Wind Power: Crisis: What Crisis?

"You could say we have been too optimistic for too long," Ditlev Engel, chief executive of Vestas said last October as the company cut its workforce by 15%. He later qualified these words, saying it was right to study the markets before taking "tough decisions" to close four production units in Denmark and another in Sweden, but it was inevitable this phrase would make headlines, sending shockwaves across the industry.

Vestas' move was in response to shifting fortunes, and shifting global markets. "If you can make a turbine in Asia and deliver it to Europe at a comparable price to making it in Europe, we have a problem," said Engel. "So we have to make sure we can always compete with what we call 'Asia plus freight'."

Logistics has not been the only problem facing wind power unit producers in a worsening context as the global economic crisis strengthened its hold. In addition to fiscal constraints in Europe, demand for wind turbines has been hit by lower fossil fuel prices and credit scarcity since the onset of the financial crisis. Reduced political momentum has become another negative factor.

Comments from Vestas' CEO Ditlev Engel on cutting 3000 workers in Europe prompted wider market concerns about the wind sector's prospects (Source: Vestas)

Industry observers had warned of overcapacity in Europe for some time. Engel said his company was responding out of financial necessity, diverting production capacity where manufacturing is less costly, while retaining development and research activities in Denmark. It was a strategy, he said, essential to preserve Vestas' profitability in the years to come.

But if it was a "readjustment" that many had seen coming, is also represented a rationalisation that sent industry forecasters hurriedly back to their desks. Immunity is no longer a word being bandied about in wind power circles when the biggest multinationals are apparently preoccupied weathering the current economic crisis.

A Goal to Sustain an Industry

At least the producers have access to markets that have goals to reach. Or, at least, that is the theory. At the centre of wind's meteoric rise in Europe has been the need to cut greenhouse gas emissions by 20% by 2020 compared to 1990 levels to boost economic growth, maintain technology leadership and keep climate change in check.

Wind power's fortunes remain firmly hitched to ever more demanding carbon reduction targets and the European Wind Energy Association (EWEA) asserts that the current target has become easy to meet because of recession, leading to lower industrial activity. EWEA stresses a 30% cut by 2020 remains a crucial first step to the 80%—95% emissions cut by 2050 already agreed by the European Union heads of state. The cut is considered essential if Europe is to maintain its leadership in renewable energy technologies such as wind energy, and to create new jobs, become more competitive, and avoid losing ground to other regions. The loss of 3000 jobs in northern Europe is all the more painful as investing in renewable energy - and wind power specifically – is central to the EU's wishes to create a million new jobs through local manufacturing, growing GDP by an estimated 0.6%.

EWEA says the benefits of a move to 30% outweigh the costs. It cites the International Energy Agency (IEA): 'Every year of delayed investment in more low carbon sources adds €300—400 billion to the price tag'. If the reduction target was to remain at 20%, a much higher and more expensive reduction effort would be necessary post-2020. Moreover, the recession has reduced the cost of meeting the 20% target from €70 billion to €48 billion per year in 2020, or 0.32% of GDP, according to the European Commission.

Over the next five years, global wind power capacity is poised to grow almost threefold to nearly 450 GW from 160 GW, taking the sector's market value to $124 billion in 2014, from $75 billion in 2010, according to BTM, the Danish wind energy consultancy firm. BTM predicts that, if capacity continues to grow, reaching 1 TW by 2019, wind energy would then account for more than 8% of world electricity production, compared with around 1.6% in 2010.

Gamesa, GE and Siemens are all planning to invest in UK manufacturing (Source: Gamesa)

Almost a year ago, the Global Wind Energy Council (GWEC) reported that the global markets would continue their rapid growth, with the world's wind power capacity increasing by 160% over the five years to 2014. Its next annual industry forecast is expected to be similarly bullish.

