BBW European Wind Farms run out of puff - CEO moves on

Whilst there is a great deal of interest in using "free" wind energy to generate electricity, there is much optimistic noise made so investment in the sector looks increasingly attractive because of ..

1. The increasing cost competitiveness of wind energy
2. Need for increased security of energy supply, particularly by those countries with
limited fossil fuel reserves
3. Concerns about rising CO2 emissions and global warming
4. Increased global demand and for electricity - expected to double between 2002 and 2030,

Despite all this it is still difficult to identify the costs / benefits. Therefore it is interesting to consider the performance of Sydnay based Babcock & Brown Wind Partners.

A global investment company spun off investment company Babcock and Brown and listed on the Australian Stock Exchange on 28 October 2005 @ an application price of Aus$1.40 they now after a lengthy decine over 12 months from a high of over Aus$2 have hit Aus$1.43. They have a market value of approximately Aus$850Mn.

The company owns or has interests in a globally diverse wind energy portfolio with a total gross installed capacity of 671.6 MW , Europe (26%), North America (49%) and Australia (25%). They currently operate 2 wind farms in Australia (100%), 5 in the US (40% min), 2 in Germany (99%) and 6 in Spain (100%).

The business model appears relatively fool proof . Costs are fixed for operation and maintenance and sizeable proportion of electricity produced is sold under offtake contracts with large established utilities. These include - Australia AGL; Country Energy; Alinta . US TXU; Pacific Corp
· Germany RWE Rhein Ruhr · Spain Endesa . Most sites are partly owned and financed with local currency limited debt financing with hedged interest rates (except in the US) so providing a high theoretical stable cashflow.

There are different regulatory regimes which affect tax treatments ... all focused on promoting growth in renewable energy generation and use.

Direct Tariffs

Germany - Renewable Energy Sources Act (EEG) 2004
Spain - Electricity Act 1997 & Associated Royal Decrees
France - Electricity Law 2000 & subsequent Decrees

Quota Systems

Australia - Renewable Energy (Electricity) Act 2000 and Mandatory Renewable Energy Target

Tax Credits

US - Energy Policy Act of 2005, Production Tax Credit Incentives

Strong government support, especially in Europe, has helped the growth of wind energy and there is now said to be nearly US$20 billion invested annually – which has helped to contribute to a
reduction in cost of energy to about 4-7 US cents/ kWh depending on the specifi c wind resource. Wind energy capacity additions accounted for about 10% of total new electricity generation added
globally in 2006.

This strong growth in wind energy is forecast to continue at 20% a year according to Emerging Energy Research. Wind energy is expected to account for approximately 3% of global electricity generation by 2015. Offshore wind energy development is not expected to make any significant effect until after 2015.

However the results discussed at yesterday's AGM are disappointing, with Revenues of Aus$73 Mn they could distribute 10.2 cents a share.They booked a net loss of $16.24 million for 2005/06

Problems arose locally due to "non recurring items"

1. Delays in the acquisition of the Olivo wind farms in Spain
2. Delay in the construction of the Niederrhein wind farms in Germany.
3. Low wind conditions in May and June 2006 across the European portfolio (!)
3. Low wind conditions at the Lake Bonney 1 (Aus) site. (!) (the whole of their output is on a a single long term offtake contract with a term of 10 years with Country Energy)

How they can claim low wind conditions are "non - recurring" is a little difficult to unravel. ...but any sailor will tell you the wind is fickle and unreliable.

CEO Peter O'Connell stepped down to take up a role elswehere in Babcock & Brown and a search for a new chief executive is underway.

Making money out of wind energy is evidently not all plain sailing. Watch this space.