Temporary downturn says Danish industry -- Economic stimulus packages likely to target renewables

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Delayed projects but no cancelled orders reports the Danish wind turbine industry, which is beginning to feel the first effects of the global financial crisis. Staffing levels at compent suppliers are being adjusted to the slowdown, with rotor blade supplier LM Glasfiber announcing its intention to dismiss 450 workers in Denmark out of a 2200 strong workforce, as well as 150 out of 1450 employees in the United States. Denmark's two big turbine producers, Vestas and Siemens Wind Power, have largely put a stop to recruitment. Behind the scenes, however, lies a widespread expectation within the Danish industry -- which represents around 40% of global wind industry revenues -- that for wind power the downturn is only temporary.

Sector growth will continue through 2009, assures Birger Madsen from BTM Consult, a respected industry observer over three decades. The rate of growth will slow for a period before picking up again, he says. The broad fall in prices for raw materials caused by the global recession is likely to bring down wind turbine prices, he points out. Provision for raw material price changes are often included in turbine purchase contracts.

Cheaper turbines

"I've seen estimates that wind turbines can be 10-15% cheaper, but be aware that is without necessarily hitting the bottom line for wind turbine manufacturers," says Madsen. Delayed orders will also free up turbine supply and potentially reduce bottlenecks in delivery of major components such as bearings and gearboxes that have plagued the market, he adds. On the other hand, investment in more component production capacity was initiated before the full effects of the financial crisis were felt. That requires capital that may no longer be available, he cautions.

The particular problems faced by the industry in times of tight money supply are threefold. First, more equity is being demanded of project developers. Whereas banks were previously satisfied with owners providing 10-20% of total project cost before they would finance the rest, now they are demanding more. As a result, developers with limited resources are not able to proceed with all their intended projects and some are being delayed.

Second, banks are now under stricter orders to lend only a specific proportion of their capital, which has been drastically reduced in recent months. In a situation where bank capital has perhaps dropped by 50%, old traditional customers tend to take priority over new and less well understood industries.

Third, "old wind" has begun to compete with "new wind." When the cash requirements of companies such as Italian utility ENEL and asset management firm Babcock & Brown cause them to sell their existing wind farms for less money than new can be installed for, the entire market comes under pressure. The new owners, however, quickly build up cash reserves for potential investment in new wind farms.

Stimulus packages

Belief in the ability of the wind market to recover faster than those of other industries is strong, but if the much discussed "green revolution" is to set the wheels of broad economic recovery in motion, bank finance has to be made available once again. Government backed economic stimulus packages must contain provisions targeted directly at building out the needed infrastructure for renewable energy growth, says Madsen. The commitment by European governments to 20% energy from renewables by 2020 across the EU gives them no other choice. President Barack Obama is pushing for a similar US commitment.

The job losses at LM are the most dramatic announced yet. At this time last year, the company had orders for EUR 2.4 billion, compared with EUR 2.1 billion today. Yet in the 2007 fiscal year, LM's turnover amounted to EUR 577 million, an indicator of its speed of growth. The delayed orders result from master purchase agreements with inbuilt provision for adjustment should market conditions change. "So it is in the short term that we are adjusting to the situation. Longer term our expectations of the wind market are intact," says LM's Steen Broust Nielsen.

The announced job losses come after LM, just before the financial crisis exploded, expanded its facilities to provide blades for a further 2 GW of wind turbines, bringing manufacturing capacity at 12 factories around the world to 5 GW. The investment was largely made in Spain, India and China (Windpower Monthly, May 2008). Expectations for 2009 have now been slightly reduced and the workforce is being reduced accordingly. "On the other hand, the production expansion means we are in a good position when the market turns and demand picks up again," says Broust Nielsen.

LM has traditionally tended towards mass hiring and firing and the current round is no surprise to local union leader John Bondebjerg. He says it would not surprise him if LM took on 100 workers before the summer. In 2003, LM fired 450 of 600 workers. Once the current round of dismissals is realised, LM will have 1750 workers in Denmark and 6000 worldwide.

Market analysts are uncertain about when the recession will hit the industry. The broad feeling is it will not be until 2010. Some believe that most of Vestas' budgeted revenue for the year is secure in orders already announced. The inclusion in purchase contracts of stiff penalties for order cancellations reduces the risk of customers pulling out.

Generally analysts agree that large orders from financially strong utilities are relatively safe, while smaller orders from independent project developers are at risk. Utility and big company orders make up most wind turbine business these days. Manufacturer requirements for large advance payments for wind turbines, which escalated with demand outstripping supply, are not expected to be maintained with the return of a buyers' market.

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