USA - GE renewables unit gets a favorable wind

It's hard in a business where you are literally, as well as figuratively, tilting at windmills. But that business may have just received its biggest tail wind yet. When President George W. Bush called last month for more effort in alternative energies, the 300 engineers and financiers at GE Energy Financial Services, a business that last year attracted about $7 billion in investment in the United States, were cheering. "The renewables space has really heated up, and I hope it will account for 20 or 30 percent of our investments in five years," said Alex Urquhart, the unit's president. For now, wind energy is the only profit star in General Electric's alternative energy galaxy, and both the finance and equipment sides of the company know they are gambling when it comes to solar and other fledgling technologies. Still, analysts applaud their decision to move.

"When you get the president talking about renewable energy, it has to be turning up the dial at GE," said Deane Dray, an analyst at Goldman Sachs. Energy Financial Services, however, recently bought a wind farm in Germany and already was installing turbines there at a rapid pace. It has invested in solar energy farms in California and was in the last stage of negotiations for a large solar project in Europe. Renewable energy projects already account for $1 billion of the unit's $11 billion portfolio and are its fastest-growing niche. "The president's speech changed zero for us; it was simply a recognition of what we already knew," said David Calhoun, vice chairman of GE Infrastructure, the group that includes both turbine manufacture and energy financing. Energy equipment and related services, which accounted for about $42 billion of GE's $149.7 billion in revenue last year, is the company's largest industrial business. Alternative energy products like wind generators accounted for less than $6.3 billion of last year's sales. And today, alternative energy financing is barely a footnote in GE's revenue stream.

But the GE machine is gearing up for change. In five years, GE expects that alternative energy products will account for more than a quarter of its energy equipment revenue.
If that happens, it will probably be a boon for Energy Financial Services, too. Last year, energy financing got plucked out of GE's finance stable and placed under Calhoun's umbrella, along with the equipment makers. The financial team members say that working side by side with the technical equipment gurus is helping them choose among potential investments. They get early alerts, they say, on which blade designs and composites make the most efficient wind turbines, on whether solar energy is gaining momentum, or whether the resale or reuse value of the technologies will be worth anything if a project does not work out or a borrower defaults. "Only 60 percent of our projects involve GE technologies, but the global research center helps us decide which technologies to invest in," said Kevin Walsh, managing director of Energy Financial's new renewable energy group. GE is not alone in backing renewables, of course. In November, Goldman Sachs committed itself to investing $1 billion in renewable energy, and it is already "well on its way" to achieving that, according to Lucas van Praag, a spokesman. J.P. Morgan Chase has said it will invest more than $250 million in wind energy projects. And venture capitalists have for some time been investing in smaller renewable energy projects and technologies.

According to the American Council on Renewable Energy, about $7 billion was invested in renewable energy projects last year, and Michael Eckhart, the nonprofit group's president, expects investments to increase by 25 percent a year. Eckhart and many others said they believed that, if Bush's imprimatur resulted in new regulations or tax incentives, even more Wall Street money would be attracted to projects that glean energy from sources other than oil and gas. Wind power seems to be the favored alternative energy source these days. The costs of turbines have come down even as their reliability and efficiency have increased, and GE, Goldman, J.P. Morgan and others are snapping up wind farms across the world. In contrast, persistent shortages of silica, needed to make solar panels, have kept the solar energy sector from soaring. And few Wall Street dollars are going to projects that involve wresting megawatts from agricultural waste, be it crops like corn or the switch grasses that Bush mentioned or methane generated from manure.

The president's speech may change that. "Now that the president has put the power of the bully pulpit behind ethanol, a lot of conservative people who thought biofuels were silly will view them as a mainstream investment," Eckhart predicted. For now, though, investors say the logistics of selecting sites for factories and transporting biofuels keep such fuels from being economically viable. "George Bush said interesting things about potential opportunities in biomass, but we need a better understanding of any legislative or regulatory changes his comments might spur," van Praag of Goldman said. GE Energy Financial Services has taken a few tentative steps toward biomass, though. It has a longtime, if small, investment in plants that burn wood chips for fuel. It is seeking advice about potential biofuel investments from colleagues at Jenbacher, an Austrian company that GE bought in 2003 and that makes generators that run on gases emitted from landfills. "I'm going to keep calling our people in Washington and see what kind of rule-making is evolving around the biofuel idea," Urquhart said. In the meantime, Urquhart is keeping his eye out for biotechnology projects that might merit investment now. Calhoun has his eyes peeled on Urquhart's quest, in case it turns up something GE should buy or make.