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Uneasy confidence

The global pool of money managed by people chasing safe investments is astonishingly deep. It took the entire history of mankind for the world's savings to top $39 trillion at the turn of the decade. Since then, the globalisation of industry and societies and the rapid rise in wealth of developing nations has increased the pool's depth to around $70 trillion in just eight years, according to the International Monetary Fund. All that money is looking for a safe home capable of providing a predictable revenue stream.

The housing market and its glut of repackaged mortgage investments has been the main repository for much of that money, with America playing a dominant role. But the collapse of that house of cards and the subsequent shattering of confidence in the credit markets not only means the giant and amorphous pool of money is looking for alternative havens: stability has also replaced high profit margin in the collective investor psyche.

The impact of all this on wind power development is a subject of hot debate in the industry's financial circles, as stories in this issue reveal, particularly our series airing expert perspectives on the credit crunch (pages 59-68) and in news of the first wind company listing in America for years (page 41). The overall message is that wind power may well be among the businesses well placed to become a new safe haven -- and there is plenty of money about. Granted, the credit crunch has made banks much more fussy about what and who they lend their money to. True, project finance is tougher to negotiate. And yes, the financial instability of recent months has created unwelcome volatility for the publicly traded wind companies.

But the broad consensus is that the wind sector has not seen the last of utility-led mergers and acquisitions, wind companies successfully going public, or private equity interest in well structured deals at realistic prices. What's more, with projects and deal structures now subject to more rigorous scrutiny, better quality and fairer returns for all parties should result.

The industry has come a long way in a short time. At the turn of the decade, earning money from investing in the wind sounded like a poor joke and there was little sign where all the needed cash for growth was to come from. Volatile share prices fed the notion that the sector shared much in common with the dotcom business, an airy bubble likely to burst. But much has been learned by the financial sector in recent years. Provided wind turbines keep turning, money invested in them will keep rolling in. Safe as houses is what folks would have said, until the events of last summer. In times of trouble it is the old world assets like steel, mining, infrastructure and agriculture that are pulling in the substantial returns, while high tech is relatively flat. The wind business, far from its fluffy green image, is all about hard assets, things you can touch and drop on your foot. That is where the money is today. It is a truth that has struck none other than legendary oil billionaire T. Boone Pickens, who just signed up for 1000 MW of wind turbines from GE Energy (page 8). In his traditional industry, oil fields peak, decline, and force the investor out to find yet another oil field. "It can drive you crazy," he says. "With wind, there is no decline curve."

The lessons of history, however, are not to be ignored. The wind industry's past financial woes were not caused by any seismic shift in global economics, but by serious technology failures. Veteran investors in the wind sector are uncomfortably aware that the risk is still there. News of further gearbox failures, this time on Vestas' flagship 3 MW turbines in Canada (page 43), will not be making them feel any easier. History has also taught us that what goes up in business inevitably comes down again. Augusta's James Knight warns (page 60) that once utilities who should have been in the wind business before now are done with catching up, the appetite for wind projects will fall -- and so will the prices paid for them.

Investor grumbles

Behind the overt statements of overwhelming confidence in money supply to the industry, there is more anxiety and uncertainty below the surface than the brave words in public would have us believe. The squeeze on lending is tough in an industry where nearly all the costs are up front. The higher the cost of financing, the more money needed to pay it all back again, and the higher the price that has to be paid for each kilowatt of electricity produced. The fear that rocketing costs could price wind out of the market is not far below the surface. In Germany, where purchase prices are fixed, investment is already drying up. Elsewhere, investors are grumbling ever more loudly at being forced to accept lower and lower returns for the privilege of being allowed a stake in a wind project, while the risks they are expected to shoulder are much the same as ever.

With wind power purchase prices at the limit the market can currently bear, credit in short supply and getting more expensive, and returns on equity as low as investors in wind plant will accept, something has to give. Wind project development companies expecting a continuing bonanza fuelled by investors lining up to pay sky high sums for their assets may be headed for disappointment. A price correction is on the cards.

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