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United States

United States

America the top annual market once more -- Almost 8.5 GW in one year

The American wind market has done it again. Installation of new wind plant across the United States in 2008 exceeded all expectations, coming in at 8311 MW (tables and map), a slightly higher tally than that reported by the American Wind Energy Association (AWEA) and almost 3000 MW more than installed in 2007, itself a record year. Total wind generating capacity at the start of 2009 was close to 25.4 GW.

Prospects for 2009 lie in the realm of the unknown, although this time it is not imminent expiry of the federal production tax credit (PTC) for wind plant owners that is keeping investors' hands in their pockets, but the US financial crisis. For once the PTC was extended through 2009 before it managed to expire last year and it has now been further secured through 2012 as part of the federal government's major economic stimulus bill passed last month -- giving the wind industry a stable US market for a full four years for the first time ever. This year the PTC is worth $0.021 in tax reductions for every kilowatt hour of wind power produced.

The problem now is a dearth of investors with profits big enough to need to make use of financial vehicles such as the PTC to reduce their federal tax bills. Even if such investors exist, the failure of the Wall Street investment banks that ran the PTC vehicles has all but destroyed the "tax equity partnership" model behind much of US wind power financing in recent years. To deal with the problem, the stimulus bill provides for the PTC to be converted to an investment tax credit (ITC) if desired, with the option to realise the value of the ITC as a straight capital grant for projects that start construction in the next two years (page 27).

Whether new financing models appear and what they will be remains to be seen, but much will depend on the details of the PTC's alternatives, which have yet to emerge. Many believe that well structured wind projects will attract capital and long term prospects are good, although AWEA entered 2009 fearing that as much as 50% of planned development this year would not break ground. "It's hard to imagine in one year you can go from a boom to such a bust," says John Calaway of independent wind power producer Babcock & Brown (B&B). According to Calaway, the tax equity investors left in the market are requiring higher returns on their investments in wind farms than previously, "sucking all the value" out of projects from a developer's viewpoint.

Others are more optimistic. "I would diverge a little bit from some of the most pessimistic forecasts for 2009. It's a little hard to see dramatic reductions in installations in 2009 because turbines have been largely paid for and construction loans made," says Clay Coleman at Iberdrola Renewables, which brought 458 MW online in the United States last year. "It's sort of like the freight train that's left the station, you really can't stop in the middle of 2009, but most developers are probably in go-slow mode at this point -- and where they can stretch out deliveries and stretch out construction contracts, they are doing so," he adds. "Without a quick turn around in the credit market, which we don't really foresee, we'll see dramatic reductions in 2010 and beyond."

Tougher due diligence

New strategies are emerging in the changed climate. Coleman says Iberdrola is running its prospective wind projects through an increasingly stringent pre-screening due diligence process. Because almost all wind farms and project portfolios have some problems, says Coleman, this process simulates today's financing gauntlet so that only projects that are "squeaky clean" are presented to potential equity owners with the capital to bankroll them.

Iberdrola, Spain's largest electricity utility, is a major force in the US wind market. With its acquisitions of PPM Energy, Midwest Renewable Energy Corp and Community Energy in recent years, the company exemplified the flood of European capital into US wind power between 2006 and 2007. But last year, with most of the low-hanging fruit gone, European acquisitions of US wind assets slowed to a trickle. Ireland's National Toll Roads bought small Midwest developer Wind Capital Group; Iberdrola made a lateral move into fossil fuels by acquiring Energy East, a utility in the Northeast. Any mergers and acquisitions that might occur this year are more likely to be sales of distressed assets -- such as early stage wind plant developments -- many done quietly through private transactions.

Turbine order frenzy

Wind turbines are a big part of that freight train that has already left the station. Turbine deliveries to the United States are continuing through 2009 and into 2010 from contracts and turbine supply loans arranged during better economic times. But, according to Ed Zaelke from law firm Chadbourne & Parke, few new contracts are expected. "We have seen turbine financing dry up to be pretty much non-existent," he says. "There are a lot of clients that are long on turbines and looking for some place to put them and trying to figure out how they can make this work in 2009."

