Energy

A Chill Blows Through Wind Power


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The green energy sector has a lot riding on 2009. Policymakers from Washington to Beijing have pledged billions of dollars in "cleantech" investment to jump-start the depressed global economy and create millions of new low-carbon jobs.

That should be a boon to the wind power industry, which is working to harness the world's second-largest source of renewable energy after hydroelectric. As with the solar industry, wind power has been hit by a sudden slowdown in private sector investment as credit has dried up and the price of oil has fallen from its mid-2008 high. The industry hopes public spending will help fill the gap until the global economy gets back on its feet.

The multibillion-dollar stimulus packages are particularly important for Europe, which remains the largest wind energy market worldwide and is home to six of the world's top 10 wind turbine manufacturers. Despite the Continent's dominant position, companies ranging from Denmark's Vestas (VWS.CO), the global leader in turbines, to Spain's Iberdrola (IDRO.F), the world's largest developer of wind farms, have been forced to cut back to meet the new economic realities.

According to market researcher Emerging Energy Research (EER), new installed wind capacity worldwide will increase by just 14% in 2009—less than half the typical annual growth rate booked in the past decade. Consultancy Accenture (ACN) projects wind power capital expenditures over the next two years could fall by as much as 30%.

Falling Demand

The slowdown is closely tied to the global economic crisis. Project financing costs, a critical element in this capital-intensive sector, have skyrocketed as banks cut back on lending. Scores of independent (and often highly leveraged) energy producers have already been pushed out of the market. That could cause demand for wind turbines to fall by as much as one-third in 2009, as only cash-rich utilities such as Florida Power & Light (FPL) have the means to continue investing.

With sales soft, Europe's turbine manufacturers have been forced to cut prices to offload unsold inventory and to shut down costly plants built to accommodate now-reduced global demand. Profit margins have fallen in tandem. "[The] financial crisis is noticeably impacting the global wind industry in the short term," says Keith Hays, EER's global wind research director. "It's impacting the global wind project finance market and the equity values of major listed wind energy players."

Until U.S. President-elect Barack Obama outlines more details about his proposed $150 billion, 10-year plan to invest in green energy, analysts reckon investors will shy away from the sector. The ISE Global Wind Energy Index, which tracks 57 wind-related stocks, has fallen 56% in the past year. Shares in Vestas and its Spanish rival Gamesa (GAMS.F)—the first- and third-largest global turbine suppliers, respectively—are down by more than two-fifths over the same period. And General Electric (GE), ranked No. 2 globally, has lost 57% of its market capitalization since the beginning of last year, though the U.S. company is much more diversified than its European competitors.

"We expect [wind turbine] overcapacity across the industry and think this could have an impact on all players," says Credit Suisse (CS) analyst Mark Freshney. "Vestas and Gamesa may benefit through taking a higher market share, but growth still will be lower."

It's a remarkable change of tone from just 12 months ago, when insatiable demand for turbines prompted delivery delays of up to two years. At the time, energy producers were so desperate to get their hands on windmills that many turned to a lively secondhand turbine market to meet their needs.

High Cost of Capital

For European players, the toughest problem now is rising financing costs that render many wind projects no longer cost-effective. Industry watchers figure the cost of capital has jumped by up to 200 basis points (two percentage points) over the past six months as banks embraced more conservative lending practices. The increase particularly has hurt scores of speculative developers who jumped into the wind power generation business but lacked the deep pockets of utilities. Late last year, for instance, U.S. entrepreneur T. Boone Pickens said he would scale back a planned 4,000-megawatt wind farm in Texas due to the high cost of capital.

"Smaller developers below the publicly traded radar screen [will] be more affected since they are reliant upon the project finance market," a recent Credit Suisse report said.

It's not just small producers cutting back on wind investment. Capital costs for large, cash-rich European utilities, such as France's EDF (EDF.PA) and Germany's E.ON (EONGN.DE), have also risen by roughly 50 basis points since September 2008. In response, Spain's Iberdrola, which owns the second-largest wind energy company in the U.S., has cut its expansion plans by almost one-third, as has smaller Spanish player Acciona (ANA.F).

These reductions, in turn, are forcing European wind turbine manufacturers to scale back their production and expansion plans. Both Vestas and Gamesa announced temporary plant shutdowns in the fourth quarter of 2008, while other European companies such as Germany's Siemens (SI) and Nordex (NDXGK.DE) are mulling similar moves. Analysts now project it will take European companies until 2012 to install the production capacity they had previously planned for 2010.

To make matters worse, European turbine makers also face more competition from cheaper Asian rivals. Danish renewable energy consultancy BTM Consultants believes about 18% of the world's turbines are now manufactured in India and China, compared with 67% in Europe. Birger T. Madsen, BTM's founder, says Asia's share will continue to rise, putting increased pressure on European suppliers' margins. "Asian manufacturers will continue to gain ground," he says.

Faced with a tough business environment, Europe's wind industry certainly would benefit from any increases in government spending. In the long term, industry watchers say, the business case for wind remains intact. Indeed, global wind capacity is expected nearly to double by 2020. But for now, public sector help seems needed. Says Sak Nayagam, climate change lead at Accenture: "Government help for the wind industry could provide a much-needed economic stimulus."

Scott is a reporter in BusinessWeek's London bureau .


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