Blowing in the wind
Comment of the Day

November 10 2010

Commentary by Eoin Treacy

Blowing in the wind

Thanks to a subscriber for this report by John Kirjee and colleagues for Deutsche Bank covering the Australian wind sector. Here is a section:
Fundamental: 20% renewable energy by 2020 - where will it come from?
The Australian Federal Government has mandated 20% of Australia's electricity must be sourced from renewable generation by 2020. While the scheme is now in its third iteration as the Large-scale Renewable Energy Target (LRET), the legislation enjoys bipartisan political support and implies significant increases in renewable generation over the next decade in Australia. What technology will be the dominant contributor to the required growth?

Industry: Renewables currently represent 6.5% of Australian generation In 2009, approximately 6.5% of Australia's total electricity load was generated from renewable sources. However this number is misleading given the dominance of legacy hydroelectric projects in the Snowy Mountains and Tasmania. Backing out legacy hydro assets that are only eligible for Renewable Energy Certificates (RECs) above historic generation levels we estimate the number is closer to 1.5%, further underlying the challenge that 20% by 2020 represents.

Thematic: Plenty of good ideas, few are commercially economic If we had a dollar for every novel low carbon technology we've uncovered, we might just be able to fund one of them. Carbon Capture and Storage could keep Australia's coal fleet viable, while geothermal, photovoltaic solar, thermal solar, wave, tidal and biofuels all seem to work in the laboratory on or a small scale. We see the issue is one of economics not technology, as the timeline to 2020 is simply too short to enable the economic development of novel technology.

Eoin Treacy's view Governments keen to increase the production of renewable energy are turning to wind as the most cost effective option so far. However, with this trend has come increasing competition, particularly from low cost Chinese manufacturers with privileged access to the requisite raw materials. The result has been that early leaders such as Vestas Wind Systems and Gamesa find themselves in a radically different trading environment with their shares reflecting both margin compression and loss of market share. (Also see Comment of the Day on November 4th and September 9th 2010). This article by Ben Sills and Christopher Martin for Bloomberg focusing on M&A may also be of interest.

A number of Chinese companies focused on the wind sector have recently gones public. Hangzhou Advance Gearbox Group on the Chinese mainland, Xinjiang Goldwind Science & Technology in Hong Kong and China Ming Yang Wind Power Group in the USA have all listed in the last few months.

China Longyuan Power Group continues to range mostly above HK$7.75 and a sustained move below that level would be required to delay scope for some additional higher to lateral ranging.

Dongfang Electric is not a pure wind play since it also has interests in nuclear and hydro. The share remains in a relatively consistent, albeit increasingly overextended uptrend. A sustained move below HK$37 would break the progression of higher reaction lows and likely signal the onset of a medium-term reversion to the mean defined by the 200-day MA.

China High Speed Transmission has been ranging mostly above HK$15 for 18-months and needs to sustain a move above HK$20 to indicate a return to medium-term demand dominance.

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