Wednesday, January 21, 2009

The Case for Wind as a safe Investment

I am not alone in believing the current safest investment would be in wind energy. The wind will keep blowing and people will keep needing electricity, although the amount will depend on the overall state of the economy amongst other things.

And, in Ireland, wind energy will always have a market because of the way the Irish market works. Since all generators must sell their electricity into a pool from which suppliers buy the electricity to sell to their customers. Wind energy will always be a price taker because it is always better to sell, regardless of how low the price. For a gas powered station, the cost of the gas gives a bottom to the price at which it is worth selling. (The calculation is actually more complex because of the cost of shutting down and restarting plant.) So your wind power will be sold ahead of other non-renewables.

Ireland desperately needs wind energy. We import nearly 90% of our energy and will be vulnerable to chaotic price changes in oil, which sets the price for gas, until we change that. There are many new renewable technologies coming on stream that may be appropriate for Ireland, but none that have over 20 years of experience of use. So wind it is in the short term, and we have plenty of wind. Ireland has set the target of 40% of electricity production from wind by 2020. If this target is to be reached that would mean building one 1MW wind turbine every day! See article in Greenmonk for the numbers.

So how might you wrap this product to make a good investment? I suggest a government backed bond with tax free returns for the first 10 years. In return no returns would be paid until the end of year 2 to allow time for construction and connection to the grid (see comment later as this is currently 5+ years). The product would be managed by a bank or financial services company who would operate the scheme on a 1% commission basis. This should not be problematical as there would be low management costs unlike other financial products.

Returns will depend on electricity prices, which in turn are a function of demand and oil price, both of which are currently uncertain. SEI projected returns before tax of 5.5% here.

So what are the risks? The main risk is that the grid will not be updated quickly enough to take an increase in wind, that demand response will not be implemented quickly ensuring that wind farms are not curtailed (turned off) when supply exceeds demand, and that longer term, high bandwidth interconnectors to europe are not built to ensure best price of electricity generated. This is why government support for this investment product to ensure that infrastructure was implemented in a timely fashion.

More about wind energy and the need for demand response here:

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