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25th Anniversary Special - An Industry Comes of Age - What once was a cottage industry

When the wind industry began, a decade before Windpower Monthly, it was reliant on regulatory support, as it is now. And its early history clearly charts the growth of environmental awareness, as support policies were adopted nationally. In Denmark, the first grid-connected turbine, a 22 kW machine, was installed in 1975 in response to an anti-nuclear movement. Environmental campaigners in California then woke up to renewables, and in 1983 contracts giving a high price for wind generation were introduced, plus an investment tax credit regime.

Government regulation and environmental concerns set the timetable for the growth of wind power, explains Mike Davies.

When the wind industry began, a decade before Windpower Monthly, it was reliant on regulatory support, as it is now. And its early history clearly charts the growth of environmental awareness, as support policies were adopted nationally.

In Denmark, the first grid-connected turbine, a 22 kW machine, was installed in 1975 in response to an anti- nuclear movement. Three years later came support for wind power through favourable tax treatment for private investors, and by 1980, where there had been none, there were 20 Danish turbine manufacturers.

Environmental campaigners in California then woke up to renewables, and in 1983 contracts giving a high price for wind generation were introduced, plus an investment tax credit regime. Promoters brought together doctors, dentists, investors from Denmark, who together funded California's wind bonanza. By 1985 the state was host to three large seas of turbines.

 

Faltering steps

With knowledge on a learning curve, turbine design varied hugely. Vertical or horizontal axis; upwind or downwind; two or three blades. There was little knowledge of what was best. Blades fell off and turbines fell over - the problems were highly visible and embarrassing. Some stopped working or simply failed to generate income. As discontent grew, California's investment tax credit was withdrawn and the industry stopped in its tracks.

As with many start-up industries, wind energy was driven by larger-than-life characters. Turbine manufacturers, often children of the early inventors, and developers ran small firms with few staff. Offices were not plush - they were more likely to be back rooms or, as one US developer chose, a small office above a local strip club.

Once in, few people ever really leave the wind family - they just change roles. You'll find some of the original characters at industry events, watching the suited hordes scurrying around, while they muse about the days when contracts were negotiated from blank sheets of paper, and when developers bought turbines to modify themselves because they knew better than the inventors.

 

Coming on board

Other countries started to make moves towards renewable energy, but not always for the best of reasons. The UK introduced the Non Fossil Fuel Obligation as a sop to environmentalists at the same time as it added its support to the nuclear lobby. The wind energy industry did grow, however, and began to form associations. The American Wind Energy Association (AWEA) began in 1974, and four years later came the British Wind Energy Association (BWEA). Then came the Danish Wind Industry Association in 1981, followed by Germany's Bundesverband Windenergie in 1996.

They started small: AWEA met in the basement of a Detroit police station and BWEA gathered in a corner of a pub. AWEA, however, is a good measure of the industry's growth in what is today's largest wind market. Participating delegates to its annual conference first broke through the 1000 barrier as recently as 2001 and this year saw 23,000 visitors make it one of the largest trade shows in the US for any industry.

Germany, which would become the principal market in the world for many years, became a serious player in 1992 when the government introduced its first support program. Until then the German wind industry was characterised by a multitude of private investors owning heavily promoted, small numbers of wind turbines that were scattered across the countryside. A policy of premium purchase prices for wind power, which was guaranteed for 20 years, ensured market growth.

With the growth of the industry came the growth of finance to fund it. Initially the Scandinavian banks lent to the individuals investing for the tax breaks, then others started to provide loans secured entirely in the wind turbine's future earnings and, without recourse, the sponsor's capital assets. Eventually, an American company emerged that would ultimately affect wind energy's history for more than a decade. US Windpower dealt in wind farms and turbine manufacture. Renamed Kenetech in 1993 and quoted on the stock markets, it rapidly expanded from California into the European market, taking on ever larger projects and attracting major lenders.

In the mid-90s, a climate of confidence in grew from several international projects. Kenetech had moved into Spain and the Netherlands. A small US developer, UPC, had created the first utility scale projects in Italy. India had put support mechanisms in place.

Then, in May 1996, a financial catastrophe turned confidence on its head when Kenetech imploded, taking with it a great deal of money from investors and lenders alike. Almost overnight the wind energy industry ground to a halt. Banks stopped returning phone calls from developers and wind became a dirty word.

