United States

United States

US Special - Market Overview - Market back down to earth with a bump

From spectacular growth rates year on year of more than 100%, the US wind market is likely to lose much of its high-flyer status in 2009 as wind turbine orders plummet in the wake of the financial crisis. Barack Obama's stimulus package will help, but more federal measures are needed for a rapid return to impressive growth. Pie chart: Utility market shares in the US; foreign utilities, industrial majors, oil and gas majors, regulated utilities, independent, unregulated US utility sub.

It was the best of times, it was the worst of times. Both equally true for 2008. On the high note, the US wind industry shattered all previous records for new installed capacity with 8358 MW, far surpassing 2007's record-breaking 5244 MW. Wind's growth rate has been nothing short of spectacular - over 100% between 2006 and 2007, and 60% between 2007 and 2008.

 

Texas again led the way with over 2600 MW. Next was Iowa with approximately 1600 MW. Minnesota, Kansas and New York each had more than 400 MW, followed by North Dakota, Wyoming and Wisconsin, each with more than 300 MW (pages 14-15). To put this in perspective, the entire US build in 2005, itself a record at the time, was just 2400 MW.

The capital requirements for this level of build are enormous: approximately dollars 16 billion for 2008 alone. The trend is therefore towards large, well-capitalised developers that can sustain the huge capital commitments required. Although independent developer/owners accounted for 22% of the 2008 market, many of them first-time builders, utility developer/owners accounted for approximately 65%. This includes foreign-owned utilities and unregulated utility affiliates. With Shell and BP, we are also seeing the emergence of oil and gas majors accounting for approximately 6% of the market.

There were several major consolidations during 2008. The biggest deal of the year was the sale by the fallen Allco Financial Group of a 3100 MW project in development in Tehachapi, California (Windpower Monthly, September 2008). Including a 1550 MW power purchase agreement (PPA) with Southern California Edison - the largest wind PPA ever signed - Allco sold the portfolio to ArcLight Capital Partners and Terra-Gen Power for dollars 325 million plus the assumption of letters of credit with a value of dollars 65 million.

Meanwhile, US firm GE again dominated the turbine market with a 43% share, followed by Denmark's Vestas with 13% and Siemens of Germany with 10%. Indian turbine maker Suzlon, Spanish Gamesa, US firm Clipper and Japan's Mitsubishi each had sales in excess of 500 MW. Both Acciona of Spain and German company Repower had their debut with numerous other manufacturers gearing up to enter the market.

So all systems were go for an even bigger 2009 - until the credit markets collapsed during the fall of 2008. The effect of the financial crisis on the market cannot be overstated. New bank credit commitments ground to a complete halt during the fourth quarter of 2008. As large financial institutions suffer heavy losses, fewer of them have huge tax bills to offset by using the dollars 0.021/kWh production tax credit (PTC) that underpins the US wind market - the credit pays about 33% of the capital cost of a typical wind farm. This avenue of finance, known as the tax equity market, dramatically shrunk from dollars 5.2 billion in 2007, with 18 active investors, to dollars 2.5 billion in 2008 and only four investors. This has stranded numerous projects, leaving them without the tax equity they need to progress.

With developers no longer able to obtain easy access to credit, new turbine orders have plummeted. The market has swung from turbine shortage to surplus, with turbines reportedly selling at steep discounts in the secondary market. Financial pressures have forced even Babcock & Brown, the third largest developer of wind projects in the US, to put its wind business up for sale. Numerous other developers are rumoured to be actively seeking new owners as well.

The good news is President Obama has made renewable energy a priority for the new administration. Congress has also embraced renewables with bold, new policy initiatives. The economic stimulus package unveiled by the new administration (Windpower Monthly, March 2009) contains a 30% cash grant in the form of a refundable investment tax credit (in lieu of production tax credits). Though not enough to fix the market, it will certainly help. Significantly, more federal measures, including a long-awaited national renewable electricity standard, are in the works.

So although 2009 looks like it will see a drop in activity from 2008, the fundamentals for long-term growth still remain - America's need for clean, renewable, domestically produced energy at competitive prices. With strong public policy support and the thawing of the credit markets, we should see a return to impressive growth.

 

ABOUT KAYE SCHOLER

Kaye Scholer LLP is a legal firm specialising in business law. Its GreenTech Group helps clients to manage risks and take advantage of opportunities associated with climate change and green technology.

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