A Chill Blows Through Wind Power

The green energy sector has a lot riding on 2009. Policymakers from Washington to Beijing have pledged billions of dollars in "cleantech" investment to jump-start the depressed global economy and create millions of new low-carbon jobs.

That should be a boon to the wind power industry, which is working to harness the world's second-largest source of renewable energy after hydroelectric. As with the solar industry, wind power has been hit by a sudden slowdown in private sector investment as credit has dried up and the price of oil has fallen from its mid-2008 high. The industry hopes public spending will help fill the gap until the global economy gets back on its feet.

The multibillion-dollar stimulus packages are particularly important for Europe, which remains the largest wind energy market worldwide and is home to six of the world's top 10 wind turbine manufacturers. Despite the Continent's dominant position, companies ranging from Denmark's Vestas (VWS.CO), the global leader in turbines, to Spain's Iberdrola (IDRO.F), the world's largest developer of wind farms, have been forced to cut back to meet the new economic realities.

According to market researcher Emerging Energy Research (EER), new installed wind capacity worldwide will increase by just 14% in 2009—less than half the typical annual growth rate booked in the past decade. Consultancy Accenture (ACN) projects wind power capital expenditures over the next two years could fall by as much as 30%.

Falling Demand

The slowdown is closely tied to the global economic crisis. Project financing costs, a critical element in this capital-intensive sector, have skyrocketed as banks cut back on lending. Scores of independent (and often highly leveraged) energy producers have already been pushed out of the market. That could cause demand for wind turbines to fall by as much as one-third in 2009, as only cash-rich utilities such as Florida Power & Light (FPL) have the means to continue investing.

With sales soft, Europe's turbine manufacturers have been forced to cut prices to offload unsold inventory and to shut down costly plants built to accommodate now-reduced global demand. Profit margins have fallen in tandem. "[The] financial crisis is noticeably impacting the global wind industry in the short term," says Keith Hays, EER's global wind research director. "It's impacting the global wind project finance market and the equity values of major listed wind energy players."

Until U.S. President-elect Barack Obama outlines more details about his proposed $150 billion, 10-year plan to invest in green energy, analysts reckon investors will shy away from the sector. The ISE Global Wind Energy Index, which tracks 57 wind-related stocks, has fallen 56% in the past year. Shares in Vestas and its Spanish rival Gamesa (GAMS.F)—the first- and third-largest global turbine suppliers, respectively—are down by more than two-fifths over the same period. And General Electric (GE), ranked No. 2 globally, has lost 57% of its market capitalization since the beginning of last year, though the U.S. company is much more diversified than its European competitors.

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