And even then, it took off only in a part of the state served by a grid fueled mostly with natural gas, where power prices are relatively high.

Surrounding the tiny town of Fluvanna, on the western edge of the grid, is the Brazos wind project, which sprawls across 30 square miles. Brazos is the second-biggest working wind farm in Shell’s portfolio. It sells its power to TXU Corp., the Dallas-based utility that’s under pressure to curb emissions from coal plants. Last month, a private-equity group agreed to buy TXU for $32 billion, and promised to more than double the utility’s wind investments to get environmentalists’ backing for the buyout.

On a recent afternoon, a computer in Brazos’s office showed that the project’s 160 towering white turbines were generating just 5.5 megawatts, a fraction of their 160-megawatt capacity. Tom Schroeder, the site’s supervisor, said a weather front was approaching, calming the air. The wind had been “screaming” that morning,” said Mr. Schroeder, whose last job was on an oil rig off Nigeria. And “it’s going to be probably screaming tonight.”

In Texas, some of the strongest wind is in the Panhandle, which lies to the north of Brazos. But the Panhandle has few high-voltage lines and it sits in a multistate power grid that commands relatively low power prices because it gets much of its power from coal, a cheap fuel.

State officials are talking seriously about building new power lines to expand wind production. If one were built to Briscoe County, this massive wind resource would be unlocked.

Eddie Rhoderick, a rancher and farmer in Briscoe County, used to hate the wind. When it whips in after a heavy rain, it “sandblasts the cotton plants,” he says. But a few months ago, he leased 1,900 acres to Shell. He won’t divulge the terms of the deal. “Shell bought me a root canal,” he said one recent morning as he headed to the dentist.

Shell rolled into Briscoe last summer as the talk of new transmission lines heated up in Austin. So did Horizon Wind Energy, a Houston company that Goldman Sachs bought in 2005 and has now put up for sale.

Wind developers in the U.S. have typically offered landowners one-time signing payments of about $3 an acre and annual royalties totaling 3% of revenue. Within months in Briscoe, energy companies were offering signing payments of between $50 and $80 an acre and royalty payments of about 6% annually, according to Mr. Arnold and several other local landowners. If the Briscoe project is built, a local rancher could expect to collect some $80,000 a year for each “section” of land, a parcel equal to 640 acres.

Laquetta Schott , the local manager of a title company, has leased about 1,900 acres to Shell. Though Ms. Schott won’t discuss the terms of her contract, she says wind deals are offering signing bonuses that “could be more profitable than oil and gas.”

In December, BP bought a wind-development company that had been scouting in Briscoe. But skyrocketing prices persuaded BP to retreat to a county farther south. “With Shell and Horizon bidding up the properties to what we think may be unsustainable levels, we have stepped away,” says Robert Lukefahr, head of BP’s North American alternative-energy business.

Horizon hopes to build a wind project in Briscoe County with a capacity of about 600 megawatts, says Michael Skelly, Horizon’s chief development officer. That would make the Horizon project one of the biggest in the world. It would still be less than one-third the size of the 2,000-megawatt project that Shell’s Mr. Wilby says his company hopes to build.

More than a dozen companies that want power lines in various parts of the state have submitted proposals to the Texas Public Utility Commission, the state agency that oversees electricity issues. Shell’s proposal calls for a 290-mile line to Briscoe that it estimates would cost $480 million. Ultimately, that cost would likely be paid by Texas customers. The state is scheduled to signal its intentions in July.

The companies won’t disclose how much they’ve spent so far on preparatory work such as land leases. Their spending is a tiny fraction of what they would ultimately invest if the power lines were approved.

Meanwhile, Mr. Arnold, the Briscoe County rancher, is relishing the battle for his land. He hasn’t signed a lease with any of his suitors. “They think there’s big bucks in this, or they wouldn’t be playing,” Mr. Arnold says. “Them folks don’t play for cheese and crackers.”

Write to Jeffrey Ball at [email protected]