It’s a Breeze: European Firms Bring Years of Experience to U.S. Wind Power Market

European wind-power firms see an opportunity in the United States’ increasing interest in alternative energy. Indeed, the inroads that electricity-generating wind turbine technology has made in the U.S. are due in large part to the efforts of companies based in Europe.

A few examples:

  • In 2007, German mega-utility E.ON AG bought the U.S. assets of Ireland’s Airtricity Holdings for $1.4 billion.
  • Danish firm Vestas Wind Systems A/S announced plans in August to build a blade and turbine factory in Colorado, adding to the production of an existing Colorado blade plant and creating 1,350 jobs.
  • Last month, New York regulators gave final approval to Spanish power producer Iberdrola SA to acquire Energy East; the $4.5 billion acquisition would bring the amount of Iberdrola assets in the U.S. to about $20 billion.

Other European firms at work in the U.S. include Acciona SA and Gamesa SA of Spain; Fuhrlander AG, Nordek AG and Siemens AG, all of Germany; and several others. The Europeans have come to ply their expertise in a country where inconsistent public policy has not encouraged domestic investment. 

Even with this activity, wind-power advocates worry that the industry’s growth in the United States rests in the hands of the U.S. Congress and the next administration. Earlier this month, Congress threw wind advocates a bone when it attached an extension of existing subsidies as an earmark to the critical $700 billion plan to rescue the U.S. financial sector. While wind proponents expressed gratitude at the extension, the move by Congress follows a pattern of short-term support that critics say has stunted the growth of wind power in the United States.

The Production Tax Credit, or PTC, makes electricity from wind facilities cost competitive with older types of power production, including coal. The credit had been set to expire at the end of this year. It gives producers of wind-generated electricity a federal tax credit of two cents for every kilowatt hour of electricity they produce. The PTC applies to utility-scale energy producers, not small homeowner-sized systems, which receive a different tax incentives package.

But even with such tax breaks, investors still see wind energy as somewhat risky. “Renewable energy will require early adopters — whether they be individuals, utilities, states or countries — to pay higher prices for these sources as they are pioneered,” says Michael Tomczyk, managing director of the Mack Center for Technological Innovation at Wharton. “Later, as costs come down, the commitment will be justified, especially if you factor in the tangible benefits of energy independence and the impact on pollution and global warming,” Tomczyk says.

The most technologically advanced wind turbines produce electricity at a cost of about five cents per kilowatt-hour, comparable to a typical coal-burning power plant. Still, the building of wind-powered generating facilities requires investments in the millions of dollars, and lenders have been reluctant to commit funds in the past when it has appeared the Production Tax Credit was in jeopardy. According to the American Wind Energy Association (AWEA), development of new wind facilities has fallen precipitously in years when Congress has allowed the tax credit to expire. “You could make the case that our federal policy is a textbook case of how not to build a manufacturing industry,” says Randall Swisher, executive director of the American Wind Energy Association in Washington, D.C. “You send the message [that] it is risky to invest in this space.”

The pattern of wind power’s tax credit dependency is clear: In 1999, with the PTC in place, 575 megawatts worth of wind power was added to the nation’s grid. The credit was allowed to expire in 2000, and just 43 megawatts worth of wind projects were built. The credits were restored in 2001, and 1,696 megawatts of wind capacity went online, followed by just 410 megawatts of new wind power in 2002, when the credits were allowed to expire. The credits have remained in place since 2005, leading to the addition of 2,431 wind-generated megawatts that year, 2,454 in 2006 and 5,244 last year.

“Wind at present becomes viable as a result of its subsidies,” says Matthew White, a business and public policy professor at Wharton. Barring a sudden technological leap, “wind would not be competitive with coal” absent incentives such as the Production Tax Credit. So, with the PTC’s inconsistent history, why are so many European firms jumping into the U.S. wind energy arena? And for that matter, why are wind “farms” a much more common sight throughout Europe than in the United States?

“In Europe, there’s more of a willingness to move forward on environmental protection,” White said. “Europe has been a whole lot more willing to pay the short term price. That price can include the higher upfront costs of enacting more aggressive regulation. And it can also encompass subjective costs — such as aesthetic concerns about the siting of wind turbines.”

The question of how to get wind electricity to customers has posed a thorny issue as well, further slowing adoption in the United States. “Unfortunately, many ‘windy’ sites in the U.S. are located in remote areas far from urban centers where the electricity is needed,” Tomczyk says. “Can we efficiently transmit electricity from a wind farm in South Dakota to Chicago? Another variation on this theme involves installing wind turbines on buildings. Chicago is the ‘windy city’: What would happen if every office building in the city had several wind turbines on the roof?”

An Opportunity Missed?

Ron Pernick, an analyst with research firm Clean Edge, argues that an opportunity was missed. “We could have owned this industry,” Pernick suggests, noting that President George W. Bush was an aggressive advocate of wind energy when he was governor of Texas. Today, Texas leads the nation in “wind farms” with nearly 4,500 megawatts of capacity. But over the last eight years, the White House has shown demonstrably less interest in supporting the technology on a national scale. “I was a bit surprised by the Bush administration,” Pernick says. “Europe over the last decade or so has had much higher supports for renewable energy, particularly wind.” And so, he adds, it’s not surprising that European companies have made a strong showing in the U.S. market.

Still, some U.S. firms are benefiting from the growing domestic interest in wind power. In Michigan, where manufacturing industries have been pummeled by the changing economy, precision machining company K&M Machine Fabricating can barely keep up with orders for its oversized, precision-milled wind turbine parts, according to CFO Gary Galeziewski. The firm’s main line of business is heavy transportation — milling large parts for mining and construction vehicles and locomotive engines. The company entered the wind business a decade ago as something of a low-volume sideline and watched it take off. Now, “we’re pretty bullish on wind,” Galeziewski says.

