Sunday, 26 September 2010

Market Leader Upper-Intermediate: Wild is the wind.

Green energy

Wild is the wind

Sep 23rd 2010

Two years ago, windmill-makers were worried about their inability to meet a surge in global demand. Last year the industry installed 37,500 megawatts of electricity-generation capacity, increasing the total installed base by almost a third. Capacity in China doubled. Wind firms’ main worry was a shortage of components.

That typhoon of demand has now passed. Installations this year in America could be little more than half what they were last year, predicts the American Wind Energy Association, an industry club (see chart). In Europe demand for new windmills will fall by 14-15%, say analysts at HSBC, a bank. The only big market that continues to grow, though slowly, is China. Wind firms face their first recession.

The credit crunch does not help. Some 40% of wind parks in America and Europe are built by small operators that finance their projects through debt. Lehman Brothers, the bank whose collapse was the starter’s gun for global panic, was a big financier of wind power. “Lehman Brothers was a sort of a switchboard for the industry,” says Peter Kruse of Vestas, the world’s biggest wind-turbine manufacturer, “and they didn’t pick up the phone any more.” A study funded by the German government found that the availability of ten year debt for wind parks had fallen by as much as 40% while the cost of debt relative to benchmark interest rates more than tripled in 2009. The credit squeeze has eased in America, but less so in Europe. Wind farmers in Spain and Portugal find it hard to borrow because of worries that their governments may default or cut subsidies.

The credit crunch may blow over, but two more persistent problems are also present in this market. The first is that the recession has curbed electricity consumption in Europe, both by shuttering plants, some permanently, and by encouraging firms to use power more efficiently. All this will make it easier for most European countries to meet their renewable-energy targets by 2020. Germany and most southern European countries will exceed their targets if they keep building windmills at the current pace, so analysts at HSBC predict cuts in clean-energy subsidies. New wind installations are likely to remain lower than last year’s for the next five to ten years, predict analysts at HSBC and Bernstein Research. Low natural-gas prices are also undermining the case for wind power.

Amid the gloom, however, is some respite for the biggest manufacturers. During the boom of the past five years there was a proliferation of small manufacturers and a fragmentation of the market. The market share of Vestas, for instance, slipped from 28% in 2005 to 15% last year. In these leaner times, buyers in Europe and America are placing orders mainly with the biggest firms, since they seem less likely to go bust.

The next year or two will doubtless see mergers and takeovers. Some of the weaker manufacturers will die.

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