United States Report: Turbine market makes crunch response

While developers shelve planned projects and the previously ordered turbines lie unused, unbuilt or undelivered somewhere around the US, the hardware manufacturers are looking for clever ways to keep themselves and their customers afloat.

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The financial crisis on Wall Street last autumn blew a hole in the credit markets used to finance the development of wind energy. Though a new-found optimism has entered the sector, driven partly by President Barack Obama's desire to reduce carbon emissions and create thousands of new jobs in renewable energy development, the downturn in project construction has left many developers with unused turbines, intended for projects that have been put on hold, laying idle across the United States.

Some of these turbines are in storage, others in transit, but most have not been built yet. Instead, their buyers are looking to stall the outstanding deliveries until they have a development to put them in and to push the payment due off their balance sheets.

Meanwhile, turbine vendors are taking steps of their own to slow the rate production and are trying to co-operate with finance-starved developers in the US. The situation began many months ago when developers committed to big multi-megawatt package deals for future delivery of turbines. In some cases, those deals included hundreds of turbines, many of which have reached their intended homes or will do shortly. But others, say experts, have been deferred. "What all the vendors have done is allowed the large guys to defer portions of their orders for future years," says Joel Link, former head of Midwest development for Invenergy and now a lead developer with Element Power.

Link adds that one major developer he knows well cut its 2009 turbine delivery, deferring the remainder until 2010. Even where deliveries and payments can be deferred, the burden of paying for them at all can still be too much for developers that are unable to get their turbines into development and up and generating income. Yet many turbine vendors would rather help their customers than cast them into the poorhouse. "Manufacturers would rather work with (solvent) developers than deal with bankrupt ones," says Link.

Big players hit

There is a misconception that it is almost exclusively the smaller, less reputable developers that are looking to offload excessive turbines. In fact, a good number of big, reputable companies ordered many more turbines than they are able to use in the post credit crisis world. "They still need to do some deals," says Alan Merkle, who structures turbine supply agreements for law firm Stoel Rives.

The fact that hundreds of turbines are ending up in the hands of middlemen, essentially in a grey market, poses a number of problems for the turbine trade. Traditionally, a turbine is granted a warranty on the basis that it will be shipped from its place of manufacture, by a means determined by the seller, to a location specified by the buyer. If it ends up in the grey market then there is a risk that the warranty becomes void, as it is shipped by a third-party courier to a third-party warehouse, where it may not be looked after properly. "It's not in the long-term best interests to have turbines parked in a bank-owned parking lot or warehouse owned by somebody else who is not in the wind business," says Merkle. "Because eventually they will end up someplace where they won't work as well because they haven't been properly cared for. That reflects badly on the vendor, even if they didn't do anything wrong."

Keeping tabs on their products

For these reasons, turbine manufacturers are often closely involved in the grey market. "Whoever the buyer is wants the turbine supplier to sign on to the secondary sale to try and keep warranties intact," says Merkle.

That said, although the majority of excess turbine deals see vendor involvement, some developers that have ordered more turbines than they are able to use are seeking discrete sales to other developers, says Dan Firestone president of Encore Renewable Energy Resources, which quietly brokers transactions between parties. It has been brokering one- and two-turbine deals, along with excess components such as transformers and generators. Developers that have over-ordered equipment are keeping quiet to avoid the public perception of wobbly financial security. "In a professional industry nobody wants to admit they have a problem," says Firestone. "But generally, if you talk long enough they will come clean."

A number of wind projects, particularly in the small 10 to 20 MW range, have seen financing fall through and are seeking to offload turbines. One of Firestone's customers had GE 1.5 MW turbines lined up for a project in the Northwest, but lost a needed equity partner to finance the project and has since been using Encore to sell its excess turbines. As the vendor does not participate in the sale, the new buyer typically does not get as many contractual benefits that originally accompanied the sale, says Merkle. This includes warranties, technical support and operations and maintenance support. "But the prices are right," says Merkle. "You can take some risks if people really need to unload and sell them at a discount. We've seen some pretty cheap discounts, particularly if warranties are about to expire. People can get a bargain."

Certainly, vendors don't want to see their turbines shoved in a warehouse to be sold at a discount. Should the turbines end up in the grey market, vendors can find themselves losing sales to their own turbines - which are being discounted elsewhere.

So what can be done to prevent too many turbines falling through the gaps into the grey market? Analysts say that turbine vendors are usually unwilling to accept equity in future wind projects as compensation for making concessions on agreed orders. Nor are many happy to offer a big cut in price. Yet there is a fair amount of motivation to co-operate to some extent in order to ensure that the turbines end up with a reputable developer rather than floating around on the market.

Analysts point out that the current weakness in the US turbine market has been less evident in lowered prices and more in greater availability and quicker deliveries. Certainly, projects that may in past years have been ignored by big turbine vendors are now finding a ready ear. As Link says: "There's a lot of feeling right now in the market that if you show up to the turbine vendor with a power purchase agreement for X price and you show your economics, you could get a turbine order and price that fits your economics."

Certainly, the developers that can survive the downturn, hold on to turbines and put them in the ground can take advantage of the buyers' market. The tables could again turn in favour of the manufacturers, says Link. "If we go through another boom cycle," he says, "they'll be back to gouging us all."

