The Great Windfall
WITH SECRET MAPS, STATE-OF-THE-ART TURBINES, AND A LITTLE LUCK OF THE IRISH, A DUBLIN-BASED GREEN-ENERGY STARTUP IS DOING WHAT SO MANY OTHERS HAVEN'T: TURNING A PROFIT BY GENERATING ELECTRICITY OUT OF THIN AIR.
(Business 2.0) – When Seamus Herron and his brother John inherited 1,100 acres of rugged farmland in Donegal, Ireland, in the 1970s, neither was sure whether it was a blessing or a curse. The northern tip of Ireland is too cold, cloudy, and strewn with boulders to grow much of anything beyond Christmas trees, and the bogs are too soft to support cattle. After striking out with alternatives--like raising ostriches--the Herrons fell back on Donegal's centuries-old staple of herding hill sheep. The cantankerous creatures with black faces and curved horns generate a break-even business at best, because their wool sells for just 20 cents a pound. But today a new source of wealth in Donegal has blessed the Herrons. Along a series of high ridges, 18 wind turbines installed five years ago by a Dublin-based startup called Airtricity run day and night on a steady 16-knot breeze. Together the machines produce 12 megawatts of electricity, powering about 8,000 homes in the area. More important for the Herrons, they generate an annual royalty of roughly $55,000. And because of its unique wind characteristics, the property has appreciated as much as 100-fold, making the erstwhile shepherds multimillionaires. Says Seamus with a sheepish laugh, "I have no regrets whatsoever about getting into the wind business."
Neither does Eddie O'Connor, Airtricity's tirelessly enthusiastic CEO. In just six years, Airtricity has built nine wind farms in Ireland and the United Kingdom, which together generate about 200 megawatts and $155 million in revenue, making it the fastest-growing independent wind-power producer in the world. The privately held company holds leases on additional land that could produce another 3,600 megawatts--more than half of the current U.S. wind output. It sits in the vortex of the trillion-dollar global power market, where issues of climate change and oil dependency are opening more doors than ever for entrepreneurs. Airtricity's most advanced wind farm, located in Arklow Bay, seven miles off Ireland's east coast, uses the largest commercial turbines in the world.
That Airtricity's turbines are turning a profit--a projected $10 million this year--makes the company a rarity among hundreds of wind-power firms around the globe. Its secret? Airtricity figured out how to sell power directly to retail customers, bypassing utilities altogether. "It's a miracle in Ireland," O'Connor says, "because it has the least environmentally friendly government in the world."
But that's just the start. Airtricity is already buying up wind sites in the United States, where O'Connor wants to import his retail model. He's also been pitching governments on creating "supergrids" along Europe's Atlantic coast and across the United States that would be fed by hundreds of massive wind farms. O'Connor may share a popular goal--to cure the West's addiction to oil and eliminate the greenhouse gases released by coal-fired power plants--but he's among the first to show that serious money can be made along the way.
From the start, O'Connor had an edge over like-minded entrepreneurs in the United States and other countries. Because it's surrounded by so much open ocean, Ireland has the most concentrated wind corridors in all of Europe. Between 1840 and 1900, the country was the scene of the last golden age of windmills--two centuries after they'd peaked in Holland. Until electrical power generated by coal-fired plants took over at the turn of the last century, Ireland was dotted with the wood sails of mills that ground corn and grain into flour.
By the time the first modern wind farms were built in California's Central Valley in 1981, a Dublin Institute of Technology engineering professor named Brian Hurley was trying to persuade utilities to exploit Ireland's wind corridors on a grander scale. Hurley finally caught the attention of the Irish government, which in 1988 hired him to survey the country. Hurley spent two years in a Renault hatchback stuffed with maps and field notes. His study, released two years later, pinpointed Donegal as Ireland's most prized wind asset.
The report went unnoticed until 1994, when the Irish government mandated that the state-owned Electricity Supply Board--a monopolistic dinosaur for most of the 20th century--start buying a portion of its power from wind producers. That's when Hurley got a call from O'Connor, an old college buddy who had been a senior executive at ESB for nearly two decades and had undergone a green conversion after studying global warming. "I'd been running another utility that was a big polluter," O'Connor says. "I wanted to turn it into a wind company, but it didn't happen. So I quit and did it on my own."
O'Connor had already raised $500,000 from friends and associates to form a startup, called the Future Wind Project, and had begun prospecting sites. The advent of computerized turbines during the previous decade had cut production costs nearly in half, making wind much more attractive to investors. The two began scouring Hurley's notes for intelligence on farmers who sat on the best land. By the time they got to the Herrons in 1996, a competing prospector had already staked a wind sensor on one of their bogs. O'Connor began courting Seamus by telling him he was bringing a world-renowned scientist to assess his land. "The wind was howling, and the rain was horizontal," Hurley recalls. "I trudged around with Seamus, saying how many more turbines we were going to put in and where. But in actual fact, I couldn't see a damn thing."
