[Vision2020] Wall Street Journal Article: US Fails To Supply Windmill Technology

[Ted Moffett]

*All-*
**
*The previous web links to the article may not offer access without a
subscription.  Here is the text of the article, minus the graphs and other
associated "boxed" info:*
**
*CURRENT AFFAIRS*
Alternative Energy Hurt
By a Windmill Shortage
While Projects in U.S.
Stall, Europe's Utilities
Expand Their Reach
By *KEITH JOHNSON*
July 9, 2007; Page A1


The race to build new sources of alternative energy from the wind is running
into a formidable obstacle: not enough windmills.
In recent years, improved technology has made it possible to build bigger,
more efficient windmills. That, combined with surging political support for
renewable energy, has driven up demand. Now, makers can't keep up -- mostly
because they can't get the parts they need fast enough.

Numerous wind-power projects from Virginia to California have been stalled
due to the shortage. But for some renewable-energy companies in Europe,
where wind power has been in vogue for almost two decades, the logjam is a
lucrative opportunity. These firms anticipated a shortage of turbines and
locked in orders with makers. They're now using their considerable buying
power to gobble up smaller utilities in the U.S. that couldn't otherwise get
their hands on turbines.

That was the case with Community Energy Inc., a company in Wayne, Pa. After
trying for years to kick-start wind-power projects in the U.S., the company
had built only two small wind farms; a third sat idle. Brent Alderfer, the
founder and chief executive, said he had few problems acquiring the
necessary permits and funding. But when it came to getting windmills, he
faced a multiyear delay.

"We were like an airline sitting there and being told we had to wait three
years to get our airplanes," he says.

In late 2005, Mr. Alderfer contacted Iberdrola SA, a Madrid-based utility
that has emerged as one of the world's leaders in renewable energy. Six
months later, Iberdrola purchased Community Energy for $40 million. Two
months after that, technicians had outfitted the company's stillborn project
with gleaming white turbines that started churning out enough clean
electricity for about 6,500 homes.

"We couldn't have done this on our own -- not then, not in five years'
time," says Mr. Alderfer.

Modern wind turbines are astonishingly complicated machines, containing more
than 8,000 components and requiring special transformers to turn their
spinning blades into electricity. Though commonly called windmills, they're
technically wind turbines. Manufacturers depend on a network of component
suppliers that, in turn, need years to ramp up production. That's created a
bottleneck for the turbine makers.

Iberdrola's strategic advantage stems in part from a €3 billion, or $4.09
billion, bet it made last year to lock up most of the order book of Spanish
turbine maker Gamesa SA -- the world's second largest -- through 2009.
Iberdrola also holds a 24% equity stake in Gamesa.

In addition to Community Energy, Iberdrola snapped up two other small U.S.
developers last year in Iowa and Virginia, both of which lacked the funding
and the turbines to get going. Last month, it entered into a deal to buy its
first regulated U.S. utility company, Energy East Corp., of Portland, Maine,
for $4.58 billion, in part to take advantage of U.S. tax credits for wind.

Though still a relatively small force on the U.S. energy grid, wind power is
on the rise as oil prices and environmental concerns soar. Governments from
Beijing to Sacramento are showering the sector with subsidies in an effort
to boost production of clean energy and reduce emissions of greenhouse-gases
like carbon dioxide. Europe now plans to produce 20% of its energy from
renewable sources by 2020, up from about 6% today, with wind power playing
the leading role.

In the U.S., more wind power was installed last year than in any country in
the world -- 2,454 megawatts, or more than the equivalent of two nuclear
reactors. Despite the recent action, the U.S. still lags behind other
countries that have spent decades nurturing wind power with subsidies and
price supports. Germany has fewer wind resources -- breezy, wide-open spaces
-- than the state of North Dakota, for instance, but has twice as much wind
power as the entire U.S. Spain, with one-seventh the population of the U.S.,
has the same amount of wind power. Overall, only about 1% of power in the
U.S. comes from wind.

The turbine shortage could have a significant impact on how quickly the
industry can continue to grow in the near term, as well as on what shape it
will take in the future. Just five manufacturers produce more than 80% of
the world's wind turbines. A midsize, 1.5-megawatt turbine costs about $1.2
million.

Miguel Salis, the head of the Madrid-based Eolia, a fund that supplies
financing and development know-how to small wind-farm developers, says, "The
biggest restriction right now to wind power's growth -- everywhere, not just
in the U.S. -- is the lack of turbines." He says that so many developers
have "projects under way but can't get them completed, often because the
turbine makers don't give them the time of day."

Makers need thousands of specially crafted parts, including gearboxes,
blades and bearings, to build a turbine. Transformers vary depending on each
country's electrical grid. And the type of turbine depends on the wind
resources available: Relatively wind-poor Germany has always used larger
turbines, while breezier Spain and China have based their growth on midsize
turbines.

Vestas A/S of Denmark, the world's biggest turbine maker, says the supply
problems are crimping its production capacity. The company produced about
880 megawatts of turbines in the first quarter, down from more than 1,000
megawatts in the fourth quarter of 2006. "We are no stronger than the last
delivered component out of the 8,000 components," Ditlev Engel, Vestas chief
executive told investors in May.

Turbine makers are trying to make up the difference. Vestas is hoarding
components to keep production steady, at the expense of working capital.
Others are buying companies that make components to bring production
in-house.

Siemens Wind AG of Germany, a unit of Siemens AG, two years ago bought
Winergy, the leading maker of gearboxes for turbines. Suzlon Energy Ltd. of
India snapped up a series of smaller component companies. Then, last month,
it paid $1.8 billion to buy rival turbine maker REPower Systems AG of
Germany, which gave it access to a new set of component suppliers.

