Wind Power 2005 in Review, Outlook for 2006 and Beyond

I thought this was an excellent summary of the current state of the wind power industry (with a North American focus) from the folks at Renewable Energy Access:

Wind Power 2005 in Review, Outlook for 2006 and Beyond

By Godfrey Chua, Research Director, Emerging Energy Research

The North American wind power market is at last entering a period of sustained growth. Both the US and Canada achieved record installations of wind power projects in 2005, and both are poised for steady growth moving forward. And coupled with this growth a new competitive element has emerged that will further define the North American market in the years to come: turbine supply leverage.

According to a just-released study by Emerging Energy Research entitled US/Canada Wind Power Markets and Strategies 2005-2010, the record year for US wind power installations in 2005 is a direct result of the extension of the production tax credit (PTC), first at the end of 2004 and further extended to 2007 through the passage of the Energy Policy Act of 2005. This three-year horizon will break the boom and bust cycle that has plagued the US wind industry. And the passage of new state level portfolio standards, as well as amendments to existing standards, are also enhancing the long-term prospects of the US market.

In Canada, there is increasing dynamism in the wind power market as a result of recent federal and provincial efforts to promote it. Between 2004 and 2006, provincial governments and utilities will have issued RFPs for 6,000 MW of renewable energy; results so far show that the lion's share will be awarded to wind projects. The national government also extended the wind power production incentive program to April 2010. As a result, like the US, the Canadian wind power market will see steady growth ahead.

Boosted by renewable RFP activity, utilities expand activities in wind power

Driven by a variety of factors, including generation mix, RPS, green marketing, and least cost resource considerations, utilities in the US and Canada are procuring more wind power than ever. This trend is highlighted by a proliferation of renewable RFP activity and a growing roster of utilities becoming active in wind power.

While RPS programs have become a key driver, more than half of ongoing activity derives from efforts not directly related to an RPS mandate. EER's new study identifies wind project pipelines of at least 13,000 MW in the US have been identified across the country. While the most activity has traditionally been centered in the western US, the Northeast has shown a dramatic increase over the last year. Texas, having doubled its RPS, will overtake California in 2006. The fastest growth rates are expected occur in new states implementing RPS, such as New York and Colorado, as well as those learning to exploit tremendous untapped wind resources, such as the Dakotas, Illinois, and other Midwest and Pacific Northwest states.

The increased development activity and interest in the Canadian wind power market is the result of growing demand from power purchasers and a clear signal of their commitment to the technology. While the Canadian market remains small with only a handful of experienced wind IPPs, a slew of new entrants backed by major energy companies have entered the market and are poised to capitalize upon the market growth. The provincial initiatives have resulted in an RFP pipeline that is nearly 6,000 MW, with activity centered in Ontario, Quebec, Manitoba, and New Brunswick. Hydro-Quebec alone has issued RFPs for 3,000 MW of wind energy, providing a key anchor for the market in the years to come.

Wind IPPs and developers enter a new level of competition in US and Canada

Wind IPP and developer competition in both the US and Canada entered new dimensions in 2005. The industry has scaled and consolidated, and companies have shifted along the value chain throughout 2005. The result is a level of competition and market activity that the industry has never seen before.

Amidst these dynamics, another competitive element has emerged that will further define the North American market in the years to come: turbine supply leverage. With past boom and bust cycles in the US-caused by the PTC-discouraging investments in local manufacturing, industry scaling has had the inevitable side effect of creating a turbine supply shortage. According to EER's study, this shortage has constrained wind IPPs and developers in their ability to realize their projects and, ultimately, to create value. Some wind IPPs have discovered that, by taking the financial risk and locking in turbine supply early, even before projects in their own pipelines may be ready, they can achieve growth and build market share by using these turbines as leverage into late stage projects from other developers.

The bottom line is that scale continues to drive competitive advantage. Attributes such as a good track record, capability to deliver large-scale projects, and market reach that is able to span multiple markets, are now par for the course. Building an edge in the competition for power purchase agreements entails taking these attributes to an even higher level and, at least for the near-term supply and demand scenario, simply having the wind turbines with which to build wind plants.

Unlike the US market, which was launched by pioneering developers and independent companies, the Canadian market is already comprised of companies backed by large energy firms and industrial concerns that bring with them financial resources and commercial credibility. SaskPower and other leaders such as Vision Quest and Axor have significant operations behind them. In addition, heavy hitters invested in emerging wind IPPs-TransCanada with Cartier Wind Energy Group, and Brascan Power, which purchased Superior Wind Power in 2005-also point to the role major energy companies will continue to have in the growth of the industry, and the challenge and increased competition ahead for the existing market leaders. The nascent market does include one notable foreign entrant in Spanish wind IPP Acciona/EHN.