A market familiar with change

Most major vendors going into 2010 have reduced their manufacturing capacity to more closely match the anticipated lower demand. This chopping and changing is familiar to the American wind market, which experienced years of boom and bust cycles largely dictated by the US federal government's production tax credit (PTC), a "green" tax cut for turbine manufacturers, which was turned on and off depending on whether Congress voted to renew it at the end of a particular cycle. During those up and down days, Merkle says that developers often signed shared risk deals with turbine suppliers by providing them with sizable cash payments up front for production of the turbines. If the PTC lapsed in any given year, the developer would not take delivery of the turbines and the vendor would keep the deposit.

Today's credit crunch is less easily cured by an act of Congress, so, into 2010, vendors are trying much more than in past years to accurately match manufacturing capability with orders. "The risk is still the same," says Merkle, "but the assessment is a lot more complicated." He adds: "What I see is that the vendors are not willing to take as much risk as they did during the PTC boom-bust cycle. They are being more cautious and trying to do a better job of producing in line with orders." Some turbines are in storage and some are in bank-owned warehouses but, for the most part, buyers' deferments mean that the vendors are finding ways to slow production and may themselves have turbines or subcomponents in storage. Indeed, subcomponent manufacturers have also been affected by the slump.

The US's blade and tower production in particular has seen the most visible downturn because the two sectors make up a large percentage of all turbine components produced in the US. Many of the housings for machinery - the nacelles - are imported from abroad and those that are assembled in the US often use a large proportion of subcomponents from overseas.

Adapting to survive

There is much interest in the business of manufacturer GE, which easily retained the top seller position in the US last year by installing around 2500 of its 1.5 MW turbines. Experts, including Link, say GE has the potential to produce around 3000 units a year at full capacity but that the assembly lines have slowed and may produce as few as 1400 units each year until orders pick up. GE declined to comment.

Link adds that market observers are speculating that Vestas has instead opted to keep its production capacity going but is stockpiling units in storage. Vestas, however, is now pricing the units for order and future delivery for the US market in US dollars for the first time, which is a sign of a vendor adapting to a harder selling climate in the US, says Link. "They used to make the developers take all the foreign exchange risk," he says.

De facto warranties

Buyers that do involve the turbine manufacturers are finding a silver lining in today's market. In addition to increased availability and shorter delivery times, additional post-sales service is being offered as enticement to make a deal. In the past, full warranties for wind turbines covered the product for around four years. During the boom years of the sellers' market that quickly diminished to two years and offered less coverage as vendors exercised their power. Today, rather than extending the terms of their actually warranties, vendors are providing generous technical support and maintenance that comes close to the equivalent of a warranty. Merkle offers a recent example between unnamed parties. "A vendor agreed on a maintenance contract to fix everything on the turbine no matter what goes bad and to do so for a set fee," he says. "They don't care if you call it a warranty or a service contract. The buyer sees they have full coverage for anything that goes wrong or needs attention for a set number of years at a certain price. De facto, you could say, warranties are more generous than they used to be."

A less visible area of turbine sales is in projects, motivated by the very fact that a developer has got into difficulties when over-buying turbines. A developer selling excess turbines may find a more ready buyer for them when the units come packaged with an accompanying project site in advanced stages of development. This includes some or all of the following: power purchase agreements; electricity grid interconnection queue positions or interconnection agreements; verifiable on-site project data measured for one or more years; land control; and any range of necessary permits for construction.

It is hard to prove, says Merkle, but there is little doubt that some recent project sales were motivated by cash-strapped developers that went in too long on turbine orders. The exact detail of package deals varies from developer to developer. For example, an electric utility may buy a wind project and its turbines, and decide to use the turbines for a separate development site of its own while holding the project site for future use. Or if the project accompanying a turbine order still needs to secure something like a final build permit, then the turbines can be used at a different site that is ready to build.

In today's market, utilities are the likely buyers of both wind development and turbines. They are typically better capitalised and more creditworthy than wind developers because they have a revenue stream from consumers that fluctuates very little. Many utilities that were previously content to buy power from wind projects owned by independent power producers are now becoming ready buyers of entire projects. As Merkel says: "It's been a fairly fast transition driven by policy, economics and the utilities' recognition that they have to have a pretty significant percentage of their portfolio coming from green sources - and they are more exposed having to buy power instead of owning some."

T. Boone Still in for Wind

No discussion of excess turbines is complete without reference to Mesa Power and its charismatic owner, T. Boone Pickens. The Texas billionaire is arguably the most famous name in the US wind market, following his plans for a wind project up to 4000 MW in size and a mainstream media blitz said to have cost him more than US$40 million to advertise his push into wind.

Mesa Power, the wind development subsidiary of Pickens' holding company, signed a supply deal at the peak of the market in May of 2008 for 667 GE 1.5 MW wind turbines, the largest single order GE has received for its wind turbines. The contract required that the turbines be delivered at the beginning of 2010 and throughout 2011. Yet Pickens' development has been placed on hold because of transmission line constraints and today's difficult financing environment.

While GE does not comment on deals or pricing, Mesa attorney Monty Humble says that the "delivery schedule will be synchronised with our development schedule," and that opportunities remain to plant the turbines at smaller projects throughout Texas and beyond.

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