In 2010 GWEC expected that the global installed wind capacity will reach 409 GW by 2014, up from 158.5 GW at the end of 2009. This assumed an average growth rate of 21% per year, which is conservative compared to the 29% average growth that the wind industry experienced over the past decade. During 2014, it said, the annual market will be more than 60 GW, up from 38.3 GW in 2009. In the past, these projections have regularly been outstripped by the actual performance of the industry and have had to be adjusted upwards. Despite the ramifications of the financial crisis, 2009 was no exception, and 2010 is expected to follow the trend. 

It is news that should hearten the likes of Engel who, after his company's painful crash diet, believes Vestas is more strongly positioned to take advantage of emerging markets than ever before, even as it reported a nine month loss in earnings to September 2010, blaming staff cuts on a gloomy industry outlook which will see it secure an estimated 7000-8000 MW of turbine orders in 2011, down from the 8000—9000 MW of last year.

So despite being downgraded by numerous investment institutions, including recently, Barclays, producers generally remain emboldened by mainly optimistic regular industry forecasts. Another industry report, from Nomura, predicts an almost 15% rise in global installations this year on the back of double-digit growth in the Americas and Asia where, coincidentally, more than half Vestas' orders originate. The UK and Germany are expected to pick up some of the slack in Europe, where the recession and reduced subsidies in countries such as Spain have taken a toll. Overall, international IPPs have continued to drive the market forward in spite of tight financial conditions.

A Global Issue? 

It would appear there is some evidence to show that it is in Europe where the severity of economic woes are being felt most. But there are worries, also, in the US and even in China, which has so far avoided the downturn but which has seen growth rates tumble. 

The US remains on top in terms of cumulative installation, but last year experienced its slowest quarter since 2007. As development continues, the Department of Energy estimates that 54 GW of offshore wind could be included in the 300 GW required to meet 20% of the US electricity needs by 2030, with the best offshore wind resources in the north east and the Atlantic Coast from Georgia to Maine.

However, last year saw the development of wind power continue to be hampered by an ongoing tightness in the financial markets and the overall economic downturn. Countering this, to some extent, were the provisions of the government's Recovery Act, in particular the grant programmes, and there remain legislative uncertainties at the federal level in Canada, resulting in forecasts for a North American market that will stay flat for at least another year, and then pick up again in 2012 to reach a cumulative total of 101.5 GW by 2014 (up from 38.5 GW in 2009). This would translate into an addition of 63 GW in the US and Canada over the next five years. "America has the best wind resources in the world," Engel told Forbes magazine a couple of years ago. 'Not harvesting America's wind would be like going to Saudi Arabia and not drilling for oil."

But a study of the US market for wind power by IHS Emerging Energy Research, "US Wind Power Markets and Strategies: 2010-2025," predicted that 2010 would be the first time since 2004 that the American wind industry would fall short of the previous year's growth, despite unprecedented federal wind incentives. The study blamed reverberations from the financial crisis which continue to create a difficult near-term market landscape, especially in light of stubborn energy policy uncertainty.

More than Half of Vestas' orders come from beyond Europe (Source: Vestas)

The US market is in the grip of a slowdown, brought about by a lack of federal direction, creating an unstable business environment across America. Virtually nowhere is exempted. "It's a national market issue right now," says Paul Lucy, director of the North Dakota Economic Development Division. "If you look at the stats put out by the American Wind Energy Association (AWEA), depending upon which quarter of the year you look at, they've seen a decline in the installation of wind power, wind generation farms anywhere from 50 to 70%," he says.

"Without an energy policy, we have some uncertainty in the industry, which creates an unstable business environment," added Lucy. "Utilities then become less eager to enter into those power purchase agreements." Without that demand, wind farm equipment manufacturing companies throughout the country, including North Dakota, have been laying off employees. Another obstacle for wind farms is a lack of transmission lines. Lucy says a federal energy policy would also help address that issue.