Though interest from investors “has been kind of fickle” industry wide, Galeziewski reports that his firm recently bought a $20 million piece of steel-milling equipment that will allow it to fill more orders for base plates and turbine casings. One of his biggest problems is simply finding employees skilled enough to run the machinery and make sure the products fit within exacting parameters. “We have to bring on 120 people. They’re great, high-paying jobs,” he says, “but the people are hard to find.”

GE Wind, a division of the sprawling conglomerate General Electric, has established itself as a U.S. giant in the industry. “GE is often so brilliant at picking up assets of distressed companies,” notes Pernick, the analyst with Clean Edge. GE’s wind assets were previously owned by Enron, and were acquired on the cheap by GE after the disgraced energy firm’s collapse. Now, on a unit-sale basis, GE is the most prolific manufacturer of wind turbines for the U.S. market, according to AWEA. Of the 3,200 wind turbines installed in the U.S. in 2007, 1,560 were made by GE, the association reports. But the four firms trailing GE are all based in Europe or Asia: Vestas with 537, Siemens with 375, Mitsubishi with 356 and Gamesa with 287. The United States has about 17,000 MW of installed wind generating capacity, or enough to power about 4.5 million U.S. homes.

Wharton operations and information management professor Karl T. Ulrich says it is not surprising that non-U.S. turbine manufacturers have gained traction here so quickly — it’s the nature of that business. “In the wind industry, most transactions are between a relatively small number of well-known entities,” he says. Those entities include electric utilities, turbine manufacturers, site developers and operators, and sometimes municipal and state governments. Because the number of parties is so small and well understood, it is not very hard for a non-local firm to make contact with the key parties. That is, it’s not like the restaurant business where location matters in order to attract a large number of retail customers. If you are [selling] a $100 million airplane, wind turbines, ships, or the like, you don’t really care if you have to fly across the ocean to make a sales call.”

In a September report written with the Political Economy Research Institute at the University of Massachusetts, the Center for American Progress took aim at what it described as erratic federal policy. “Lapses in federal production tax credits, occa­sional one- to two-year extensions, and uncertainty about the future of these credits have led to a ‘boom and bust’ cycle in the development of wind power,” according to the report. The center proposed that “production tax credits for all types of renewable energy should last long enough so that businesses can make sound investment decisions.”

Bailout Helps Wind Firms, Too

As it turned out, the Energy Improvement and Extension Act of 2008 was chock full of treats for renewable energy industries. Like many mired legislative proposals, the energy bill found the votes it needed by hitching a ride on the Emergency Economic Stabilization Act — the $700 billion financial sector bailout. In addition to extending the Production Tax Credit another year, the energy bill authorized $800 million in clean renewable bonds to pay for the tax revenue lost to promote solar, geothermal, biomass and other renewable power projects.

Ulrich predicts, however, that the financial crisis could ultimately sap the willingness of political leaders to pursue more aggressive strategies to promote wind and other renewable energy sources.

“The most efficient mechanisms for stimulating the development of alternative energy technologies would be carbon or other green taxes,” Ulrich says. “I don’t think any economists disagree on this. This is a political problem, not an economics problem. Second best would be a cap-and-trade mechanism for carbon dioxide emissions. Before the credit crisis emerged, I was hopeful that one of these two mechanisms would occur in the next U.S. presidential administration. Now I think it is unlikely either will happen in the next four years.”

Many states, however, don’t use tax credits as a carrot to reward alternative energy production. Instead, they use a stick: Renewable Portfolio Standards set mandatory minimum percentages for the amount of electricity produced in the state that comes from wind, solar or hydro-electric generating sources. Pennsylvania, for instance, has mandated that by 2020, 18% of the state’s energy come from renewable sources, including wind. That puts pressure on the state’s electric utilities to get access to those renewable sources.

Peck, of Gamesa, says that has worked out well for the Spanish firm, which established its North American headquarters and a manufacturing facility on the site of a long-shuttered U.S. Steel mill near Philadelphia. Pennsylvania’s electricity generators, including Exelon unit Peco Energy, have committed to buy 1,000 megawatts of wind power generated by Gamesa developments by the end of 2010.

While European nations have leapt ahead of the curve in wind power development, a number of organizations see the makings of a brand new U.S. economy based on sustainable technology and practices. The Center for American Progress report also called for a two-year, $100 billion federal stimulus package to encourage six “green” infrastructure areas, including wind. The report’s authors say the program could be paid for in full through a “cap-and-trade” carbon auction in which companies would pay for the right to pollute above a pre-set standard. The report also claimed that such a program would create two million jobs, as people would be needed to retrofit buildings for energy efficiency, expand mass transit, build and maintain “smart grid” electrical transmission systems, and develop wind and solar power, along with renewable biofuels, to ease demand for foreign oil.

Oil tycoon and financier T. Boone Pickens has thrown his weight behind wind energy with what he’s calling The Pickens Plan. He’s been barnstorming across the Midwest to promote wind energy as part of a solution to the nation’s dependence on foreign oil. If wind does catch on, Pickens stands to benefit: He is investing $10 billion to build in West Texas what he says will be the world’s largest wind farm.

Galeziewski, of manufacturing firm K&M, sees the doors of opportunity still wide open for enterprising firms or individuals seeking entrée into wind power. “Ultimately,” he says, “it’s fun…. Wind is like the wild West.”

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