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Strong manufacturers do not need home comforts

EUROPE: Accounting for 0.34% of GDP in 2009 and employing more than 30,000 people, the Spanish wind industry is a major European success story. Yet this January, Spain's renewables policy support was uprooted. Faced with EUR2.4 billion in electricity sector debt, the government announced a moratorium on feed-in tariffs (FITs) for new renewable generation.

This undoubtedly has serious implications for all segments of the wind industry, not least the stirring up of worries about the possibility of retroactive changes to tariff schemes in other markets. While the wisdom - or otherwise - of the decision is, and will continue to be, a source of debate, another question stands out: will the Spanish wind manufacturing industry withstand the de facto disappearance of its domestic market? In pondering this question it is illuminating to compare the experience of the Spanish turbine industry to that of two other countries: Denmark and the UK.

In Denmark and later in Spain, the government understood and took seriously the role of a strong domestic market in developing a future export industry. Their policies not only provided domestic turbine manufacturers with R&D support to get through the innovation 'valley of death', but they also took care to ensure that this 'technology push' was underpinned by FiTs providing the crucial 'demand-pull' that nurtured the industry. Today, global giants of turbine manufacturing from Denmark and Spain, such as Vestas and Gamesa, stand as undeniable testaments to this commitment.

A prime example of a failure to understand the interrelationship between energy policy and industrial development comes from the UK. In the 1980s, economic recession resulted in cut-backs in public spending. Amidst radical reforms to the electricity sector, which eventually resulted in privatisation in 1989, the opportunity to create a domestic market for renewable electricity was missed.

Delayed policy support and serious design flaws left the UK unable to capitalise on its then world-leading wind power R&D programme. The government has now rediscovered active industrial policy in the context of new offshore wind technologies. Sadly, the one-shot chance to create a UK wind manufacturing industry was lost and the impact of the more enlightened current policy is likely to be limited to reducing the cost of imports required for UK offshore deployment, rather than development of a major export sector.

In Denmark, manufacturers Vestas (and Bonus) flourished, demonstratomg that once an industry is established, strong domestic demand becomes less important. Even when, in the early 2000s, domestic demand fell significantly as onshore sites became scarce and the turbine market approached saturation, both companies remained resilient: they had outgrown dependence on the home market by pursuing exports.

Similarly, Spain's manufacturers are now exporting strongly, with domestic sales making up a diminishing proportion of turnover. An analysis of Spanish major OEM output and Spain's wind installation rate suggests that growth in the number of turbines shipped 'decoupled' from the domestic installation market in the mid-2000s, echoing the Danish experience. All these manufacturers were able to look back on the home markets that had nurtured and shaped them as just one - albeit important - opportunity in a constellation of dozens of international wind markets.

While there are clear parallels between Spain and Denmark, we should be wary of ascribing them too much significance. The saturation of the Danish market was incremental and widely anticipated; Spain's FiT moratorium was announced with alarming abruptness, leaving manufacturers little time to adapt.

Perhaps more important are the factors that drove the Spanish government to such a radical volte-face. Recent declines in installation rates in Spain and output from some OEMs hint at prevailing macroeconomic, industrial and political conditions that differ starkly from those experienced by Vestas in the early 2000s. Spanish manufacturers, like all multinational suppliers to the wind industry, now have to contend with global oversupply in turbine manufacturing capacity and an uncertain outlook in many mature wind markets.

Ultimately, it will be global factors and companies' response to them, rather than any incentive regime, that will shape prospects. Vestas has recent experience of just how tough the challenges posed by these powerful global forces can be.

Nonetheless, the unambiguous fact remains: Spain, following Denmark, facilitated the development of industries able to outgrow a need for stable domestic demand - a mark of success for any manufacturing industry. The conspicuous lack of home-grown turbine manufacturers in the UK reminds us of this.

Oscar Fitch-Roy is a senior policy consultant at renewables consultancy GL Garrad Hassan's strategy and policy unit.

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