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spacer October 2008

Dark enough for ya?

Yeah, our prognostication (in our July 2005 Commentary) for a bursting of the real estate bubble and a general economic downturn was a little off the mark, thanks to the momentum generated by that old demon "irrational exuberance," which was enough to delay the Darkness's arrival just a bit.

One thing we would never have predicted, however, was the move by the Bush administration, that stalwart defender of deregulation and free markets, to socialize all that bad debt as the solution to the financial crisis. Of course, it probably helps save a lot of rich peoples' bacon.

As the battle to garner the votes needed to enact the rescue package was waged, provisions were added to make it more palatable to recalcitrant members of the U.S. Congress. One of the items that stood out: an extra $18 billion tacked on for tax breaks for renewable energy, including production credits for wind power.

Relative to a bill that could dole out as much as $700 billion, plus an oinking big helping of pork barrelling, that sounds like a broker's fee, but in absolute terms it's a heck of a lot of money. This is a testament to how alternative energy has moved from the fringe to the mainstream, and the epicentre of that shift is wind power.

Not since the age of sail has the harnessing of the wind held so much potential to affect the evolution of humankind. Europe is far ahead in this race, with North America playing catch-up, while the Johnny-come-lately Chinese are bursting forward like bike racers on steroids.

A seemingly unlikely leader of the U.S. team is Texas oilman and billionaire T. Boone Pickens. Pickens's plan envisions 400-foot turbines sprouting up over a vast swath of the Great Plains states, from North Dakota to Texas. As his website blares, "The United States is the Saudi Arabia of wind power."

Pickens dreams of replacing expensive imported oil with wind-generated electricity, natural gas and biofuels. The octogenarian is putting his money where is mouth is, spending $2 billon thus far on his Pampa Wind Project in northern Texas, which will cost $8 billion to $10 billion by the time it's complete in 2014.

Wind power currently accounts for about one percent of electricity production in the U.S. and Canada. In Europe, the transformation is much further along, and nowhere more so than in Denmark, the world leader in the technology. A full 20 percent of that nation's electricity now comes from wind. Spain and Germany clip in at 9 and 6 percent respectively.

Greenies like to claim that investments in clean energy can reap economic benefits, but it is the Danes who walk the talk. Over the past decade, exports of wind technology have grown at compound annual rate of 25 percent, to 4.7 billion euros in 2007.

Denmark's Vestas is the world's leading wind turbine manufacturer with approximately 28 percent of global market share in 2007. After that, Spain's Gamesa and Germany's Siemens are roughly tied with 15 percent each, followed by America's General Electric and India's Suzlon, with about 10 percent each.

Vestas's stock trades on the Copenhagen exchange, currently at 388 krone (about CDN$82). A growth stock that is profitable and pays a dividend, Vestas is light years from contrarian territory, but the recent global sell-off has clipped the wings even of high flyers, so that the stock is down sharply from its high of 700 krone in June.

An ADR trades over the counter under the symbol VWDRY at a ratio of three units for each ordinary share. Gamesa is also growing fast, and made a 220 million euro profit in 2007, but is difficult to buy here.

It's easy enough to purchase GE or Siemens, but these are mega-conglomerates whose wind-power operations make a relatively small contribution to their overall financial results.

To take a broader stab at the wind industry, there are always the ubiquitous ETFs. One is PowerShares Global Wind Energy Portfolio, which trades on the Nasdaq. The top five components are the aforementioned Vestas and Gamesa plus Japanese conglomerate Mitsubishi, Switzerland's engineering giant ABB and France's renewable energy specialist EDF Energies Nouvelles. These comprise a weighting of about 43 percent of the portfolio, with the remainder made up of smaller stakes in 29 companies.

The expense ratio of .75 is above average for an ETF, but still well below managed mutual funds. The ETF came out in July at $24 and is now trading at $13.30.

Another new ETF, First Trust's Global Wind Energy Index Fund, is more diversified, with a total of 67 stocks, the top five of which make up just one-third of the whole. And the expense ratio is a bit lower, at .60. The ETF debuted in June at $29.45 and is now trading at $15.53.

If a global recession knocks down the price of petroleum farther than it has already fallen, interest in wind power will wane and these two funds could get quite a bit cheaper, but they are both worth looking at.

