Spanish link arms in landmark deals -- Project pipelines and turbines secured for America

In a wave of huge deals, Spain's dynamic duo, Gamesa and its largest single shareholder, utility Iberdrola, have further stamped their mark on the European and American markets. First, Iberdrola signed up to buy 2700 MW of machines from Gamesa Eólica for installation in both markets over the next three years. Complementary to that deal, Iberdrola also contracted to buy 1000 MW of completed wind power stations being developed by Gamesa Energía in the United States, with 300 MW immediately in sight. Days later, Iberdrola announced its takeover of US developer Midwest Renewable Energy Corporation (MREC), along with that company's 1600 MW wind project portfolio, revealing part of the reason why it needed to secure a turbine pipeline.

Both Spanish companies brandished the 2700 MW turbine contract, valued at over EUR 2300 million, as the global industry's single biggest order to date. It is "equivalent to 80% of Gamesa's annual capacity output for 2008," says Gamesa. But despite all the fanfare, neither Gamesa nor Iberdrola, which owns 24.4% of its main turbine supplier, are releasing further information beyond saying the turbines are destined for Spain, other European countries, Mexico and the US.

On past performance, the turbines will go to the Iberdrola projects that come off first, with more than half for Spain, where the utility already operates 3400 MW. In the US, Iberdrola says its acquisition of MREC last month and Community Energy in May (Windpower Monthly, June 2006) brings it a combined portfolio of 3800 MW of projects in development, 600 MW of those at an advanced stage. At least some of that is to be supplied with turbines from Gamesa Eólica's Pennsylvania facility.

Delivery pressure

Across France, Italy and Poland, Iberdrola has already acquired development portfolios for 1124 MW and in Greece it owns 49.9% of the country's biggest developer, Rokas, with 1636 MW in progress, 600 MW of that scheduled for end-2008. Iberdrola is also developing projects in the UK, Slovenia, Portugal, Brazil and Mexico. With a recently signed 1000 MW prospecting agreement in China as well, all indicators suggest Iberdrola will be needing more machines in the near future.

Gamesa's share value rose 4.6% on Madrid's stock exchange on the back of the Iberdrola announcements, indicating that investors have few worries about Gamesa's ability to supply the required turbines. The company is spending EUR 104 million on ramping up production capacity over 2006. With the Pennsylvania complex in the US, and a new 700 MW/year facility in China, Gamesa now operates six nacelle assembly factories. Half of its wind turbines are now equipped with gearboxes and generators from companies it owns, says Gamesa. It also says it makes the bulk of its blades.

Turbines built in Pennsylvania will eventually feed into the development pipeline of MREC, which Iberdrola bought for EUR 30 million. Of MREC's full 1600 MW of developments destined for the Midwest, some 400 MW is close to construction. The company is led by Stephen Dryden, whose prior wind development work included FPL's 42 MW Cerro Gordo plant in Iowa and the 80 MW Top of Iowa project. Dryden recently cut a deal with local Iowa utility, Madison Gas and Electric, for the output of a 30 MW project -- but that hinged on securing turbines.

"Finding turbines takes a lot of time and it was dragging me away from doing real Greenfield development," says Dryden. "On top of chasing financing, I was having to chase turbines." Now under Iberdrola's expanding global umbrella, Dryden says he is relieved to have that worry removed. "This now allows me to get back into the projects. Now I can get down to where the rubber meets the road."

Dryden says Iberdrola's landmark turbine agreement with Gamesa was a key aspect of MREC teaming up with the company. Turbines will first come from Spain, he says, but eventually they will be manufactured and delivered from Pennsylvania as Gamesa ramps up production there.

By no coincidence, Community Energy, a developer and green credit marketer, is also headquartered in Pennsylvania. They fit into the larger picture, says Dryden, because of their recent acquisition by Gamesa. Just as the two Spanish companies teamed up, Dryden sees MREC and Community Energy performing in their respective geographic markets as the development pipelines for Gamesa turbines bought by Iberdrola. There could even be some closer synergies with Community Energy in terms of MREC's green credit division, which he says could end up being administered by Community Energy.

MREC's acquisition by Iberdrola fits into an increasingly global wind business model based on market forces that are putting the squeeze on smaller regional developers unable to come up with the capital for developments. "All the major turbine vendors are looking to lock in contracts for four or five years," says Dryden. "It doesn't look pretty for the smaller guys, but some will shift. No doubt market efficiencies will come in somewhere and seize that niche. The local developer will have to find their niche."

Iberdrola in America

At the opposite end of the developer scale, Iberdrola is focused on long and expansive contracts. With its deal to buy 1000 MW of completed wind plant being built by Gamesa's project development business, Gamesa Energia, in Texas, Pennsylvania and Illinois, Iberdrola says the first contract, in which "300 MW will be firmly committed," is pending. A further 200 MW is "subject to acquisition rights" while 500 MW is still in the pipeline. The deal is valued at $700 million-$1.1 billion, depending on what gets built.

The agreement follows a long line of similar deals between the two companies, starting with Iberdrola's purchase in 2002 of 1000 MW built by Gamesa in Spain. That was followed in 2004 by a 250 MW deal in Portugal and, in 2005, a 700 MW deal across Spain and Italy. Much of the last two deals remains to be fulfilled, as does Gamesa's 2003 commitment to sell 426 MW of completed wind farms across Italy and Portugal to Belgian utility Electrabel. So far Gamesa Energía has announced delivery on just 80 MW to Electrabel.

These outstanding orders, not to mention turbine requirements for Gamesa Energía's own 20 GW portfolio, put further pressure on Gamesa's turbine output. Gamesa Eólica has equipped 7500 MW of wind plant across 20 countries, but it still has to prove it can cope with the new global demand market.