Vic Abate expects that many makers of gearboxes, towers and blades for wind turbines will go under next year. He should know -- as vice president of General Electric Co. (GE:US)’s renewable energy business, Abate is the executive who will seal their fates.
With a federal tax credit that subsidizes the U.S. wind industry set to expire at the end of 2012, GE is scrutinizing its supply chain (GE:US). Uncompetitive vendors will be culled, Abate said, while stronger suppliers will be offered operational and financial assistance.
The looming shakeout may give GE, the top turbine maker with 29.4 percent of the U.S. wind market in 2011, an opportunity to wring better terms from its 200-plus vendors. The company has as many as 10 suppliers for some components now, a figure that may dwindle to just three once Abate is done, Bloomberg Businessweek reports in its June 11 issue.
“We’re in the process of picking winners and losers,” Abate said.
Manufacturers of turbines and parts will shed an estimated 10,000 workers in the U.S. this year in anticipation of a slowdown in orders, according to the American Wind Energy Association. If Congress doesn’t extend the production tax credit, that figure will hit 37,000 in 2013 -- about half the industry’s workforce.
The incentive, first offered in 1992, grants owners of wind farms a credit equal to 2.2 cents per kilowatt-hour for electricity produced over a 10-year period. Congress’s Joint Committee on Taxation estimates that extending the break for just one more year would cost $4.1 billion in forgone tax revenue over a decade.
Senator Charles Grassley, an Iowa Republican, one of the sponsors of a bill that would preserve the credit, has said he expects no decision until after the November elections.
“Without an extension this industry is going to be in real trouble,” said Steven Lockard, chief executive officer of TPI Composites Inc., a Scottsdale, Arizona-based maker of blades that counts GE among its financial backers and customers. “The job cuts are coming pretty quick, depending on where you are in the supply chain.”
Renewing the credit near the Dec. 31 deadline would still mean a lag time of six to nine months for production rates to rebound, Broadwind Energy Inc. (BWEN:US) CEO Peter Duprey said during a May 9 conference call with investors. The Naperville, Illinois- based maker of steel towers for turbines got more than 10 percent of its 2010 sales from GE.
Kaydon Corp. (KDN:US), an Ann Arbor, Michigan-based manufacturer of ball bearings that counts on GE for 10 percent of its revenue, is also bracing for tough times. “There will unquestionably be a dropoff in wind shipments and production,” Kaydon CEO James O’Leary said in a May 9 conference call.
Uncertainty over the tax credit is making it hard for developers to plan new projects.
“If I don’t have that long-term outlook I can’t find investors,” said Gabriel Alonso, CEO of EDP Renewables North America, the U.S. development unit of Portugal’s EDP-Energias de Portugal SA. “Right now utilities are not contracting for long term power for 2013.”
GE, based in Fairfield, Connecticut, is in a better position to weather the loss of incentives than its suppliers. Its orders for wind turbines more than doubled to 696 turbines in the first quarter, from 327 turbines a year earlier, partly because wind-farm developers are scrambling to beat the December deadline.
GE suppliers will be scored on efficiency, quality and price, along with the strength of their balance sheets. “The ones that have the best quality and the lowest cost position are the ones that are going to win,” said Abate.
Sounds like “Survivor,” the reality-TV show pioneer. Except in Abate’s version, there’s no 11th-hour immunity. “Once you’re out, you’re out,” he said. “There won’t be any head- fakes.”
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