On Reflection: The unseen ticking bomb and how to defuse it

WORLDWIDE: The wind industry lives dangerously when it builds factories in markets supposedly protected by trade barriers. The propensity of such markets to explode is well known. We must campaign to eliminate all environmental tariffs and local content requirements.

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I came to the wind industry in 2006 from a job as trade negotiator in the Danish foreign service. For years I had dealt with complex trade negotiations and delicate market access cases. It was quite a change, moving from a role in diplomacy into the positively charged and bullish wind industry, where only the sky seemed to be the limit of entrepreneurial endeavour.

And so it was, at least for a while. But as the global financial crisis took hold and left the world reeling in its aftermath, a new and harsh economic reality dawned, both for governments and for the wind industry.

Shoring up national economies and controlling energy prices were high priority for governments, especially in emerging markets. From their perspective, imposing local manufacture of wind hardware helped meet two separate priorities. Local jobs were stimulated in a local green industry and price transparency was achieved.

In the wind industry, however, counter forces were at play. Once-stable markets became volatile and price pressure overpowering. Survival was at stake. Mitigation of market risk meant spreading business across a portfolio of countries and lower unit prices required critical mass and scale in sourcing components. Globalisation, not localisation, was blowing in the wind.

Imagine my disappointment at being plunged back into controversial trade issues driven by industrial policies, protectionist barriers and mercantile instincts. At one level, the wind industry's tacit acceptance of trade barriers in the form of local content requirements (LCRs) is understandable. Financial sweeteners and orders tend to follow. Moreover, the industry grasps the benefits, also politically, of local job creation. But even in bigger markets where forced localisation of supply chains might make commercial sense, LCRs typically lead to higher prices for potentially poorer quality and risk the creation of cartels. They are a ticking bomb under sound economic growth.

Local content is not bad in itself. Installation and assembly, transportation, service and maintenance by local firms can easily make up at least 30% of the value of an imported wind farm, and more in offshore. Local vendors in wind also have a history of becoming global players. The real value is created downstream in support services and not in manufacturing, as many believe.

Even if the political preoccupation with LCRs was justified, they are illegal under World Trade Organisation rules, as Canada learned in 2013 when it was told to unpick the entire Ontario wind market. Indeed, commercial players lured into investments by LCRs do so at huge risk. That may explain the wind industry's apparent preference to keep the bomb unseen. Nobody dares attempt to diffuse it. But LCRs are strategically counterproductive to achieving the overall aim of fully cost competitive wind energy. Better a controlled dismantling than a big bang.

Wind has become a "strategic" industry, like steel, automobiles and agriculture, which are beset with trade barriers supposed to protect. Believe me, these are not to be wished for, with all their politics, restrictions, quotas and limited competition. A better example is the IT industry. In the mid 1990s it forged an international agreement defining fair rules for global trade, competition and supply chains. Today, we all benefit from the affordable dissemination of global IT that resulted.

In renewables we can and should do the same. We must actively support the international environmental goods agreement, on track to be signed at the UN climate summit in Paris in December. We must work to eliminate local content barriers and refocus on growing a thriving downstream wind business, with local manufacture only when it makes commercial sense.

Peter C Brun is managing director of the Alliance of the Sustainable Energy Trade Initiative. He was previously head of global government relations at Vestas Wind Systems

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