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Wind sector set to ride out turbulence

The economics of wind energy may be shakier, given falling energy prices and a tight credit environment, but the need for countries to meet tough renewable-energy targets should help the industry ride the downturn

Fincancing for wind-power projects is increasingly hard to come by. Leading turbine manufacturers are under-performing the market and corporate-growth forecasts are being slashed. But market participants and analysts remain optimistic about the wind-energy sector's long-term prospects.

They argue that wind's pivotal role in meeting global renewable-energy targets will help the sector to maintain momentum and that any reductions in growth prospects must be seen in the context of the rampant expansion of wind projects over recent years. Global wind power capacity totalled 120 gigawatts (GW) by the end of 2008, a rise of more than 27% over the year, according to the World Wind Energy Association, which expects the total to reach 160 GW by the end of this year.

"Order backlogs, which are at a historic high at the moment, will come down. But the medium and long-term outlook is still strong, although not as rosy as manufacturers have been experiencing over the last few years," says William Young, a wind-sector analyst at New Energy Finance (NEF), a renewable-energy consultancy.

Denmark's Vestas Wind Systems, the world's largest turbine manufacturer, continues to expect robust demand for wind power resulting from national and supra-national targets. In December, for example, the EU formally adopted a target to derive 20% of its energy needs from renewable sources by 2020. "Wind will take the lion's share of that figure, because there is nothing else that can become operational on that time-scale," says Peter Wenzel Kruse, Vestas' senior vice-president, group communications.

Kruse concedes that the market for turbines is likely to suffer in the short term, but says Vestas is optimistic about longer-term prospects – especially because it believes it should be able to weather the financial downturn better than some of its competitors. "Now the market is not as hot as it was, there is a flight to quality," he says.

On announcing its third-quarter 2008 results, the company lowered its sales forecast for 2009, to €7.2bn ($10.0bn). But that figure would still represent a rise of around 25% over expected revenues for 2008, indicating that the wind market, while softer than it might have been, should continue to grow strongly. In anticipation of that, Vestas plans to double its output of turbines to 10 GW between 2007 and 2010 (see p10).

Uncertain outlook

The immediate outlook is uncertain, however. In December, US oil tycoon T Boone Pickens expressed concern over the ability of his company, Mesa Power, to raise funds for the world's largest wind development – a 1 GW-plus farm – which it hopes to build in Texas. He said he was pinning his hopes on expected new incentives from President Barack Obama to boost renewable energy. "Where's the money is the question. I don't know how we'll do it. I'm anxious to see what Obama comes up with. There is no money to finance a wind project now," Pickens told reporters.

Meanwhile, in Germany, the national wind association, BWE, has reportedly been in talks with the German environment ministry over greater state support for wind companies. And in the UK, Centrica said in late 2008 that it was reassessing the economics of wind farms, given rising raw materials and credit costs. The utility company has built two large wind farms off the coast of eastern England recently, but has yet to approve plans to build three more projects.

While funding difficulties may delay some ventures, projects in some of the world's more unlikely wind markets are proceeding. In December, Austrian power utility EVN and Germany's Enetrag said they were building a 50 megawatt wind farm on the Black Sea coast of Bulgaria for around €100m. Analysts said funding a wind project in Bulgaria one or two years ago would have been tough, but the need to meet EU renewable-energy targets was providing a valuable spur to investment. Bulgaria must boost renewables use to 16% of its energy mix by 2020 from less than 8% today – wind and hydropower will be the main instruments for achieving this.

The uncertain short-term outlook has contributed to poor market performances for wind energy-related stocks, which have under-performed European and US share markets as a whole. But sector analysts remain broadly upbeat about longer-term prospects. Says NEF's Young: "There is a bit of uncertainty around the plans of some of the larger companies, such as Centrica and Iberdrola, but they are not stepping back substantially from the sector. They seem to be maintaining a strong public commitment to wind in the long-term, but saying they need to think carefully about 2009."

Confidence is also evident among some participants in the UK's burgeoning offshore, shallow-water sector. Abu Dhabi's Masdar stepped in to partner Germany's E.On and Denmark's Dong Energy in the London Array project after Shell quit the venture to focus on what it says will be more profitable onshore wind projects in the US. Masdar took a 20% stake in the £2.5bn ($3.6bn) project in the Thames Estuary, which could eventually have generating capacity of 1 GW from more than 270 turbines, making it the world's largest offshore wind farm.

Development of deep-water offshore wind projects is likely to be affected more severely, given the much greater costs. Shallow-water projects cost roughly double the price of onshore schemes per unit of power, while deep-water projects, still at the pioneering stage, will cost even more. "There are considerable questions to be asked about the economics of deep offshore wind and significant uncertainty about exactly how it could work," Young says.

However, Vestas' Kruse says any softening in the offshore market will have minimal effect on most turbine manufacturers' business. While offshore wind tends to receive more media coverage, it remains a small part of the market, accounting for just 2% of total EU wind capacity in 2007.

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