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Confidence is key

For two-and-a-half years, wind industry share prices steadily outstripped those of the broader market. Housing markets disintegrated, banks collapsed and a credit crisis took hold, but wind shares stayed relatively strong, a seemingly safe, if still rough haven, for investors in a world slipping into recession. Against that background, the precipitous plunge in listed wind stocks in the last weeks of October was a rude awakening, all the more so because the dramatic drop, led by Vestas, Gamesa and Suzlon, is largely without explanation. Orders are strong, profits are good, and the industry's healthy fundamentals remain unchanged; in some ways they have even improved. Yet on average, wind shares towards the end of October were down by about 45% on the start of the year, reports Fortis, a bank.

Wind's status as a relatively young and unconventional stock makes it a more volatile investment than established blue chips. But why it suddenly became the place to get out of rather than into is a case for future study. Investors clearly got the message that the volumes of equity and credit needed by the rapidly growing sector would not be available to it. What spooked them? Oil prices, according to one train of thought. As market research company Douglas Westwood points out, the past three months have seen the largest increase in oil prices in real terms since 1861 -- and also one of the largest decreases. Prices peaked at $147 in mid July and then plummeted, to $73 on October 20. If oil is high, the reasoning goes, wind looks cheap and becomes a good bet, but when oil prices drop, wind gets priced out of the market.

The next big scare factor came with the realisation that several of the financial players behind the heavy investment in wind power assets in the US were no more, or no longer had access to fat taxable profits in need of offsetting. The appetite for wind power's federal production tax credit (PTC) may well have halved in the past month (page 29). Marginal projects will go begging for investors as a result. Two US wind developers, one a major power company and the other a small independent wind producer, have already announced they are pulling back on plans for 2009 (page 8). Others are retrenching more quietly.

If the wind market was actually driven by oil prices and if tax shelter equity was really gone for good, then investors in wind equipment suppliers would have reason to bolt for it. But neither is the case. Historically, the correlation between renewables' share prices and oil prices is statistically insignificant. As to the dearth of tax equity, as long as there are corporations paying taxes in America, there will be investors looking to offset them, once they have found the door to the PTC shelter. If, meantime, a few marginal projects die a quiet death, that may be no bad thing. The overheated market of the past two years has done little to bring down prices, promote better product quality, or encourage sound financial strategies.

The consensus is that new equity players will emerge. Oil companies, awash in profits and anxious to diversify into energy sources with long term prospects, may be among the frontrunners. Abu Dhabi's investment in the world's largest offshore wind project last month (page 55) and a wind turbine manufacturer (page 42) would support that contention as would BP's heavy commitment to troubled Clipper Windpower. Other energy companies, like Swedish hydro utility Vattenfall, continue to buy wind companies (page 44). Even venture capital is ready to invest in wind projects, arguing that banks can do little better than lend to solid steel and concrete that generates guaranteed cash flows for 20 years (page 38).

Wise investors have already worked out that returns on wind project investments are likely to improve. As some projects are dropped, easing turbine supplies, costs will fall, helped down by cheaper copper and steel as demand from other industries weakens. Profit margins for wind farm owners should improve and with wind power prices falling relative to those of other generation, the market will expand. As the more capital intensive technology, wind power benefits most when the price of raw materials falls.

The role of government

Going into a recession, however, smaller wind companies will suffer at the hands of better capitalised competitors. Some will be forced to sell to their bigger arch rivals. New entrants will find it tough, whether they are giants like Korean Hyundai going into turbine manufacture, or French Veolia into project development, both with their eyes on the US (page 37), or small start-ups by industry veterans exercising skills as varied as project financing, turbine production and wind development (pages 38-40). Investors will be wary of new products, including those from China.

Despite the tougher times, the economic, environmental and security of supply fundamentals attracting newcomers to the wind business remain firmly in place. Vast volumes of aging conventional power plant need replacing. Governments are increasingly convinced that wind power can do the job: sustainable, secure, affordable, says UK energy minister Mike O'Brien. Needed are strong policies to stimulate growth in a sector that promises thousands of jobs, economic revival, and cheaper electricity long term. Confidence is key. A wind industry that exudes confidence in times of trouble will give governments the courage they need to take unprecedented action for unprecedented times.

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