Wind Power's a Breeze in Europe

Sep 20 - Business Week

After years of playing second fiddle to mainstream power sources, Europe's renewable energy sector is now going from strength to strength. Lucrative government subsidies, an EU-wide goal to reduce CO2 emissions 20% by 2020, and growing public support for the fight against climate change have turned this new industry into a force to be reckoned with.

Wind power is leading the push into renewables, helping to place Europe ahead of other regions [BusinessWeek, 8/3/07] in the race to capitalize on the green power revolution. According to Barcelona-based consultancy Emerging Energy Research [EER], the European wind turbine market -- including construction -- will surge by two-thirds between 2006 and 2015 to an annual total of $15 billion.

Germany and Spain, the EU's largest producers of wind power, each are expected to add up to 2,000 megawatts of wind power capacity -- almost the same amount produced by three coal-fired power stations -- annually from now until 2012. Growth in Eastern Europe, an emerging wind market, is expected to be in the double digits annually during the same period.

A Spate of Acquisitions

It's no wonder then the EU will install over 40% of the world's wind farms over the next eight years. as 13 of the 20 largest wind power markets are located in Europe. "Wind is becoming a tried and tested technology for many EU countries," says Catalina Robledo, European wind energy analyst at EER.

The wholesale acceptance of wind power in the European energy mix has led to a spate of acquisitions by large utilities keen on cashing in on renewable technology. In August, German power company E.ON (EONGY) scooped up a wind farm operator in Spain and Portugal for $1 billion from Danish company DONG Energy. And late last year, Spanish utility Iberdrola (IDRO.BE) -- the world's largest wind power provider [BusinessWeek, 6/6/07] -- forked over $23.2 billion for Britain's Scottish Power, in part for the company's extensive wind portfolio in Britain and the U.S.

Now many energy companies are turning their eyes to Eastern Europe, where limited domestic competition, above-average wind supplies, and government subsidies offer high rates of return for players eager to increase their wind portfolios. Production capacity in Eastern Europe is pegged to grow by 33% annually to 7.5 gigawatts by 2015, according to industry predictions.

Poland, the New Frontier

Poland is of particular interest. The country's wind power production is expected to increase more than seventeenfold, to 2.6 gigawatts, between 2006 and 2015, according to figures from EER. Investment in the country's wind sector will reach $3.3 billion by the end of the decade, and utilities ranging from Spain's Endesa (ELE) and Iberdrola to Germany's RWE (RWEG.DE) and E.ON all have facilities under construction.

According to Cord Landsmann, the chief financial officer of E.ON's newly-formed renewables division, Central and Eastern Europe offer widespread potential for on- and offshore wind farms. The German giant is currently building a 60-megawatt wind farm in the North Sea and is looking at several onshore sites in Poland.

While investment in wind farms helps cut the carbon footprint of European energy companies, there are also significant financial incentives for going green. Under EU and domestic rules, utilities can charge higher rates for renewable electricity, either through government-mandated prices for end customers or so-called renewables obligations, which reward companies for building carbon-friendly power plants. Such subsidies have helped Europe build up its alternative energy industry by providing financial incentives to companies that invest in new technologies, says Paul Ekins, head of the environment group at the London-based Policy Studies Institute.

Tough to Keep Up With Demand

One company that has been quick to exploit the financial rewards and public support for wind power is Siemens (SI). The German engineering giant's power generation business installed scores of wind farms last year around the world, with a combined power-generation capacity of 15 gigawatts -- equivalent to nearly 19 coal-fired power plants. Siemens aims to nearly double its rate of annual installations to 27 gigawatts by 2011.

Siemens has used Europe's growing interest in wind farms to take on the other giants of the business, the U.S.'s General Electric (GE) and the market leader, Denmark's Vestas Wind Systems (VWS.CO). Now Siemens is aiming to grow its wind turbine business in North America and Asia, where the markets are growing at 15% and 10%, respectively, says Andreas Nauen, the head of Siemens' wind power division. "Suppliers are finding it difficult to keep up with demand," Nauen says. "At present, we're taking in orders for 2009 and 2010."

The clamor for turbines has led to a rapid expansion of production across the industry, with Siemens' factories now pumping out four machines per day, compared with just four per week back in 2004. This growth has provoked some controversy. Critics say safety standards may have fallen as companies expanded too fast, citing examples such as a 100-meter tall wind turbine in Northern Germany that broke apart in high winds [BusinessWeek, 8/24/07] in November, 2006.

Still Less Than 10%

Despite the worries, Europe's wind power sector remains the darling of politicians and business leaders. The EU's target to produce 20% of its energy from renewable sources by 2020 also has helped raise interest in wind power -- especially because other renewable technologies like biomass and solar remain too expensive for mass use.

Nobody is saying that traditional electricity sources, such as coal- and gas-fired power plants, are going away anytime soon. Wind farms still make up less than 10% of Europe's energy mix, and industry analysts say they will represent only a part of the EU's drive for greener electricity.

Nevertheless, the rapid maturing of the sector, bolstered by expanding economies of scale and regulatory support for green technologies, has made wind power the favorite child of Europe's drive into renewable energy.