Though wind advocates see nearly limitless possibilities for their industry and compare its present state to the early days of the oil business, caution is warranted. The fact that the wind blows inconsistently is an obvious disadvantage. As long as the percentage coming from wind is small, and the grid has sufficient standby generation, the variability can be evened out fairly easily. But it gets harder once the 20-percent threshold is reached, and many believe that the practical maximum is 35 percent of total electricity production.

Many experts are also skeptical about the prospect of wind decreasing reliance on gasoline; they point to the lack of infrastructure for charging vehicles -- and, in a classic Catch-22, private companies are reluctant to build infrastructure for a service that doesn't yet exist.

Once again, it's the Danes who are going to try to push the envelope. They have signed a deal with a California company to set up 500,000 places where car batteries can be charged overnight, plus 150 stations where motorists on longer trips can quickly swap a battery running low for a fully charged one. Cars running on gasoline are heavily taxed in Denmark, with an average sticker price of $60,000. Electric cars will go for as low as $20,000.

An ingenious part of the concept is that if the bulk of Danes make the switch, the battery charging system will act as an enormous buffer, helping to even out fluctuations in wind speed; through the use of smart meters, users' batteries could be charged when power is abundant, and be used to feed electricity back into the grid when gentle breezes prevail.

How is it that a tiny country like Denmark, with a population of five million, was able to develop an entire industry from scratch and become leading edge? The efficient partnering of government, scientific institutions and industry explains a lot, but it goes far beyond that.

Over 100,000 families own a piece of a wind turbine -- 85 percent of production is owned by individuals or cooperatives. Danes have a sense of ownership over the technology, and this mood builds community support and political consensus.

Another key has been a consistent strategic focus on developing the industry. After the energy shocks of the 1970s, California briefly became the wind capital of the world. But when oil got cheap again, boom was followed by bust. In Denmark, research continued, filling the vacuum created by global disinterest. And all of this was well before climate change was a front-page issue.

Though Danes are now proud of their record in reducing carbon emissions, their efforts have always been driven by the goal of energy self-sufficiency and a desire to develop a valuable technology.

Here in Canada, it's a different story. As one wind engineer we talked to put it, "We are very democratic about the way we spend r&d money. We dole out a bit here, a bit there, try to help everybody out, but never spend enough on one thing to really make a difference."

Therefore, those who wish to invest in Canadian manufacturers are basically out of luck. Though we are blessed with enormous wind re sources, we have been content to import the turbines from overseas, and most of the large contracts have gone to GE. Even a lot of the steel towers are imported from the United States.

Provincial and federal governments have been supportive of the industry with production subsidies, but while political leaders talk about the jobs and economic stimulus promised by green technology, it appears that those benefits are going to foreigners while Canucks get subcontracts to pour cement foundations.

There are some small start-ups, but they are mostly niche players using licensed designs to chase contracts too piddly to be of interest to the large international vendors.

Perhaps that explains why we could find only one unique Canadian contribution. Scientists at the University of Calgary were mystified as to why hundreds of dead bats are found around wind turbines with no sign of actually being hit by the rotors.

Researchers patiently did autopsies on 75 bats and found that they were victims of barotraumas -- sudden changes in pressure created by the wash of the turbine's blades cause blood vessels in the bats' lungs to explode. Well, we don't have anything against bats, but wouldn't it be nice if Canadian research actually contributed to the production of wind power, instead of just insights about its ecological impact?

It may be too late for Canadian businesses to start making wind turbines, given our lack of research into the area and the fact that the Chinese, with their usual pricing advantage, have entered the field in a huge way -- the number of competitors has gone from zero to 35 in the past 18 months.

But there are still a few Holy Grails out there that will need to be tracked down in order for a decisive transition to be made from fossil fuels to renewable energy. A key one is the ability to store extra power where it is generated and move it efficiently, and on demand, to where it is needed.

Various methods are being tried -- pumping water into reservoirs, underground compressed air, new types of batteries, producing hydrogen through electrolysis -- but so far all have proved to be technically cumbersome, expensive and/or inefficient. If we could crack that nut, the world would beat a path to our door. Such a technology would not only boost the deployment of wind turbines to remote, windy locations, but would also make solar power far more practical as well.

Canada would do well to make a focused effort to become a world leader, rather than whining about wind turbines looking ugly or making too much noise. After all, even with global warming, we still need to heat our homes in winter, and prefer to cool them in summer, while watching the latest Canadian Idol.

To satisfy a growing population's energy fix, more energy will be needed, and options beyond the current standard mix are a must.

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