A Chill Blows Through Wind Power

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"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 .