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Turbine maunfacturers offer added value as price index shows no sign of recovery

WORLDWIDE: As the wind energy sector has moved into the mainstream, the global wind turbine sector has grown increasingly competitive. That is partly due to less demand for electricity because of the global recession, unusually low gas prices, an overcrowded market for power-purchase agreements and financing, and policy uncertainty in some major markets. Now there is also competition from newer players, such as those based in Asia, and an industry-wide trend towards increased manufacturing efficiencies and scale.

Vestas' prices have fallen to pre-2009 levels
Vestas' prices have fallen to pre-2009 levels

All of these factors have contributed to what has become a buyer's market for wind turbines, forcing manufacturers to cut costs or offer other incentives such as lengthy warranties. In some cases, sellers are offering huge concessions to clinch a deal. This is especially true if their turbines have a shorter track record. Analysts note the lower prices are a bonus for developers and for utilities that want secure clean energy in longer-term deals.

Last year, average prices for onshore wind turbines dropped to below EUR1 million - or $1.36 million - per megawatt for the first time since 2005, according to the Bloomberg New Energy Finance (NEF) wind turbine price index. In 2010, global prices were down 7% compared with contracts signed in 2009 (EUR1.06 million/MW) and 19% lower than peak values in 2007 and 2008.

The trend is only partly attributable to the higher number of contracts signed in the crowded US market, where manufacturing capacity has been ramped up in recent years. The US has no feed-in tariffs, which means electric utilities must offer renewable-energy generators profitable fixed-rate long-term power contracts. Average prices in the US were as low as $1.27 million/MW for contracts signed in 2010 for delivery in the second half of 2011, says NEF.

Dan Shreve, a US-based director of Danish consultancy Make Consulting, agrees: "We have seen marked declines in pricing." Make has tracked a global drop in prices of as much as 20-25% compared with the peak before the recession. But Shreve cautions that figures can be hard to compare year-on-year or between vendors because of what may or may not be included - such as service or warranties - and vastly different market conditions.

It is unclear to what extent leading vendors such as GE, Siemens and Vestas have been able to maintain premium pricing and a full order book. In some markets in 2010, NEF found that such top vendors had signed contracts for as little as EUR0.9 million/MW. That is a severe drop from prices at the market peak in 2008 of EUR1.2 million/MW, says NEF analyst Eduardo Tabbush. Smaller vendors, in the US at least, now have fewer orders in the pipeline due to the soft market, a trend that has been described as order consolidation for the market leaders.

Vestas reports its average order price per megawatt was down 5% globally last year compared with 2009. But that reduction must be seen in context, says Peter Kruse, senior vice-president of group communications. The cheapest type of orders - for the supply of turbines only - made up a greater proportion of Vestas' orders in 2010 compared with previous years. In addition, some of the company's capacity is idle.

Scott Barron, global product line director at Acciona, believes wind turbine makers cannot continue to cut prices. "For example, if GE or Siemens reduce their prices, then you have to respond," he says. "It has got to the point where we have sort of stabilised at the bottom point - it's not sustainable to go much lower and for manufacturers to meet their profit targets."

Ed Einowski, who negotiates wind contracts in the US for law firm Stoel Rives, attributes the pricing trend to supply and demand. Since mid-2010, he has encountered a trend for reduced prices, lower-priced warranties and service contracts that are more all-encompassing.

In essence, turbine vendors are taking on more risk. In some cases, he says, buyers can even clinch a form of vendor financing, while some recent turbine contracts signed in the US have allowed payments to be deferred until the project is operating.

Fellow Stoel Rives partner David Hattery has seen some warranties extended from two years to five or even 10 years. "We've also noticed a willingness to work on schedule, with developers able to say when they want an order or whether they want more flexibility, such as a change in the delivery schedule," he says.

Enhanced guarantee

The downward pressure on prices has also caused manufacturers to offer a broader range of turbine configurations and other extras. For an additional fee, Vestas is now offering an enhanced service guarantee that takes into account the energy a turbine should produce at different times of the year (see Vestas launches new service guarrantee).

Furthermore, in February German manufacturer Fuhrlander and insurance company Munich Re unveiled the world's first insurance for a turbine manufacturer's guarantees. Fuhrlander is giving buyers of its turbines sized up to 2.5MW a technical guarantee of five years and service contracts that are insured.

Einowski says more utilities may have been signing power-purchase agreements for wind in the US over the past six months. That is cause for optimism. But he also notes that many in the industry thought the price slump in the US had bottomed out towards the end of last summer - which didn't happen.

Looking to the future, it is likely this trend will only continue until it hits the bottom line. Procurement officers for developers in the NEF survey expect prices to stabilise around current levels for 2011 and 2012, with few further reductions in the near term.

 

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