Last July, AWEA published figures showing a collapse in new capacity added in the sector. In the second quarter of the year, only 700 MW of wind turbines were installed in the US, down 71% from the same period in 2009. Elsewhere, officially, as is outlined in the IHS study, the US is still on track to add more than 165 GW of new capacity through 2025. The Midwest, Great Plains and Rocky Mountain states will act as major wind power export hubs to other areas, including California, the South and the Mid-Atlantic. Wind was set to represent US$330 billion in investments between 2010 and 2025, while offshore wind projects will only account for only 5% of total installations by 2025. Transmission issues, said the report, continued to be a barrier to wind projects.

China Is The Champion, But Europe Not Out Yet

China, like Europe, sees wind power as an important contributor to its stated goals of reducing carbon intensity. But China is even more ambitious, aiming for a 40% reduction by 2020. In 2009, the country accounted for one-third of total annual wind capacity additions, with 13.8 GW worth of new wind farms installed. This took China's total capacity up to 25.9 GW, thereby pushing China past Germany as the country with the most installed wind power capacity by a narrow margin. According to the Chinese Wind Energy Association, new capacity added has doubled every year since 2006.

With an unofficial target of 150 GW of wind capacity by 2020 – an ambitious target that looks set to be exceeded well ahead of time – the Chinese government will remain one of the main drivers in the coming years, with annual additions expected to be over 20 GW by 2014. Although the government has expressed concerns about the overheating of Chinese turbine manufacturing, any precautionary measures are likely to be targeted at production rather than the deployment of wind turbines. China's growth is underpinned by an aggressive policy supporting the diversification of the electricity supply and a burgeoning domestic industrial base.

Fiscal constraints mean that growth in new wind energy installations in Europe is forecast to shrink from 14% in 2010 to 1% this year, according to analysts at Citigroup. But, the European bubble isn't ready to burst yet. With an aggressive focus on offshore development, no country or region is moving at a faster pace than Europe. According to figures released by EWEA, installations increased 51% in 2010. And this is being translated into manufacturing investment which is seeing some pockets of investment. For instance, the wind giant Gamesa has advanced its strategy to make the UK the core of its worldwide offshore wind business by proposing to set up its marine wind technology centre in Glasgow, Scotland, a move that could see the creation of 130 jobs in the country's largest city.

Gamesa's announcement comes just a few months after it unveiled an industrial plan for offshore wind power in the UK, where it plans to invest over €150 million through 2014. In addition to its offshore technology centre in Glasgow and a potential industrial, logistics and O&M base in Dundee, Gamesa's offshore wind strategy for the UK includes construction of a blade production plant and engaging in offshore logistics from a number of UK ports, around which it will locate its wind turbine O&M operations.

Assuming financial conditions remain favourable, EU officials and EWEA say up to 40 GW could be installed in the North Sea region by 2020.

Aside from Gamesa, General Electric and Siemens, among the world's biggest wind power companies, are planning to invest more than £300 million ($475 million) in the UK in the next three to four years, creating an estimated 3600 jobs. Up to 70,000 jobs in offshore wind could be created in the UK by 2020, according to government estimates.

Europe also continues to lead the field in research and development and will continue to be host to the largest wind capacity until 2014 (136.5 GW), when it will be overtaken by Asia (148.8 GW), according to GWEC. By 2014, the annual European market will reach 14.5 GW. In its 2010 round-up, EWEA also predicted a good 2011 for offshore wind, with 1-1.5 GW of new capacity connected in Europe.

In Europe, EWEA also highlighted a number of other trends emerging during 2010. They included a steady flow of investment announcements from utilities, which have continued to increase their balance sheet commitments to the sector, while national and international finance institutions such as the European Investment Bank (EIB) and export credit agencies have been essential allies in the development of the sector during a particularly difficult economic period. These, says EWEA, are likely to remain active in the sector in the coming year, providing critical liquidity at a low cost, ensuring that a smooth transition can be engineered towards a more mature market when commercial banks are more able to undertake large transactions without them.

It is clear that even giants like Vestas are not immune from the volalities of the regional market, but it is also clear that the global wind sector is nothing if not robust.