Wind turbine sales may take big recession hit

A wind turbine is pictured near power lines during a sunset in Dorenaz near Martigny, in Southern Switzerland, August 9, 2008.

LONDON (Reuters) - Investors are deserting a wind power sector which until now had benefited from twin climate and energy concerns, as a debt squeeze forces developers to re-think projects.

The sector has enjoyed explosive growth, at more than 30 percent per year during the past five years, partly on aggressively priced project finance debt.

Now that debt is more expensive, if available at all, harming the economics of wind farm financing.

Weaker demand for wind turbines, especially from smaller project developers which rely on debt finance, will hurt manufacturers.

"You're going to see a massive decline in turbine orders," said Tom Murley, the head of the renewable energy team at private equity investors HgCapital.

HgCapital is trying to raise debt finance for two renewable energy projects for next year. It still expects to find funding, but with more expensive debt.

"In the last four to six weeks we've had discussions with 15 or 16 of the more traditional project finance lending banks and ... they're closed for business for this year," Murley said.

"They say they'll be open next year but no-one knows how much they'll have to lend how much they'll be allowed to lend, what the margins will be."

Some 40 percent of developers of new build wind farms rely on project finance debt rather than using their own cash, Murley estimated -- implying a large slice of manufacturers' customer base may want significantly fewer turbines.

In stock moves so far this month market leading turbine maker Vestas is down 59 percent. Among other major companies Gamesa is down 58 percent, Suzlon by 66 percent and Clipper Windpower 42 percent.

That considerably under-performs the wider market, for example comparing with a 30 percent drop in the benchmark MSCI world index of listed companies since October 1.

SLOW

Those wind power company valuations implied that investors were expecting 6 percent annual growth in the wind sector over the next five years, compared to consensus estimates of 22 percent, said HSBC in a research note last week.

The largest U.S. operator of wind-power generation, FPL Group, provided on Monday early evidence that developers will cut orders.

The company cited the economic slump for cutting 2009 planned capital expenditures by nearly 25 percent, to $5.3 billion, which means it will add 1,100 megawatts in new capacity rather than the 1,500 megawatts originally planned.

In stock moves this month among project developers, FPL Group is down 18 percent, Europe's utility-scale Iberdrola Renovables 35 percent lower, and the smaller London-listed operator Novera is down 44 percent.

But some analysts are cautious of reading too much into stock falls.

"We foresee more than 15 percent growth per year from 2008 to 2010," said Miroslav Durana at Credit Suisse.

Durana said more expensive project finance debt could be offset by more efficient turbines in on-shore wind projects, while off-shore would see slower growth because of higher costs.

The extension of U.S. tax credits on wind farms was also good news, he said, although other analysts said there were fewer banks around to buy those credits.

Analysts agreed that turbine makers' share prices were falling partly because they had been over-priced -- with earnings P/E ratios in late September more than double those of less specialist engineering firms.

Less demand for turbines would have the spin-off for developers of cutting prices, which would be especially good news for larger utilities with cash to spare.