Wind Rush: Europeans Take The Credit

on November 17, 2011 at 6:00 AM

European wind companies have played a major role in the development of the US wind energy sector, even as shadows loom over the industry and the global economy.

Vestas, the world’s largest turbine manufacturer, clearly has high hopes for its US business, with a market share of 18.7% and room for growth. In recent years Vestas had invested in two blade factories, a nacelle facility and a tower facility in Colorado. It also has R&D hubs in Texas, Massachusetts and Colorado.

It is not yet clear whether these facilities will feel the impact of a radical reorganization at Vestas to be announced in February 2012 to reduce annual costs by at least €150 million.

Siemens, Acciona, Clipper and Gamesa are just some of the other companies from Europe that entered the US market because of its potential for growth and incentives such as the Production Tax Credit and the Section 48C program for advanced energy manufacturing facilities.

This article is part of a week long investigative series on the state of the wind industry. For more coverage, check out the Wind Rush tag on the site, and follow and participate on pressing industry issues in the Groups tab of Breaking Energy.

Under the American Recovery and Reinvestment Act 2009 (better known as the stimulus), $2.3 billion was set aside in tax credits for advanced energy manufacturing. It provided a 30% tax credit for investments in 183 manufacturing facilities across 43 states, generating more than 17,000 jobs, according to the Treasury. Despite GE’s claims for the 48C credit on other parts of its business, the largest turbine manufacturer in the US says it scaled up manufacturing without the credits.

Treasury documents show that wind turbine manufacturers originating outside the US made full use of the 48C credit.

Vic Abate, vice president of GE Energy’s Renewables, says the incoming business was a good thing for the wind industry in the US: “If you have the demand in your country, you’ll see the jobs. That’s the beauty of wind.

“The European developers and manufacturers came to the US when they believed in the US market. Look at all the factories that opened. For you to be competitive, you have to be local. The currency risks, the transportation logistics, the service network, the customer facing you really have to be local.”

Counting Credits

Siemens USA claimed the largest single 48C credit–$28.33 million–for its gear box component plant in Elgin, Illinois, closely followed by a claim of $22.15 million from Nordex USA, a subsidiary of another German company Nordex. Siemens USA was also allocated a further $4.33 million for its wind tower factory and $3.45 million for its blade facility.

Overall, Vestas received two separate tax credits for blade facilities of $21.59 million and $8.58 million and a further $21.6 million rebate for its wind tower manufacturing plant.

As the contracted turbine supplier for the 468 MW Cape Wind project, Siemens USA aims to emulate its success in Europe’s offshore wind market in the US. According to the Ernst & Young renewables attractiveness indices 2011 which still rates the US as the number two overall investment opportunity after China and ahead of Germany, Siemens AG has publically agreed to provide some, or all, of the debt and equity for the project.

Meanwhile, Gamesa USA, a subsidiary of Spain’s largest manufacturer, put in claims for almost $31 million in 48C tax credits, only one of which was authorized according to the company.

Gamesa was the first overseas wind manufacturer to set up full production facilities in the US in 2004. It now has four facilities in Pennsylvania, attracted by state and federal incentives. But it was state incentives, rather than federal, that attracted the Spanish company to the US.

Gamesa now has a blades factory in Ebensburgand a nacelle factory in Fairless Hills, attracted by $15 million worth of state incentives from Pennsylvania, boosted by the Alternative Energy Portfolio Standard. But in 2008, it closed its tower manufacturing facility. Around 950 of its 8,267 employees worldwide are now based in the US.

“We’ve invested several hundred million dollars in the US, significantly more than the subsidies that we got,” says David Rosenberg, a Gamesa USA spokesman.

Gamesa lists a $25,824,044 tax credit for Gamesa Fibramatic LLC and a further $2,764,584 for Gamesa SA G10X Nacelles LLC as declined. Gamesa has confirmed that a $2,357,954 tax credit was accepted.

Rosenberg says this credit was used to upgrade Gamesa’s Ebensburg blade manufacturing facility.

But Rosenberg admits that despite incentives, the potential expiration of the Production Tax Credit could result in factory closures.

“The US market is challenging. Without having a clear line of sight to what will happen to the PTC it’s very difficult to predict what will happen after 2012. And we don’t have an energy policy [in the US]. The combination of those two makes the future look very challenging and you also have the issues that Congress are debating right now regarding the debt.

“Without the PTC it’s quite possible to see a number of manufacturing facilities either close down or see some level of consolidation in the industry. There’s excess manufacturing capacity – roughly 13 GW-14 GW in the US today. And you’re looking at a market level of maybe 8 GW this year.”

