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America up against wind turbine shortage --Suppliers not scrambling to meet developer demands in a low price market

Wind project developers hoping to commission new wind farms in the United States before the expiration of the production tax credit (PTC) at the end of 2005 may be out of luck if they have not arranged for an adequate supply of turbines. Major turbine manufacturers like GE Energy and Vestas have already sold out their production capacity for the year, says Jeffrey Chester of the law firm Kaye Scholer LLP.

"This year is being referred to as the gold rush year because of the combination of the PTC deadline and the shortage of turbines in the market," Chester told a full house of delegates to Infocast's Wind Power Finance and Investment conference, in San Diego, California, last month. "Developers who want to get projects built this year and have not lined up turbines are not going to be able to do so."

From leading wind developer PPM Energy, Merrick Kerr says his company, owned by the UK's ScottishPower, has secured GE 1.5 MW turbines in the 325 MW of projects it has announced for 2005. "I don't think it is news to anybody that if people want to build 3000 MW of wind farms in the US in 2005, then that is going to put a big strain on the manufacturers. The laws of supply and demand are going to determine what gets built," he says.

PPM's size, bolstered by its parent being one of the leading wind farm operators in the UK, helps. "Clearly we have a lot more leverage than a smaller developer who wants to build one 50 MW wind farm, but it is an issue for everybody."

Wishing for more

James Murphy, chief financial officer of Chicago-based Invenergy LLC, says his company also has turbines for its 2005 projects. "We wish we had more, because we think we could have more 2005 projects if they were available. But as far as the turbines that we would want to use -- and what we understand as far as financability -- we think we have got all that we can get. We are already looking at 2006, making sure that if we have the PTC as a one year extension again, which we all hope it won't be, that we're lined up for that. I think for a lot of people that is going to be critical."

Ireland's Airtricity had hoped to break into the US market with its first wind farm this year, but CEO Declan Flanagan says the timing of the PTC extension to end 2005, which did not come until September, "was not optimal" for the projects it has under development. "The vendors have a tough time being able to hold inventory, to be able to gear up manufacturing to deal with this PTC boom-bust. So they sold out at a time when it didn't really suit us in terms of making commitments," he says. "We're looking at projects that otherwise would have been constructed in 2005 now being better placed as 2006 projects."

Mark Anderson of Eurus Energy America Corporation also blames the on-again, off-again nature of the PTC for discouraging European turbine makers from establishing manufacturing facilities in the US, which could have helped ease the supply situation. He says companies like Vestas and Gamesa, which recently finalised a site for a US blade plant, "would have come in a bigger way and much quicker" with a stable policy environment.

Prices up

Adding to the challenge is what some developers at the conference described as a sizeable jump in the price of wind turbines coming into the US market from Europe. The relative strength of the euro to the dollar is considered to be a main driver for the price hike. Higher steel prices are also believed to be playing a part, though their effect on wind turbine prices is minimal (Windpower Monthly, January 2005).

The problem, says Enxco CEO James Walker, is that a number of power purchase agreements (PPAs) were negotiated before this latest frenzy of construction -- based on the assumption that wind turbine prices would remain at the same level. As a result, adds Maura Schoenfeld of Meridian Clean Fuels, "there are going to be some great projects that aren't going to get built." Meridian is a major arranger of equity financing in the US industry.

The situation could also lead to some merging of interests as the year progresses, she says. "For some projects that have better PPAs but don't have turbines, you may see some merging where groups that have turbines may transfer them over."

Opportunistic

Padoma Wind Power's Jan Paulin believes the tight turbine supply situation may also be leading to some opportunistic pricing, where "people have thrown in some extra price increases because they can." But FPL's Mike O'Sullivan argues there are more complex market dynamics at play. In the US's competitive wholesale electricity market structure, the price of wind comes in at about $0.05-0.06/kWh, with the PTC included, compared to $0.08-0.10/kWh in some larger European markets.

"We've gone from this tree hugger small niche industry three or four years ago to this large global business that gets a lot of attention in a lot countries," he says. "Players like Vestas, GE and others have higher profit opportunities for their turbines than the US market. That is kind of what we're seeing this year."

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