Large master supply contracts for delivery of wind turbines inked through 2007 and 2008 -- often for hundreds of megawatt of machines -- were part of a shift in financial risk away from turbine manufacturers to wind plant developers. With developers posting letters of credit and agreeing to take turbine deliveries through 2009 and 2010, manufacturers were able to ramp up their supply chains to meet future demand knowing they had customers.

Not so fast, says Calaway. "The turbine manufacturers forced our hands to do these long turbine supply agreements into 2010. This is just my personal view, but I believe the turbine manufacturers shot themselves in the foot," he says. "The turbine supply guys forced everyone into a frenzy and all the big guys with the balance sheets took it hook, line and sinker, putting up all this money. The GEs of the world scraped all the money over to their side of the ledger and now, all of a sudden, people are trying to cancel projects and trying to get out of contracts," says Calaway.

Turbine manufacturers are not without risk from these contracts, he continues. The pool of turbine customers is now less diversified because smaller developers, unable to order several hundred megawatt of turbines at a time, were squeezed out. Independent wind project developers unable to raise financing may walk away from their problems and their turbine orders, says Calaway. Turbine manufacturers would then have to "wait in line with all the rest of the unsecured creditors," he warns.

According to Zaelke, a number of wind turbine manufacturers are trying to hold up prices, but are having difficulty doing so as a secondary market emerges for resale of turbines on order in master supply contracts, but with no project to go to.

high turbine prices

A body of opinion maintains that turbine prices were artificially high in recent years. In 2002, the turbines for a B&B project in California cost around $1.2 million a megawatt, while 2008 delivery prices were around $2.2 million/MW, says Calaway. "We've first seen a secondary market selling at a discount, and then we're seeing the manufacturer going down and matching some of the discounts," says Zaelke, who expects the warranty pendulum to shift as well. The trend toward costlier or shorter machine warranties is likely to reverse as manufacturers compete for fewer customers, he believes.

Price cutting

He adds that it is hard to get financing for anything but turbines from GE, Vestas and Siemens and that new market entrants will have be more aggressive on price cutting. From Germany's HypoVereinsbank, which has specialised in wind project financing and loans for turbine purchases, Gisela Kroess agrees. She says turbine financing will be more difficult to secure for orders from Clipper, Nordex and Suzlon.

Wind turbine supply in the US last year was once again dominated by home player GE Energy, which increased its 2007 share of 42% to 45.8% in 2008. Vestas and Siemens, in second and third places, each lost out, with Vestas' grip in the US sliding from 20.6% of the market in 2007 to 12.3% last year and Siemens's share nearly halving from 16% to 9.5%. They lost out to relative newcomer Clipper and to Indian Suzlon, both of which outpaced Mitsubishi and Gamesa. Suzlon's slice of the pie rose from 3.6% to 7.8% between 2007 and 2008 and Clipper from less than a percent in 2007 to 7.1%. Gamesa ceded the fourth place it achieved in 2007 to the newcomers by dropping down to sixth place (chart page 44).

Geographical shift

Turbine diversity increased last year, with Germany's Repower, controlled by Suzlon, completing a large project in California and Spanish Acciona machines being deployed for the first time in the US. Also German veteran Fuhrländer secured a toehold in the US with the sale of two 2.5 MW turbines on custom towers.

Where wind turbines were planted shifted somewhat as well. While Texas continued as the strongest state market, with almost 3000 MW going online, compared with 1617 MW in 2007, there was little other consistency in state rankings. Colorado, the second place finisher in 2007, was nowhere to be found in 2008, but Iowa raced up the charts from a seventh place finish in 2007, pushing ahead of California into second place behind Texas as the state with the most installed wind power (tables).

Just under 1500 MW went up in Iowa in 2008, with two players leading the rush: utility MidAmerican concentrated all its 2008 wind power installation efforts in Iowa, bringing 623 MW online in seven projects. FPL Energy -- which recently renamed itself NextEra Energy Resources -- followed up with 615 MW in five projects. Partly driving Iowa's growth is its state tax credit for wind, which is paid in addition to the federal PTC. It provides $0.01/kWh for ten years. Last year, Iowa lawmakers extended the credit's eligibility for projects in place by 2012 and it allowed for the credit to be transferred by the project owner to other parties without limit.

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