Why the Wind Market is hurting

 

“Demand for wind is simply not at the level where a lot of these companies that are making these investments woud like it to be,” says Matt Kaplan, a senior analyst with IHS Emerging Energy Research.

The first major factor in the slowdown is the drop in electricity consumption. With lower demand for electricity, utilities don’t have to procure as much renewable electricity under their state targets. This has impacted a number of project owners who sell power on the competitive wholesale market.

Secondly, natural gas prices have fallen about 65% since 2008, from $11 per MMBtu to around $4 per MMBtu. Given that wind competes directly with natural gas, this makes the resource much less competitive. And with more shale gas reserves being tapped in the U.S., prices will stay low in the coming years.

Finally, the lack of a long-term national target for renewables in the U.S. is causing major component and turbine manufacturers to reconsider investments in the country. As a result, job growth in manufacturing will likely fall flat again this year.

The reduction in demand for wind means that prices for turbines are coming down. Utilities are watching the equipment prices and waiting to sign power purchase agreements, wondering if prices will continue to fall. Meanwhile, more competition in manufacturing – particularly from asian players – is forcing turbine suppliers to focus heavily on differentiating their products in an increasingly crowded field.

“It’s a tough market out there…[but] we keep focusing on technological innovation,” says Mike Revak, director of Siemens’ American wind division. “Clearly we don’t sit idly by…staying on the cutting edge of technology gives us a competitive position.”

Revak says that Siemens won’t see installations of its turbines drop much in the U.S. this year. But if the demand picture stays they way it is today, sales will certainly be impacted into 2011. Revak believes that a federal renewable energy target could not only increase demand for wind, it could also help make the industry more competitive during challenging times like today.

“Without that that long term policy, you can’t drive down the cost of wind. You can’t have the innovation along the supply chain,” says Revak. “With that support we can make the investments and improvements to make wind more competitive with all energy.”

So what does all this mean for the wind industry this year? Matt Kaplan of IHS Emerging Energy Research predicts a 40% to 60% drop in installations.

Things could potentially turn around over the next 12-18 months. With a long-term national target in place and an increase in demand for electricity, wind might be able to make a good comeback. Clearly, despite the short-term retraction, many of the largest companies in the world are still very bullish on wind. And some executives, like Sonia Bonfiglioli, CEO of the leading components manufacturer Bonfiglioli, believe that the downturn will eventually be a good thing for the industry.

“Renewables faced a lot of speculation…from this crisis the real businesses will survive. I’m convinced that this will move toward a real industry with competent businesses and people, and no doubt it will grow,” says Bonfigioli.

The big unknown is exactly when the growth will pick back up. It’s still uncertain how quickly the industry can rebound, given all the factors working against it.

To hear more analysis on this issue, listen to this week’s podcast linked above.

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