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A Shift in Wind Power

By Alex Halperin Control of the global wind-power market is up in the air. As political and environmental concerns surrounding fossil fuels mount, wind has become one of the world's fastest-growing energy sources. Affirming the sector's mainstream appeal, major industrial outfits have jumped in and are throwing their weight around in a space previously dominated by specialized European companies.

Thanks to a renewed tax credit, in the next few years the U.S. is poised to become a key wind power market, with relative newcomer General Electric (GE) firmly entrenched as the domestic leader. GE entered the fray in 2002 by snapping up Enron Wind in a fire sale.

GALE-FORCE GROWTH. Since then the division's revenues have jumped from $500 million to an expected $2 billion-plus for 2005, gains that have taken U.S. market share from the Danish world leader, Vestas Wind Systems, and other outfits (see BW Online, 3/3/03, "A Strong Tailwind for Wind Power").

According to Danish group BTM Consult, which monitors renewable energy, worldwide wind-energy capacity has grown an average of 15.8% annually for the past five years. Although it still probably amounts to less than 1% of worldwide energy use, demand remains intense.

This should be the time that Vestas and companies such as Spanish group Gamesa, which have been pillars of the industry's growth in Europe, have been waiting for. But while they were instrumental to growth in Germany and Spain (the two countries with the highest generating capacity) and Denmark (which is estimated to derive 20% of its electricity from wind farms), the companies' success in larger countries is less assured.

BACK IN THE U.S. BTM partner Per Krogsgaard said GE's leverage in the U.S. and the strong euro have made it difficult for European companies to compete in this country, though a stronger dollar could make them more competitive. What's more, as the only major American manufacturer, an almost unheard-of advantage, GE has easy access to developers and owners, as well as enormous clout in the power sector. It's also unlikely that competitors will make a better product; industry observers say the enormous turbines put out by top manufacturers are very similar.

GE is providing more than 60% of the approximately 2,500 megawatts (MW) of wind energy capacity expected to be installed in the U.S. this year. The American Wind Energy Assn. (AWEA), a trade group, projects that at the end of 2005 the U.S.'s wind energy capacity will be about 9,200 MW, enough to power roughly 2.5 million homes.

In large part this power is generated by windmills with a generating capacity between 1 and 3 MW each. However, the word "windmill" barely seems adequate to describe these generators, with blades 131 feet long attached at a hub 250 feet above the ground, and they are not universally popular. Detractors say wind farms are ugly and not cost effective.

TAX CREDITS ARE FUNDAMENTAL. Historically the installation of wind turbines in the U.S. has fluctuated with the Production Tax Credit. This government incentive provides wind farm owners with a 1.9-cent credit per kilowatt hour generated on their facility for the first 10 years of operation. With the installation of 1 MW of capacity typically costing up to $1.5 million, over 10 years the credit can be good for about a third of the installation cost, according to the AWEA.

When the credit isn't in place, the industry sits on its hands. First enacted in 1994, the credit has expired three times, and each gap brought on an installation dry spell. Most recently it lapsed between the end of 2003 and the fall of 2004. According to the AWEA, installations dropped in the U.S. from 1,687 MW in 2003 to 389 MW in 2004.

With the credit back in place -- and extended through 2007 as part of last summer's energy bill -- there's a promising window for growth. AWEA Executive Director Randall Swisher explained that the credit is "a fundamental part of the way you finance these projects." (See BW Online, 9/20/05, "Fresh Heat for Energy Policy.")

GOING OFFSHORE. In another boost for wind power, Massachusetts, Texas, and New York are each exploring the possibility of building offshore wind farms. There are currently none in the U.S. While capable of harnessing powerful and consistent sea breezes, offshore projects require major expenditures to plant windmills on the sea floor and connect them to infrastructure on land. These difficulties make it unlikely that offshore farms will become the country's primary source of wind power in the short term.

Until recently, Vestas was the only wind company that could claim a global reach. It is still the leading producer, but Krogsgaard of BTM said the company has elected to focus on improving profitability over market share, because it "has had difficulty with [its] bottom line" for the past two years.

Indeed, even as the company expands, its stock has tumbled from DKK 452.15 in November, 2000 (at the time about $52), to DKK 62 in December, 2004 (then about $11). Working under new management in a booming market, the company has seen the stock climb back over DKK 140, and Vestas continues to fill orders around the world. Vestas declined to comment for this article.

COMPETITION HEATS UP. However, several factors suggest that the future will be more competitive. Gamesa is opening a blade factory in Pennsylvania next year, making a play for at least some piece of the U.S. market. By contrast, in the spring of 2002, Vestas announced plans to build a factory near its U.S. headquarters in Portland, Ore., but later scuttled the idea, abandoning a foothold in the Americas. The Danish concern has production facilities in India and Australia, but the bulk of its factories are concentrated in Europe, its core market.

Even there, Vestas could lose ground. GE operates turbine factories in Spain and Germany. And in December, 2004, German behemoth Siemens (SI) got in the game by acquiring Danish concern Bonus Energy, becoming the industry's fifth largest player.

For the short term, at least, the outlook is strong for the U.S. and Europe. However, as in so many fields, the industry's attention is turning to China and India, both of which have small but growing sectors. China's National Development & Reform Commission has expressed a commitment to renewable energy sources.

It is not yet clear how much of this will be devoted to wind power and to what extent it will translate into sales for the existing players. Indian company Suzlon was the sixth-largest manufacturer in 2004. But Suzlon won't have Asia to itself (see BW, 8/22/05, "Winds of Change in Inner Mongolia"). The prospect of powering the world's largest emerging markets with wind turbines has all the players spinning.

Halperin is a reporter for BusinessWeek Online in New York

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