I remember how precisely we performed the "pour" when my buddies and I economized and bought beer by the pitcher in college. You had to get the flow just right to maximize the liquid without frothing over. This analogy seems perfect to describe the current state of the U.S. wind power market.
Like most infrastructure businesses, the electric utility industry has a penchant for overestimating the need for new capacity. Three or four years are spent furiously installing supercritical coal-fired boilers, nuclear units, cogeneration and merchant plants, or, most recently, gas-fired gas turbines and combined-cycle facilities. This boom then turns into a drawn-out bust, during which many projects are cancelled and the new capacity that makes it on-line is integrated with the old in the existing infrastructure.
Call it feast or famine, boom and bust, irrational exuberance and post-Enronitis, or whatever you want. Admittedly, part of this phenomenon is not within the industry's control. Remember how the accident at Three Mile Island helped precipitate a wave of cancellations of nuclear units in the 1980s? Soon it became clear that we didn't need all that capacity because most of it was not immediately replaced.
Later, in the late 1980s, the industry overbuilt independent power plants. Then came the 1998–2001 irrational exuberance for gas-fired merchant power. Many projects were cancelled, and those that limped to completion didn't—and still don't—operate at very high capacity factors because the price of natural gas skyrocketed. Not all of the debacle can be blamed on the fall of Enron, though, or the discrediting (at the time) of electricity trading.
To foster caution and reflection, here are 10 reasons why the wind energy market is beginning to look a little frothy, like the premillennium merchant gas-fired market. I also note key differences between the two situations. At the end are some perspectives and actions that industry players may wish to consider.
In an era of high oil and natural gas prices, insecurity about terrorism, and rural economic blight, it is important that renewable energy succeed. Wind is the closest thing we have to "utility-scale" renewable energy, so its penetration is both vital to the electricity industry and to the public if wind is to get what it appears to want.
Similarity #1: One dominant supplier
By the late 1990s, one domestic supplier of large turbines, holding 60% to 75% market share, had come to dominate U.S. gas-fired plant contracts. The other major U.S. supplier ran a distant second. Two European suppliers that had entered the market earlier fought for the crumbs. Consolidation occurred, and by the time of the bust, one of the European companies was essentially in receivership.
Today, one domestic supplier (coincidentally, the same company that dominated the large gas turbine business) enjoys a 60% share of the U.S. wind turbine market, based on 2005 figures reported by a Danish consulting firm in a proprietary study. This supplier entered the market through a key acquisition in early 2002 and rose to dominance in only a few years. In the process, it knocked off the top dog, a European whose U.S. market share is now less than 20%, according to 2005 data.
Similarity #2: A long order queue
Remember when developers and utilities were waiting in line for large gas turbines? At the time, customers were "encouraged" to accept long-term service agreements (LTSAs), which were richly rewarding to suppliers and enabled the monetization of long-term service, component replacements, and repair work over a five- or 10-year period.
Today, wind farm developers and many others are saying that the market is starved for turbines. Even more significantly, the availability of turbines is controlled both by the dominant suppliers and the largest developers, which are now "long" on turbines. Faced with burgeoning demand and limited supply, project developers have no choice but to turn to new market entrants. In the meantime, the market leaders can exert control over both the project pipeline and the turbine supply pipeline. The intent of recent acquisitions, for example, has been to capitalize on complementarity between companies with turbines and companies with projects.
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