COLUMN-Vestas is window on stagnant wind market-Gerard Wynn

Thu Jan 12, 2012 9:31am EST

By Gerard Wynn

LONDON Jan 12 (Reuters) - Turbulence at Danish wind turbine maker Vestas reflects a flagging sector and demand pressures through 2014, but that only just merits chief executive Ditlev Engel holding his job.

Engel in three months has presided over two profit warnings, and on Thursday over an axe to a tenth of the workforce, job cuts mostly in Denmark. Shares have fallen two-thirds in a year.

Luckily for him, the world's biggest wind turbine manufacturer also hit guidance for orders in 2011, equivalent to more than a fifth of globally installed capacity last year.

The company's re-drafting of profit expectations and long-term targets are a window on wider sector problems of over-capacity and sliding turbine prices.

World demand rose moderately last year, by 10 percent or more, according to an early estimate by the head of the Global Wind Energy Council (GWEC), Steve Sawyer, reversing a drop in 2010.

The sector now faces a renewed economic downturn in Europe, an election year in the United States stuffed with Republican climate sceptics, and more scrutiny in China of booming projects which have out-grown the grid: blades were turning but no power generated.

These problems will be over-turned: Chinese demand will rise again after a flattish 2011; developments are ramping up in other emerging economies including Brazil, South Africa and Mexico, and in smaller countries from Honduras to Mongolia.

The trouble for the wind market mirrors that of solar: demand has slowed after boom years when manufacturing capacity exploded, leaving a nasty hangover.

Yet wind turbines have important advantages over solar: the technology is more mature and increasingly competitive with fossil fuels.

And, fortunately for Western makers, huge turbines which need complex servicing are less easily traded worldwide, leaving much of China's over-capacity at home rather than crashing global prices: China's capacity is as much as twice utilisation, according to HSBC analysts.

DEVELOPED WORLD

At present the sector is suffering from roughly 10-15 percent global over-capacity and a 10 percent fall last year in sale prices.

New challenges in Europe, the United States and China differ, and may deepen problems.

In Europe, a renewed economic downturn is curbing power demand and has raised the cost of credit, critically for an energy source which depends on up-front capital.

The cost of financing wind projects in Europe is now around 300 basis points over inter-bank lending rates, from a low of 225 points since the financial crisis, according to one developers' estimate.

In the United States the risk is to government support: demand was up in 2011, but in part due to a rush to avoid a cliff edge in government support if tax credits are not extended beyond December 31 this year.

An election-year mood for extending wind power support is framed by states which have wind power potential versus recent fallout after government support for solar manufacturer Solyndra, just before it filed for bankruptcy, and doubts among Republican candidates about climate change.

To qualify for the credit, wind farms must be operating by December 31, which in turn means construction should have started by around April - now the cut-off date for new turbine orders into the United States.

Vestas said on Thursday an additional 1,600 U.S. jobs could go if the credits were not extended.

The U.S. wind market has also faced competition with the rapid development of shale gas - still an all but exclusively U.S. energy phenomenon - which has cut gas and power prices.

BRIGHTER OUTLOOK

Meanwhile the Chinese market in installed turbines, which in 2010 grew more than 40 percent and accounted for half the world total, was roughly flat last year according to industry estimates.

The fall in demand growth is accounted for by more regulatory scrutiny of turbine quality and of smaller developments, to ensure project growth matches grid infrastructure.

But the market will still grow over the medium-term: China last year raised its target for grid-connected wind installations by 2020 to 200 GW from 150 GW, compared with 47 GW now.

And the longer term outlook in developed countries will be buoyed by offshore developments - for example Britain could install an additional 15 GW or more by 2020, in addition to growth in Brazil and other emerging markets.

"Emerging nations will remain the main drivers of growth, with India and Latin America posting the fastest rates of expansion," said Vestas rival, Spanish turbine maker Gamesa , in an emailed statement.