Imagine trying to start a garden. You design it. Build it. Seed. Water. Fertilize. And harvest.
Now imagine that you bring your trusty wicker basket to the garden to collect your bounty, but you're unable to bring the crops back to your table—you must consume them no more than 10 feet from where you picked them. Wind power generated electricity faces a similar problem: It is extremely difficult to efficiently transmit the power over large distances. As a result, wind farm operators must often resort to curtailment, which the American Wind Energy Association defines as "the practice of reducing the output of wind projects when there is insufficient transmission capacity to carry their electricity to consumers." As counterproductive as this may be, there is a bright side -- the U.S. Department of Energy found that curtailment had been reduced from 4.9% of potential wind energy in 2011 to 2.7% in 2012.
Everything is bigger in Texas
The Lone Star State is trying to reduce curtailment even further. In a few weeks, it is preparing to begin operations of new transmission lines that will bring 18,500 megawatts of wind power over 3,600 miles from rural West Texas to big cities like Dallas, Fort Worth, and Austin. Referred to as the Competitive Renewable Energy Zone (CREZ), this new infrastructure will ensure that existing wind farms will be able to operate at higher efficiency. Prospective wind farm developers are excited as well -- so much so that Texas' main grid operator has already signed interconnection agreements for over 5,500MW of new wind capacity.
One of the first companies to take advantage of the CREZ is Pattern Energy Group (NASDAQ:PEGI). Having completed a $352 million IPO in the beginning of October, Pattern Energy owns and operates eight wind power projects in the United States, Canada, and Chile, totaling over 1,000MW.
Pattern Energy recently began construction of its 218MW Panhandle Wind Farm in Carson County, about 30 miles from Amarillo. Assisting in financing the project are GE Energy Financial Services and Citigroup Global Markets, Although specific details of the arrangement are not available, Panhandle Wind will sell power to Citigroup Energy under a long-term hedge offtake agreement.
Since 2007, Citi has directed over $44.4 billion toward clean energy financing and investment as part of its 10-year, $50 billion Climate Initiative. The majority of these investment dollars appear to be in solar, not wind. In 2012, of the $8 billion invested as part of the Climate Initiative, approximately $4 billion was invested in solar and only $1 billion invested in wind.
Another company in the zone
Another likely company to take advantage of the CREZ is Duke Energy (NYSE:DUK). Having invested more than $3 billion in solar and wind power since 2007, Duke Energy currently has more than 1,600MW of wind energy in commercial operation, 897MW of which are located in Texas. This is an important revenue driver for Duke. Although in Q2 2013, the Commercial Power segment, which is comprised in part by Duke Energy Renewables, reported an adjusted segment income loss of $3 million, wind power was not at fault. Instead, Duke attributed the loss to lower Midwest gas and coal generation. In the future, Duke Energy Renewables is expected to be one of the major drivers which will deliver adjusted earnings growth of 4%-6% from 2013 through 2015.
In an attempt to further realize gains in its wind power endeavors, Duke is demonstrating some award-winning innovation. Recently winning the top utility-scale energy storage innovation award at the 2013 Energy Storage North America Conference and Expo in San Jose, Calif., Duke Energy's Notrees Battery Storage Project, a 36MW advanced lead-acid battery, is expected to greatly increase the efficiency of the 153MW Notrees Wind Power Project where it is installed by ensuring the ability to quickly regulate frequency and provide ancillary services for grid management.
Bringing power from the projects to the people
One of the companies most responsible for the success of the CREZ is Electric Transmission Texas (ETT), a joint venture between American Electric Power (NYSE:AEP) and MidAmerican Energy Holdings Company. ETT received the second largest share of the CREZ (about 20%), and it's estimated that ETT's total investment is somewhere near $1.5 billion. The project is the largest transmission construction endeavor in AEP's more than one hundred year old history. Impressively, in the third quarter, AEP's transmission operations segment (in which ETT operates) generated $22 million in earnings -- an increase of $8 million over the same period in 2012 -- due to increased transmission investment, according to management. This revenue should increase as the CREZ begins operations.
The Foolish conclusion...
Texas takes wind seriously. In 2012, Texas led the nation in new wind capacity installations with 1,826MW. With the deployment of the CREZ, it seems likely that companies, like Duke and Pattern Energy, will be interested in taking advantage of the state's updated infrastructure. Utilities, among other companies, are not discounting wind as a passing fad, but recognizing it as a viable and reputable energy source. Investors who also choose to not discount it will also find that there are numerous ways to invest in the sector.