Because wind power was basically a cottage industry until recently, it was
slow to develop a large group of professional manufacturers. Some turbine
manufacturers, like Siemens Wind, are offshoots of large engineering groups.
General Electric Co. bought Enron's wind division when the Houston company
imploded. Gamesa started life half a century ago designing propeller blades
for aircraft, and still makes most of its own blades.

In the U.S., there's another potential threat to growth -- erratic
government support for wind power. Even though wind power has made technical
strides recently, energy firms still rely on subsidies because it costs more
to generate electricity with wind turbines than other power plants such as
coal, natural gas or nuclear. Wind power requires intensive capital
investment in a short period of time, and has added costs like upgrading
transmission systems. According to the International Energy Agency in Paris,
wind farms cost between four and 14 cents to generate a kilowatt hour;
coal-fired plants cost between 2.5 and six cents.

Some 20 states now have price supports for wind-generated electricity, and
there is a federal tax credit to encourage new wind-park development. But
there is no federal requirement for utilities to buy green energy, as there
is in the United Kingdom, Denmark and Germany. And the tax credit, started
in 1992, depends on a biannual congressional approval. An effort to
introduce federal support for wind power was shot down this month in the
Senate.

The lack of a stable, long-term regulatory environment has created a
wind-power roller coaster. Developers were never sure their projects would
make economic sense a few years down the road if the regulatory climate
changed. Foreign turbine manufacturers were reluctant to build factories in
the U.S. Vestas scrapped plans for a U.S. factory three times because of
uncertainty. This spring, it announced it would build a turbine plant in
Windsor, Colo.

Today, states such as Iowa, Pennsylvania, Minnesota and Oregon have gone out
of their way to lure foreign turbine makers. Suzlon is building a turbine
plant in Minnesota. Siemens Wind and Acciona Energía SA of Spain both
announced plans to open turbine factories in Iowa. Gamesa has three plants
operating in Pennsylvania.

In a few years' time, those new factories could help ease the current
bottleneck. But in the short term, the supply crunch has shaken the
economics of wind power.

European utility firms, meanwhile, are buying up U.S. energy firms. They say
they believe growing consensus on the need to fight climate change will lead
to a more stable regulatory framework for renewable energy.

Earlier this year, Portuguese utility Energias de Portugal SA, or EDP, paid
about $2.7 billion for Horizon Wind Energy of Houston. Acciona Energia SA of
Spain bought EcoEnergy LLC, a unit of the Morse Group in Freeport, Ill.,
last month; it plans to roll out about 1,500 megawatts of wind power in the
Midwest over three years. And BP Alternative Energy, a division of
U.K.-based BP PLC, snapped up Virginia-based Greenlight Energy Inc. last
year for about $100 million.

European companies are estimated to own 20% of all the wind energy in the
U.S., says Emerging Energy Research, a wind-power study group based in
Cambridge, Mass.

American firms are now hustling to secure their own windmills to keep pace.
Invenergy LLC, based in Chicago, signed a $1 billion deal with GE in May to
get its hands on turbines to supply its ambitious development plan.

In some ways, wind power is a victim of its own success. Rising fossil-fuel
prices and bigger and more sophisticated turbines have brought wind power
closer than ever to being competitive on price with traditional power
sources. Modern machines are 10 to 20 times the size of the windmills first
installed in California in the 1980s. Bigger machines have exponentially
changed the economics of wind power because they take better advantage of
the wind and work more hours than the smaller, older machines.

That, in turn, has sparked a boom in demand for new wind-power projects
world-wide. The U.S. has quadrupled its wind-power capacity since 2000.
China, which had only 346 megawatts of wind power installed in 2000, now has
2,500 megawatts, and expects to catch up to the U.S. within three years.
World-wide, wind capacity has increased from 17,800 megawatts in 2000 to
74,300 megawatts at the end of last year, according to the Global Wind
Energy Council, a trade group.

Better technology and growing political support for clean energy should have
made life easier for Community Energy's Mr. Alderfer. When he started his
company in 1999, there were no commercial wind farms operating east of the
Mississippi.

Instead, as wind power became more attractive, his job got tougher. After
finishing their second wind farm, a modest 24-megawatt project in New
Jersey, Community Energy executives realized that upcoming projects would
have to be much larger in order to be economically feasible. Some would
require as many as 100 new turbines. "The whole thing moved quickly beyond
our ability to finance it," Mr. Alderfer says.

The U.S. wind industry was in one of its periodic booms. After two years
with virtually no new wind power, federal tax credits were renewed for 2005
and 2006. Suddenly, wind farms were cropping up everywhere. Oil-rich but
windswept Texas overtook California as the leading wind-power state.

Community Energy was trying to stay in the race. In late 2005, the company
sought to outfit its latest wind farm, at Locust Ridge, Pa., but couldn't
get the machines. Mr. Alderfer talked with GE, the biggest U.S. turbine
maker, but was told he would have to pay deposits against delivery of
turbines in 2008 or 2009. That would mean going back to Community Energy's
private holders to ask them to stump up more money, which Mr. Alderfer was
loath to do. Locust Ridge was put on hold again. "What are we going to do
with this project?" he recalls thinking.

Then he decided to call Iberdrola, the Spanish utility. At the time,
Iberdrola didn't yet have a beachhead in the U.S., and executives thought it
was a potential gold mine. Wind energy in the U.S. "is like Europe was years
ago," says Xavier Viteri, the 46-year-old head of Iberdrola's
renewable-energy business. "There's a lot of room for development there, and
there is a lot of expertise here."

--------

Vision2020 Post: Ted Moffett
-------------- next part --------------
An HTML attachment was scrubbed...
URL: http://mailman.fsr.com/pipermail/vision2020/attachments/20070709/b10ef1a2/attachment-0001.html