Bloomberg News

Vestas Jobs Threat Pressures Obama to Extend Tax Break

January 25, 2012

(Adds shares in fifth paragraph.)

Jan. 13 (Bloomberg) -- Vestas Wind Systems A/S’s threat to fire 1,600 workers in the U.S. undermines President Barack Obama’s goal of creating green jobs and adds to pressure on Congress to extend a tax credit that the industry relies on.

The world’s biggest maker of wind turbines said yesterday it will probably reduce its staff beyond the 2,335 posts it’s eliminating worldwide if the U.S. doesn’t renew the so-called Production Tax Credit, which expires at the end of this year.

“We will evaluate it during 2012 depending entirely on how the political situation evolves,” Chief Executive Officer Ditlev Engel said in an interview in Copenhagen. U.S. jobs will be scrapped “for sure” without the credit, and a decision is due “no later than the fourth quarter,” he said.

Obama took office three years ago pledging to generate jobs in the wind and solar industries, and calling in January 2011 for a “Sputnik moment” to wean the U.S. off fossil fuels. Since he came to power, carbon cap-and-trade legislation stalled and lawmakers attacked backing for solar manufacturer Solyndra LLC, which filed for bankruptcy in September.

Vestas shares have fallen almost 10 percent in two days and were down 2.8 percent to 56.85 kroner ($9.80) at 11:15 a.m. in Copenhagen today. Short positions in the company, or bets that the stock may fall, rose to 20.6 percent on Jan. 11, according to the most recent figures from Data Explorers Inc., a record in a series that goes back to July 2006.

Industry Concern

The Vestas warning adds fuel to the wind industry’s pleas for lawmakers to extend the credit, which grants an incentive worth 2.2 cents a kilowatt-hour of wind power.

Continuing the tax credit is needed to avoid the boom and bust cycles of the past in the U.S., where the wind industry employs more than 75,000 people, according to the American Wind Energy Association, a lobby group. Wind power growth is also threatened by natural gas prices, which fell almost a third last year as production from shale formations reached a record.

“The production tax credit is incredibly vital to the U.S. market,” Jacob Pedersen, an analyst at Sydbank A/S who correctly predicted the scale of the Vestas cuts, said in a phone interview from Aabenraa, Denmark. “If it isn’t there, no one will invest. If you don’t get the tax credit, the return on investment is lower.”

Tax Credit

The last time the production tax credit, or PTC, was allowed to expire, at the end of 2003, U.S. annual wind installations declined, to 397 megawatts in 2004 from 1,670 megawatts the previous year, according to AWEA data.

Vestas said 182 workers in the U.S. were included in its current round of reductions, about 7.8 percent of the total cuts. Most of the employees affected will be in Europe.

“Ultimately, if the U.S. does withdraw PTC support, then Vestas will commercially have no choice” other than firing workers, Charlie Thomas, a London-based fund manager with Jupiter Asset Management Ltd., which owns Vestas shares, said by e-mail. “The boom/bust scenario the industry saw in 2003/4 on the same issue was clearly unhealthy for the wind turbine manufacturers then, as it would be now.”

Another incentive, the U.S. Treasury Department’s 1603 cash grant program, expired Dec. 31. It offered as much as 30 percent of development and construction costs for renewable energy plants, and had paid out $9.6 billion through October to support more than 22,000 projects. Developers said funding for clean energy projects will fall this year without the 1603 program.

Threat to Developments

Letting the PTC expire this year will similarly threaten new development, Denise Bode, chief executive officer of Washington-based AWEA, said in an e-mailed statement.

The “Vestas announcement shows the danger to U.S. manufacturing jobs if Congress waits any longer to extend the production tax credit,” she said. “With stable tax policy the wind industry can grow to nearly 100,000 American jobs in the next four years and support 500,000 American jobs by 2030.”

Engel said that the tax credit ensured that the wind sector “got going” in the U.S., and that its expiration will hurt the turbine maker’s clients.

“It’s not us who gets the PTC, it’s our customers,” Engel said. “I’m sure a lot of them are very dependent on the PTC.”

Vestas has spent more than $1 billion building four factories in Colorado, and it has more than 3,000 employees across the U.S. according to Engel. He said it would be “wrong” to say Vestas will close down its U.S. plants.

Engel’s Assessment

“What we would do would be to ramp them down because the United States market has been coming and going,” he said. “I’m absolutely certain that the U.S. market will come back again, but maybe not in 2013.”

U.S. new installations declined in 2010 to 5,116 megawatts from 9,996 megawatts a year earlier, according to AWEA. Bloomberg New Energy Finance estimates that 2011 installations totaled 7,300 megawatts. U.S. installations may grow to 8,000 megawatts this year before dropping to 5,500 megawatts in 2013.

“The U.S. market has turned into a huge disappointment for Vestas and other wind turbine manufacturers who invested heavily in that market a few years ago when growth prospects seemed strong and turbines were in short supply,” said Justin Wu, a Hong Kong-based analyst with New Energy Finance.

“Now U.S. wind installations are in decline due to continued policy uncertainty and factories are becoming idle as a result,” Wu said.

--With assistance from Sally Bakewell in London, Andrew Herndon in San Francisco and Christian Wienberg in Copenhagen. Editors: Reed Landberg, Will Wade

To contact the reporters on this story: Gelu Sulugiuc in Copenhagen at gsulugiuc@bloomberg.net; Alex Morales in London at amorales2@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net


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