Peterborough, New Hampshire [RenewableEnergyAccess.com] The wind industry is undergoing temporary growing pains similar to the silicon shortage experienced by the solar photovoltaic (PV) industry: there are simply not enough materials or manufacturing capacity to keep up with the increasing demand for wind turbines. The need for steel, copper, concrete and other materials has driven up project costs, restricted turbine supplies and created a difficult market for smaller wind developers.
But despite a two-and-a-half year stretch of materials shortages and rising costs, the global wind industry is experiencing steady growth worldwide and increased acceptance by utilities, governments and citizens.
“Between 2004 and 2005, the global wind turbine market experienced a rapid period of escalation…Within the span of just that year the global demand for wind turbine components and supply jumped to a new plateau and a new rate of growth,” says Joshua Magee, senior analyst for Emerging Energy Research’s (EER) North American Wind Advisory Group.
Much of that new demand was caused by the two-year extension of the production tax credit (PTC) in the U.S., which provided certainty for wind developers and encouraged a slew of new projects. In addition, China and India emerged as major players in the wind market, further straining supply of materials.
As the global market expanded rapidly starting at the end of 2004, the manufacturing capacity was not in place to handle demand. Since 2005, manufacturers have been playing catch-up and pumping out turbines as quickly as developers can put them into the ground. However, because it takes about 20 months to ramp up manufacturing capabilities, the cost increase and turbine shortage is not expected to level out until sometime in 2009, says Magee.
“Given that the global wind turbine industry is an inherently capital intensive industry, manufacturers have spent the last two years making the necessary investments to begin to regain parity with this new level of global demand,” Magee says.
The point of parity couldn’t come soon enough for some developers. Over the last two years, project costs have risen 50% in some cases, according to American Wind Energy Association Executive Director Randall Swisher. But the industry shouldn’t be worried, says Swisher. The long-term economics of wind energy are still very attractive to utilities and their customers. While the price of fossil energies continues to rise, the cost of wind will always stay the same—free.
“In the context of what’s happening in the electric power market more broadly—both here in the U.S. and around the world—wind still can compete quite well. Part of the reason for that is because we are held somewhat harmless from the increased cost of fuel,” says Swisher.
That simple fact has helped the wind industry steadily grow, even through the current period of supply chain constraints. According to the Global Wind Energy Council (GWEC), the global wind industry will grow at an average rate of 19% over the next three years.
From Retail to Wholesale
Because of uncertainty about the extension of the PTC in 2004, many U.S. companies were hesitant to sign long-term supply contracts for turbines. During that time, European companies were expecting increased global demand and locked up deals for much of the available turbine capacity. As a result, a number of smaller U.S. developers are now having a difficult time getting equipment for their projects.
This has opened up opportunities for well-equipped European firms to increase their presence in the fastest growing wind market in the world by acquiring U.S. wind developers, and providing these American companies access to turbines.
PPM Energy, one of the largest wind developers in the U.S., saw the need to make investments in turbines before action was taken on the PTC in 2005. That has since allowed the company to sign long-term supply contracts with Gamesa, Suzlon and Mitsubishi for roughly 3,800 MW of turbines.
“We identified the need to get in front of the PTC. We worked very proactively with the turbine suppliers to mitigate some of the stop-start nature of the industry. That was one of the things that helped us get some of the optimum commercial positions that we do have,” says Harm Toren, Director of Procurement for PPM Energy’s wind business.
This past April, the Spanish utility Iberdrola bought out PPM Energy and its parent company Scottish Power. The acquisition was good for PPM, says Toren, because it gave the company even greater access to turbines and insulated them from excessive cost increases.
In the last two years, Iberdrola has acquired four wind developers in the U.S. Because the company has a 24% stake in Spanish turbine manufacturer Gamesa, it can provide these same companies with the equipment they need for projects.
Meanwhile, manufacturers are positioning themselves to more easily ramp up production of gearboxes, bearings, rotors and towers for the many eager wind developers around the world.
Suzlon Energy Ltd., a turbine manufacturer based out of Denmark, has been vertically integrating itself so that it can more fluidly construct and install wind turbines around the world. In 2006, Suzlon bought Hansen Transmissions, a leading gearbox company. Most recently, Suzlon acquired 33.84% of RE Power Systems, giving the company deeper access to the European manufacturing, maintenance and service markets for wind turbines.
Speaking at a forum on supply chain constraints at AWEA’s WindPower 2007 conference this past June, Andy Cukurs, CEO of Suzlon’s U.S. wind energy business, described how materials shortages have changed the industry.
“The industry…has gone from a retail environment to a wholesale environment where the development pipeline and the risk associated cannot be shared by all parties,” he said.
That means increased consolidation, higher capital requirements and, according to Cukurs, “a better product.” In order for Suzlon to meet the demands of its customers, the company will invest $746 million for all its manufacturing requirements through 2009.
However, consolidation isn’t the only business model playing out among the turbine manufacturers. While companies like Suzlon and Gamesa are vertically integrating themselves, manufacturers like GE are still outsourcing many of their operations.
“This primarily points to the fact that there is still tremendous flux and still a great amount of uncertainty about how best to make money and eek out the profits that are necessary within the wind turbine industry,” says EER’s Magee. “There isn’t just one trend among all turbine vendors.”
As the wind industry sorts itself out and deals with higher project costs, analysts are anticipating continued, steady growth all over the world. According to GWEC, the U.S. could overtake Germany in cumulative installed wind capacity by 2010. China and India will also represent a major force in Asian wind development, leading an expected average annual growth rate of 28% on the continent.
Overall, the industry is on track to reach almost 150 gigawatts of installed capacity in the next three years, which is more than double the cumulative installed amount in 2006.
“It would be hard not to look at the primary trends here and not be bullish,” says AWEA’s Swisher.
For more on this topic, listen to this week’s Inside Renewable Energy special report.