“There’s significant amount of excess capacity and companies are going to have a tough time sustaining operations. Overcapacity has benefited developers by driving prices down and competitiveness in the market has been very strong.

Spain’s Poster Child

In its home country, Gamesa was Spain’s poster child for its enthusiastic policies on wind energy, which supplied 16% of the country’s electricity in 2010, putting the country on target to exceed its EU directive of 20% by 2020.

Such is the success of Spain’s wind industry that during one hour on the afternoon of November 9, 2010, a record of more than 14,700 MWh was generated in Spain, covering 45% of the country’s power demand.

Heikki Willstedt, energy policy director at the Spanish Wind Energy Association, says that Spain managed to export this clean power to other European countries, foreshadowing the planned common electricity market in the EU from 2014.

“Last year, there was a lot of wind in Spain. This made the prices of the Spanish electricity market much lower than in France, which bought electricity from Spain and then sold it to Italy, which has Europe’s most expensive electricity market. So we were helping Europe to have cheaper electricity.”

Gamesa now has 32 production facilities in Europe, the US, China, Brazil and India and an annual production capacity of 4,400 MW.

In another sign that the market is slowing in Spain, 94% of the MW Gamesa sold were destined for markets outside the country as of September 2011.

The country’s total installed capacity was 21,158 MW, up to June 30, 2011. But 33.7% less capacity was added in the first six months of 2011 than in the same period last year, according to the Spanish Wind Energy Association.

Comparing Problems Across The Atlantic

“The Spanish market is healthy but it’s on a diet,” Willstedt said. “The US market is becoming more important because the Spanish market is slowing down. But of course the long term visibility of the US market is not there.”

Regardless of who wins Spain’s general election in November, the incoming administration will face the same problem: how to deal with Spain’s sovereign debt crisis which has also spread to the renewable energy industry.

Jorge Fernandez, consultancy director at Grupo CIMD in Madrid, says Spain’s success story in wind has come with €20 billion worth of securitised debt, in large part because consumers have been protected from paying the true cost of the electricity.

“For almost a decade successive governments have been afraid to raise the regulated tariffs to consumers because of political concerns” – Fernandez

“They have created a revenue deficit in the system that exceeds €20 billion. That’s how much consumers owe the companies because the true cost of energy was not reflected in the tariffs.

“For the government to make sure these securitised products were bought by the financial institutions, they offered a state guarantee. Now we have sovereign debt in Europe,” he said. “I don’t think that the government of Spain can provide more guarantee on debt, especially now that the EU is watching very closely the finances of states like Spain and Italy. The government is fooling itself if it believes this can go on forever.”

Beyond The Usual Suspects

As the European economy suffers and the Spanish wind market approaches saturation, Gamesa is looking to other markets, including offshore opportunities along with Siemens, Mitsubishi, GE, XEMC, and Clipper who have all announced manufacturing plants in the UK to capture demand from North Sea installations.

Gamesa also hopes to head offshore in the US after investing with Newport News Shipbuilding, in an R&D centre in Chesapeake, Virginia, which aims to develop a 5 MW offshore turbine, the first to be designed in north America. More than 80 engineers are working at the center and the first prototype should be installed off the Virginia coast at the end of next year.

In July this year, Senators Tom Carper of Delaware and Olympia Snowe of Maine introduced the Incentivizing Offshore Wind Power Act that should extend investment tax credits for the first 3GW of offshore wind placed into service.

These are the kind of incentives required to encourage investment in the early offshore wind projects, says Rosenberg.

“We see offshore as a growth opportunity when the market opens up,” he says. “Incentives in the offshore market are going to be needed for the early projects… in moving the offshore markets forward.”

But the company is positioning to take up offshore opportunities in Canada and Mexico, even if the US market is slow to get going, and opened up three new markets and added 21 new customers in 2011 in pursuit of itsinternationalisation strategy.

Gamesa is looking to Mexico for new orders after attempts to gain third-party traction beyond developers such as Iberdrola and Acciona Windpower in the US and Canada, says an IHS EER report.

Third quarter results showed sales in India accounting for 20%, Eastern Europe 13%, China 21% and the US 14%.

But the company’s global market share slipped from third largest turbine supplier in 2008 to eighth place in 2010. Gamesa still has 4.9% of the Chinese market, and is set to lead China-based foreign suppliers with a pipeline of nearly 1.4 GW, followed by Vestas’ 500 MW book of announced orders, according to IHS EER.

Last year, Gamesa earned a net income of €50 million, a 57% decrease from 2009. But Gamesa’s ambitious international strategy may outpace its balance sheet against the prevailing headwinds of economic and market uncertainty and as some stock analysts predict a drop in earnings over the next two years.