Wild Is The Wind

Late May, the wind industry flocked to Anaheim for its annual gathering, Windpower, hosted by the American Wind Energy Association (AWEA).  For the first time in quite awhile, attendance was down from the previous year – estimated at 14,000, compared to a reported 25,000 in Dallas in 2010.  At least part of the reason was geographic:  it’s simply more time-consuming and expensive for many to travel to the West Coast as opposed to the center of the country.  However, there’s no doubt that the vibe was more subdued.

I returned from the show ruminating on several questions:

When will new players stop entering the wind turbine market?   I am not exaggerating when I estimate the number of companies with turbine products on display at 50.  I have never heard of many of these companies, but somehow they must be able to somehow scrounge up what clearly is a significant amount of capital to amass the tooling, fabricate at least a few units, and design and staff fancy and massive booths.  A number of these no/new-name companies are Asian, presumably with lots of excess cash and considerable naivete on how to penetrate the North American wind market.  The rush is probably five years too late and clearly unsustainable – but it seems to be getting more acute rather than better.  As the old adage from the financial sector says, “the market can stay irrational much longer than you can stay solvent.”   If any of these “who-dat?” companies were public, I’d recommend shorting them.

How will consolidation unfold?  Many wind turbine manufacturers are enormous corporations with solid balance sheets, unaccustomed to being something other than a top three player.   It’s a “who’s who” of Fortune 100 companies, including the usual suspects GE (NYSE: GE) and Siemens (NYSE: SIE), newcomer United Technologies (NYSE: UTX) via its December 2010 acquisition of Clipper, mega-corporates from France Alstom (Euronext: ALO) and Areva (Euronext: CEI), the Spanish armada of Gamesa (BMAD: GAM) and Acciona (BMAD: ANA), Japanese Mitsubishi, the Koreans Daewoo, Hyundai and Samsung, Chinese Sinovel, Goldwind and other ambitious entrants, and on and on.  Indeed, this impressive list doesn’t include industry-leader Vestas, the former high-flyer Suzlon from India, and some excellent German producers including Enercon, Fuhrlander, Kenersys, Nordex and RePower.  Most of these firms have the appetite to play for keeps, and the funding to enable it for an extended period, so it will be an interesting game of musical chairs in the coming years – and a good opportunity forthcoming for M&A investment banking in the wind sector.  There’s no way they can all be successful and remain in the market.  It’s just way too crowded.

What will happen to the production tax credit (PTC)?  It’s been shown vividly that the wind industry suffers from booms-and-busts in cycles as the dominant U.S. policy pertaining to wind, the PTC, is allowed to expire and then is extended (typically for no longer than the two year duration of a House member).  It’s due to expire (again) at the end of 2012, and while the industry is optimistic about a good 2011 and 2012, after that is a guessing game – particularly in the current political climate and budget woes.  The only consensus is that the PTC won’t be addressed at all until the lame duck session after the 2012 election, but it may not be dealt with at all until 2013 – in which case the North American wind industry will experience a big setback (again).

What about domestic manufacturing for wind?  Over the years, a major force for political support to the wind industry has been the participation – both actual and potential – of American manufacturing in the supply chain.  Based on some murmurings of industry insiders, it appears that the American supply chain is in fact getting more stressed and less competitive relative to foreign (mainly, you guessed it, Chinese) sources.  If American manufacturing continues to lose ground in the wind sector, one of the most important pro-wind voices will stop throwing its considerable weight around – and the North American wind market will be the worse for it.  Stay tuned for domestic content debates, and/or examples of “reshoring” production of components back to the U.S.A., to patch this potential hole in the wind dyke.

How will onshore wind co-exist with offshore wind?  In Europe, this has been a non-issue, because the wind industry basically had to move offshore as all the plausible sites onshore had been developed.  Not so straightforward in the U.S.:  the vast majority of the wind industry remains focused on still-ample onshore wind opportunities and doesn’t want to see any resources or policies diverted from its objectives in order to support the emergence of a new segment of the wind industry offshore.  For those who are interested in accelerating the potential of offshore wind (such as myself), especially in places of the U.S. east of the Mississippi River where most of the demand and transmission exists but good onshore wind opportunities are much more limited, the competing interests of the more well-established onshore wind industry is a frustrating source of tension.  It’s a microcosm of the U.S. economic system:  protecting the near-term by minimizing the long-term.  This dilemma is the main reason that the Offshore Wind Development Coalition was established, so that offshore wind interests could independently express themselves in the corridors of D.C.  Alas, the distinction between onshore wind and offshore wind is lost among most public officials, so the existence of multiple organizations that seemingly are operating in parallel in advocacy and education is not a helpful fact to both segments of the wind industry.

It’s never easy to make it in a sector that must fight entrenched incumbents with economic advantages, but the next couple of years in the U.S. wind market will likely be an especially bumpy ride.

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