Ultimately O'Connor won over the farmer by bringing him into the company. He gave the Herrons a 10 percent stake in the wind farm and a 2.5 percent royalty on electricity sales, and hired Seamus to recruit neighboring farmers into the business. As a sheep farm, the real estate was worth as little as $1,000 an acre. The Herrons' 12-megawatt farm now brings in $2.2 million a year in revenue, and Seamus estimates his property value at upwards of $100,000 per acre.
O'Connor came out with an even sweeter deal. Seamus Herron talked a dozen other landowners into a deal to build an adjacent turbine cluster. "We ended up developing almost 80 megawatts around that site," Hurley says. It's now the largest wind park in the British Isles.
Not bad, considering that while he was brokering the deals, O'Connor was essentially broke. Having burned through his seed funding, he needed $13 million for the first set of turbines from Denmark's Vestas, the world's largest maker of wind-power gear. O'Connor got a bank loan to cover about half the sum, then raised another $10 million by selling a 51 percent stake in his startup to National Toll Roads, a cash-rich company under pressure from shareholders to expand its portfolio. With the NTR and Vestas deals in place, O'Connor's startup, renamed Airtricity, was off and running.
Soon after, Airtricity made another breakthrough: Up until 2000, when deregulation broke open the Irish power industry, the company had lost every bid it had entered to sell power to O'Connor's former employer, ESB. The utility typically offered bulk discounts to large customers like factories and made its fattest profits off little fish. So O'Connor decided to quit jockeying for ESB's business and compete head-to-head. In a country with a history of populist uprisings, it wasn't difficult to steal away enough customers to be able to sell power directly. Says O'Connor, "The customers give us independence from utilities."
Do they ever. By 2002, Airtricity had signed up more than 20,000 retail customers and sold power directly from its wind farms. Today it has 40,000. As a result, it has been able to pocket the middleman's markup on the power, an enviable gross profit margin in the high teens. Says O'Connor, "We totally rewrote the rules."
Thus far, O'Connor operates eight wind farms in Ireland and the United Kingdom, and next year he'll take over a ninth, the Arklow Bay site. The place looks like something out of Chariots of the Gods--therworldly technology left by an advanced civilization. Seven turbines spread out over two miles rise 350 feet out of the ocean with rotors that slice the air at 200 mph.
As with the Donegal wind farm, O'Connor had to move quickly to get Arklow planned and built--once again with no money down. He won over a top bureaucrat at Ireland's Ministry of Energy, who championed the project. Then O'Connor persuaded GE to pay for and install the $7 million turbines and handle any overruns or repairs. As part of the deal, Airtricity can buy the facility back from GE next year at cost.
What does GE get out of it? A showcase for the world's most advanced turbines. "Airtricity came up with one of the best offshore sites I've seen," says Todd Wynn, GE's top manager for the Arklow project. "We see them as a growing customer with great wind assets."
That kind of clout is allowing O'Connor to chase American winds just as aggressively. O'Connor has plenty of cash after raising about $140 million during the past two years. At the same time, Airtricity's North American general manager, Martin McAdam, has been building a network of landowners and wind prospectors--American equivalents of Seamus Herron. While most operators are bidding on contracts for corridors in Arizona and California, Airtricity is going where the others are not. Thus far McAdam has 1,250 megawatts' worth of sites in development in New York, Pennsylvania, and Texas, as well as top-secret spots in Colorado, Idaho, and New Mexico.
McAdam's decision to head in a different direction isn't just about supply and demand; there's politics to consider too. In order to export its Irish model and sign up customers as an electricity retailer, Airtricity will have to do it in highly deregulated states. Texas is the most open power market on the planet; utilities there buy wind power from small operators for just $30 per kilowatt-hour and then sell it for the going wholesale rate of $45 to $50--exactly the kind of gross margin that Airtricity was designed to exploit.
That's the plan anyway. But things can easily be blown off course in the wind business. Most U.S. wind utilities, for instance, are currently parking their investment funds because a federal tax credit (key to both financing and generating profits) is set to expire at the end of the year. If Congress doesn't renew it, Airtricity could find itself stuck with millions of dollars' worth of useless turbines. Or, because it has no track record in the United States, it might not be able to lure customers away from well-known utilities.
Overcoming those obstacles is, not surprisingly, the least of O'Connor's ambitions. His concept of supergrids addresses one of the central criticisms of wind power. Unlike a coal plant, which is fed a constant supply of the black stuff, a wind turbine fluctuates with wind speed, creating a problem for the power grid, since electricity has to be served in a constant stream to users and can't be stored. O'Connor says the United States could sidestep the problem by building 1 million megawatts' worth of farms across the Great Plains, the windiest part of the continent. With so many turbines spread over a wide area, output would be nearly constant. If a wind park in Montana was operating at 10 percent below its average output, another in New Mexico enjoying above-average gusts could make up the difference. Such an enterprise, O'Connor says, could generate enough power to meet the nation's entire demand: "Once the grids are built, you generate power at zero fuel cost, no emissions, and no water pollution. Forever."
Sure, this may sound like so much hot air. But it's alluring enough for O'Connor to embark on his next quixotic adventure: talking to government officials in hopes of raising the estimated $2.5 trillion it would take to make the dream come true.