Wind power a key piece of growth for Duke Energy
Duke Energy Corp. plans to use its recently purchased Tierra Energy unit to build a wind-energy division in its unregulated business, seeing an opportunity for selling alternative energy to industrial customers.
Duke expects to make money from Tierra's planned wind generators by 2009. And it is looking far beyond the 240 megawatts of capacity Tierra has under construction or its options on additional projects that would bring its total to 1,000 megawatts.
With wind energy expected to grow from its current capacity of 12 gigawatts nationwide to 50 or 60 gigawatts by 2015, Duke intends to "grow this into a real business," says one company executive.
Duke Energy Carolinas, the corporation's Charlotte-based utility, is studying potential wind projects in its service area. But that effort is in addition to the commercial business its parent is planning.
Duke Energy Generation Services, which will oversee the company's wind-power division, is not a regulated utility. It serves a specialty niche, developing and operating dedicated power plants under contract for industrial customers.
"We plan to develop a stand-alone (wind) portfolio within ... Duke Energy Generation Services, acquiring a foothold in developing expertise there," Keith Trent, Duke's chief strategy, policy and regulatory officer, told analysts last week. "The projects will be underpinned by long-term contracts and favorable tax benefits."
Dan Bakal, director of electric-power programs at investor and environmentalist coalition Ceres, finds Duke's plans interesting. Although there is generally rising interest in alternative energy sources among many companies and their investors, he sees no particular demand among industrial customers for wind-powered plants.
But Wouter van Kempen, president of DEGS, says Duke's decision was not in response to customer demand. He says the company looked at the wind business, dominated mostly by small players, and saw it as a strategic fit in a consolidating market.
"We want to grow this into a real business," says van Kempen, who once headed Duke's merger and acquisitions division. "As an industry, (wind power) is relatively fragmented. It needs capital and a large tax base to be efficient."
The industry leader in wind power is FPL Group Inc., parent of Florida Power & Light, Bakal says. It has 2,000 megawatts of wind-generating capacity in its merchant-power business.
DEGS builds and operates plants for large industrial, municipal or commercial customers. Its business is not as volatile as the merchant market, in which power is sold in short-term contracts to industrial users, power companies and other large customers.
Most of DEGS' contracts involve 50-year terms. It operates mostly gas and solid-fuel plants. Its customers include General Motors Corp. in Oklahoma City, Eastman Kodak Co. in Rochester, N.Y., and a BP plc refinery in Texas City, Texas.
In many ways, van Kempen says, DEGS' operations resemble those of a utility. But its 6,500 megawatts of capacity is dwarfed by the 27,590 megawatts of capacity in Duke's utilities.
Duke bought Tierra's wind-power development business in May from Energy Investors Funds of Boston. Terms weren't disclosed.
Tierra doesn't yet have any functioning wind farms. But Duke plans to spend $400 million through 2009 to bring its first three projects into operation in Texas and Wyoming.
That will give DEGS an opportunity to learn the business and develop a pipeline of projects for development.
"Duke is a company with a $25 billion market capitalization," van Kempen says. "If we enter a business, we have to be serious about it."
For now, the wind group will be small. DEGS has 404 employees, including about 350 who work at the plants it operates. The wind division is starting with six employees in Austin, Texas, where Tierra is based.
Some of the technological expertise DEGS develops could eventually benefit Duke's utility businesses. But van Kempen notes federal regulations strictly limit interaction between regulated and nonregulated parts of an energy company.
DEGS is interested in doing more with alternative energy sources, he says. For example, it has a small biomass site in Minnesota. But wind has greater potential in the near term as an alternative power source, van Kempen says.
As traditional power generation from coal, gas and nuclear sources becomes more expensive, sources such as wind-power will be increasingly competitive, says Bakal, the Ceres director.
"I really can't say there is an obvious market (Duke) is tapping into, but I wouldn't say it's a ridiculous idea," he says. "If they do it right, I could see something there for them to build on."
DUKE ENERGY GENERATION SERVICES
- Will use: Tierra Energy's planned 240 megawatts of wind-power generation as a starting point in that sector
- Will develop: Wind-powered plants under long-term contracts for industrial and municipal customers
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