Wind turbine shortages shift emphasis towards manufacturing capacity

The North American wind turbine market saw record growth in 2005; installations surpassed record levels seen in 2001 and 2003, with the majority of them onshore. From an industry that finally broke US$3 billion in 2005, the market is expected to more than double to just under US$7.5 billion in 2010. These figures, detailed in the EER study, factor significant price increases implemented for projects in 2006 and beyond, but also take into consideration greater vendor competition that will arise as local manufacturing capacity and new turbine models are introduced in the coming years. Improved competition will, however, not be sufficient to reduce prices to the extent they have risen for 2006.

Simply put, market share in 2005 was determined more by manufacturing capacity than by competitive strategies or items such as cost and product positions. All wind turbine vendors active in North America in 2005 sold-out of available capacity and therefore market share has been determined by how many turbines could be manufactured and delivered. The demand was even stronger than anticipated, and as a consequence, a turbine shortage transpired and availability became an important criterion for selection.

To this end, the North American wind turbine market is dominated by GE Energy. In the US, the firm enjoyed annual market shares ranging from 45% to as much as 60% in 2005. Behind GE is Vestas, having consolidated its position with the acquisition of NEG Micon, which leads in Canada, installing all the turbines in that market in 2005.

Supply chain is a constraint to turbine supply

Today's turbine constrained market makes control of the supply chain especially critical. Wind turbine vendors have attributed the lack of turbines to certain pinch points in the supply chain, such as gearboxes, castings, and blades. Ownership of or at least close ties with key suppliers in these areas is therefore important for ensuring a wind turbine vendor is able maximize production and thereby their sales potential and market share.

Component suppliers, for their part, have been reluctant to establish new manufacturing facilities due to the boom and bust cycle in the US. However, high demand for turbines has encouraged suppliers such as Winergy, Hansen, and LM Glasfiber to increase capacity through other means. For the most part, capacity has been increased as a result of planning foresight during the design of their manufacturing facilities.

In the wind turbine market, the door is wide open for those with the risk appetite, and Gamesa, Suzlon, and Clipper are stepping through. All three are building manufacturing facilities in the US, and in so doing bring substantial local manufacturing capacity online to compete with dominant GE Energy. The risk taking is paying off. EER research shows that demand for Gamesa's machines has been so strong the vendor has indicated it may still have to rely on capacity from Spain to maximize order volume. Suzlon is sold-out through 2007. Clipper, for its part, has had a successful initial public offering and many are watching the company and its technology closely. Siemens, as predicted, re-entered the market by capturing FPL's business, and is the next most likely candidate to set up manufacturing facilities in the region.

North American wind energy market outlook to 2010

The record year in 2005 could not have arrived soon enough, as 2004 was a brutal year for wind power in North America. However, as soon as better days arrived, a turbine supply shortage limited growth and inevitably brought higher prices. And more challenges lie ahead. The US will face a significant risk of a slowdown in 2008, as the current PTC is effective only until the end of 2007. In Canada, environmental permitting, unviable projects, and lack of turbines are three primary variables that may lead to lower growth.

Still, wind energy has reached an entirely new level in North America. Wind IPPs are stronger than ever and additional manufacturing capacity is on the way. The business environment is favorable-record natural gas prices, RPS in US states proliferating and RFPs building momentum in Canadian provinces, and an extended PTC in the US and WPPI in Canada-combine to shore up prospects. Looking forward, US and Canadian wind power markets are expected to see stable growth and heightened overall activity.

North American wind power is expected to see a more than fourfold increase in wind power plants in operation by 2010. The US is expected to grow from just over 6,700 MW to over 28,000 MW by 2010. Starting from a lower base of nearly 450 MW in 2004, Canada's wind power base will grow even more quickly to over 6,200 MW by 2010.

[About the author and the related report...

Godfrey Chua is Research Director of Emerging Energy Research's US/Canada Wind Energy Advisory Service. This article is based on findings from EER's new 286-page market study, US/Canada Wind Power Markets and Strategies 2005-2010, released in December 2005 and now available for purchase. Emerging Energy Research is an independent research and advisory company based in Cambridge, Massachusetts, US. For more information, visit www.emerging-energy.com through the following link or contact them by email at eer@emerging-energy.com]

Wind power has truly become a mature and competitive power generation industry with sustained growth. It is no longer faced with generating sufficient demand but rather with ensuring sufficient manufacturing capacity, a great sign that the industry has grown considerably.

The renewal of the Production Tax Credit (PTC) until 2007 will have a great impact on the wind industry, ending years of uncertainty and boom and bust cycles where the PTC expired every year and then lay dormant for a year while lobbyists tried to get it renewed (not exactly the certainty you are looking for in an investment scenario). That seems to be the best thing to come out of the 2005 Energy Bill (amidst a lot of other garbage, in my opinion). It's time to start lobbying now, though, for an extension of the PTC out to 2009 or 2010. Insuring a long window of time that we can be certain the PTC will be around will make the industry look much more favorable to investors.

I'm really hoping that Oregon will get with it and enact a Renewable Portfolio Standard sometime soon as well. We have a number of wind developments in state with more on the way but the extra legislative push to encourage development wouldn't hurt.