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Wind energy: To be or not to be - Views on News from Equitymaster

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Wind energy: To be or not to be
Nov 11, 2008

Indiaís leading wind energy equipment major Suzlon has been in news of late, not really for the right reasons. The company has faced quality issues at its installations in the US and then it shelved the rights issue owing to poor conditions in the financial markets. The companyís aggressive expansion plans are therefore expected to take a hit in the short to medium term. But it does not take away from the opportunity the wind energy market presents to the company and its international peers. This is especially given the fact that global policymakers are vouching for a greater share of clean and renewable sources of energy (like wind, solar, biomass) in their energy baskets. This article gives a glimpse of the global wind energy market. It will also discuss the different elements that shape the market and how they are expected to play out in future.

Wind energy market - Current status...
The last completed calendar year 2007 recorded the highest installations ever of wind energy equipments. Global installations stood at 19,791 MW during the year. This took the total accumulated installations worldwide to 94,000 MW. The past 5 years have seen the average growth of 22.3% per year in new installations while the cumulative installations have grown by 24%.

The top ten wind equipment companies in the world form over 90% of market. In the past couple of years, Asian manufacturers of wind turbines have been aggressively increasing their share in an industry that has been traditionally dominated by European companies. Suzlon and two Chinese manufacturers (Goldwind & Sinovel) in total accounted for 18% of the global supply in CY07.

The year 2007 also saw the global installed capacity become enough to cover 1% of the global consumption of electricity. As per BTM Consult ApS, a wind energy consultant, the coverage is expected to reach about 2.7% by the end of 2012.

...and the potential
With the future looking bright for the industry, the potential for wind energy is immense. BTM expects the sector to witness significant growth going forward. In its forecast until 2012, an annual growth rate of 20.7% per year is expected.

The fastest growing markets in the past 3 years have been China, France and the US. Going forward, the highest growth in installed capacity is expected to be in the US and China, while development in the European region would be steady from a high level today. However the Asian and the American share of the global market is poised to improve significantly.

Many factors are contributing to this high level of expectation in the wind energy market. The recent increase in political awareness of both security of supply along with the issue of global warming, consistent volatility in oil prices, the hedge that wind turbines provide against further escalations in fuel prices, shortages of fuels (coal, oil and gas) have been some of the factors that have successfully set a strong momentum for wind power across the globe. BTM estimates the world demand for wind turbines to increase to 26,500 MW in CY08 and 50,500 MW by CY12.

...and the challenges
Due to the dramatic pace of the marketís expansion, a major challenge that faces the industry currently is the acute shortage of components like gearboxes, large bearings (for generators, gearboxes and rotor shafts), forgings and castings. Thus an increase in the supply of components is the need of the hour without which this bottleneck will continue to constrict the growth of the wind equipment industry.

At present the entire global wind equipment supply chain is working at full capacity. Despite that, the supply situation for most of the key components is more or less under pressure to meet the accelerated rate of growth. Considering this scenario, in all probability, supply capacity rather than market demand will continue to determine the rate of installation of new wind turbines in the near term. The companies which are well positioned (having a strong integrated supply chain) to address this gap in the industry are the ones that will see the strongest growth going forward.

Delayed tax credit action in the US, which is a major driver for the wind energy market, is also expected to impact the sector in the short to medium term. And then there is the financial crisis that has led to funds drying up and financing costs increasing rapidly for new investments in the sector.

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