 

Starting again

The comeback was slow but eventually new financial practices emerged, returning confidence to wind energy development. At first, only Germany stayed in the game. MeesPierson, which would become Fortis Bank, arranged much of the non-recourse debt for the industry until around 2002, then other lenders emerged. Non-recourse lending brought real benefits to the industry in the requirements for bankable contracts. Wind turbine warranties began to have common wording and standards. Construction contracts became more typical of those used in other large infrastructure projects and power purchase agreements were carefully scrutinised. The industry started to grow up.

Although the middle years in the 1990s were a quiet time for the wind industry generally, a few events occurred that were to sow the seeds of future companies. Consolidation began in the Danish market as the two largest turbine suppliers, Vestas and Micon, started buying up smaller manufacturers. After a whole string of such acquisitions, Micon merged with another leading turbine manufacturer to form NEG Micon. In 2003 that company, in turn, was to disappear into a merger with Vestas, the market leader.

In California, Zond Corporation (founded in 1980 and now GE Wind) emerged as a major player. Based in Tehachapi, Zond was one of the first companies to develop its own California projects and for the first decade used Vestas turbines, accounting for 90% of the Danish firm's production. When that market died following the withdrawal of the investment tax credits, Zond continued to operate the projects it had developed and in which it had an ownership interest.

Zond also continued with a portfolio of development projects and power contracts, which eventually led to additional projects. As early as 1988, CEO James Dehlsen had been successful in persuading Florida Power & Light, a progressive US utility, to invest in new wind farms. This was FPL's entry into the wind energy market, a first step on a path that would eventually make it one of the largest global players in the wind power business. In the early 1990s, Zond decided to develop a new class of turbine and deploy the machines into Zond projects.

In 1997, Texas-based Enron partially acquired Zond and made it a subsidiary of the Enron Renewable Energy Corporation. Other business deals eventually made Enron Wind the front- runner in the US, including the acquisition of bankrupt Kenetech's rights to much of its US development portfolio as well as rights to key power management technology. Enron also acquired (for a pittance in hindsight) an undercapitalised German manufacturer called Tacke and its solid design for a 1.5 MW turbine, thus gaining a manufacturing base in Europe.

Meanwhile, Florida Power and Light, cut loose from its arrangements with Zond, set up its own development business, which was to make it the US frontrunner in ownership of wind projects. But it was the new millennium that was arguably the turning point for the wind industry, caused by a number of factors working together.

 

Becomes big business

In Spain the market was taking off, driven by a royal decree that established a very favourable price for electricity from wind plant. The market favoured incumbents, not driven by the same tax incentive structures such as those in Germany and Denmark that encouraged private ownership of wind generation. Neither was the market restricted by regulations on production tax credits like in the US. For the first time, the Spanish market allowed local utilities to have wind generation as part of their portfolios and they moved into the sector with enthusiasm.

At the end of 2001 American Enron collapsed, which could have been another body blow for the industry. Instead, its wind business was picked up by General Electric and became GE Wind. With that purchase, GE brought manufacturing expertise, market reach and an altogether new and more corporate philosophy to the business. Turbines benefited from this - particularly the very successful former Tacke 1.5 MW - and new designs began to emerge. With the credit quality of GE behind its technology, projects became more financially viable.

The difficulties of a market based on a tax credit for each kilowatt of wind power produced began to be dealt with in America. Partnership special allocation treatments allowed major corporations to buy into projects as corporate tax shields. To manage these complex structures, deal sizes began to grow, drawing the attention of major players. Financial institutions moved into equity positions - Goldman Sachs bought into the US-based Horizon group. On the back of a rapid growth in orders and scaling up, turbine vendors began to recapitalise. New players such as India's Suzlon emerged from low labour cost markets. As investors saw opportunities in the sector, mergers and acquisitions began, and still continue.

Wind power has come a long way from those few people who made it up as they went, who set up companies on a wing and a prayer, took chances to get to where we are today. This is a remarkable industry and, given where it will be in 25 years, it has hardly started.

- Mike Davies, involved in wind project finance since the mid 1990s, is currently co-developing projects in Scotland.

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