THE CALIFORNIA “turbine rush” started in Altamont Pass in 1981 and ended abruptly a few years later, but not until thousands of machines filled high-wind areas of California's deserts and mountain passes.

From 1985 to 2003, when the Danish firm Vestas introduced the V90-3.0MW turbine, the wind industry decreased its cost of energy – Capital Expenditure (Capex) plus Operating Expenditure (Opex) divided by Energy Production – by more than 50%, or 4.1% per year compounded.

The most important factor in lowering cost was the growth in sheer size: generator size increased by a factor of 100 times, that is, 10,000%. Moreover, annual energy production, aided by higher hub heights and improved aerodynamic, mechanical and electrical efficiency, grew by a factor of more than 300 times, that is, 30,000%.

This was a remarkable achievement, and saw wind power brought into mainstream power generation.

By 2004, wind had reached “grid parity” in the USA, meaning that wholesale wind power prices were at or below what utilities were paying for blocks of power.

Wind developers were seeing attractive, double-digit returns on investment, and orders boomed for the new Megawatt-class machines. Manufacturers like Vestas, Gamesa, and GE Wind grew quickly.

But then in 2005-2008, steel, copper, oil, and other commodity prices soared. Producers passed along these price increases and more, bulking up their margins at the expense of customers. Component suppliers could not keep up with demand, and it became difficult to obtain a certain gearbox or bearing. Leading manufacturers could pick and choose the projects they wanted to supply; they received large cash prepayments, sometimes 12- to 18-months in advance, just for the privilege of securing turbine supply. In short, it was a classic seller's market.

As a result, the cost of wind energy, which had gone down steadily for 25 years – hitting the bottom in 2004 to 05 – started to rise. In fact by 2009, it had increased by 20% or more.

Wind technologists' first reaction to the rising costs was to say what they had always said: “Let's make a bigger one.”

But not many sites on land can really make good use of a generator beyond 3.0 MW – there are not enough super-windy hours in the year to justify the additional cost of a 4.0MW or 4.5MW generator. The wind “S-curve,” driven as it was by ever-larger generators, was coming to an end.

To compound this, a series of further shocks hit during 2008-2010:

• Market entry: New entrants, attracted by the returns of the boom period and in some cases supported by Asian Governments, started offering cheap turbines, mostly of European or American design;
• Slack electricity demand: Recession reduced electricity demand dramatically – even among consumers, which was unprecedented;
• Shale gas: Natural gas prices dropped sharply from US$10-US$12/mmBTU to US$3-US$4/mmBTU, driven by new shale finds, further depressing power prices;
• Market support in key markets, i.e. no national legislation in the USA: Despite the election of President Barack Obama, no Fedaral Renewable Electricity Standard (RES) or carbon legislation has been enacted (although significant gains have been made at the State level, for example in California).

What is the situation today?

From the US “grid parity” of 2004-2007, we are now looking at key markets suffering major problems. For example, in the U.S., wholesale energy prices in the vast majority of States do not justify wind investments. The US market for wind turbines was expected to fall by about 50% in 2010, from 10,000 MW in 2009 to about 5,000 MW.

The situation in Europe is not quite as bleak, in large part because Governments are committed to decarbonising the grid by 2050 (see http://www.Roadmap2050.eu).

And developing nations like Brazil, India and South Africa are also expanding wind development rapidly.

And then there is China.

China, already the number 1 wind market in the world in 2009 has continued to grow, and will surpass the USA in 2010 as the largest installed base. For 2011, industry forecasts show that China will account for more than half of the global market. Essentially all the turbines used in Chinese projects are made in-country; the vast majority of those are made by a cadre of relatively new Chinese firms such as Goldwind, Sinovel, and Dongfang Electric Corporation.

This situation is in one sense “very Chinese.” The wind industry is Government-stimulated and Government-backed; most projects are (formally or informally) “off-limits” for foreign competitors. The industry creates hundreds of thousands of jobs in China, and transfers important technology from West to East. At the same time, the wind sector is very un-Chinese in that it produces almost no exports. At least not yet.
A new generation of innovation

Based on the above market summary, it is easy to reach two conclusions, namely:

• Now that wind turbine technology is “mature,” the global market will be increasingly dominated by a set of existing European designs produced “on-the-cheap” in Chinese factories;
• Wind energy in the important market of the US will be stuck in the doldrums for the foreseeable future, held in check by a lack of political support, lack of innovation and low power prices.

However, both these conclusions miss a crucial point. Competition and innovation will significantly reduce the cost of energy derived from wind. A new “S” curve is upon us, and a new generation of wind turbines is on its way that will help get the industry moving again.

Some of these are already visible in the marketplace, and this greater competition among wind turbine manufacturers has already been pressing prices downward – firms have shed jobs, cut costs, and lowered margin expectations. And declines of 10% to 20% in turbine prices have already been reported.

Several new machines have been launched within the past year that will significantly alter the economics of wind. To take two examples, the Siemens SWT101-3.0MW (direct drive/permanent magnet generator) and the Vestas V112-3.0MW (geared/permanent magnet generator) are game-changers.

The Siemens machine, launched in April 2010, is expected to greatly improve reliability (radically fewer parts, no gearbox to replace); the new Vestas turbine, launched in September 2010, features a swept area that is 55% greater than the V90, enabling it to extract much more energy from today's low-to-medium wind sites.

Aside from these well-publicised releases, what is not yet visible is a raft of other innovations, many of them emerging from US universities and start-ups, which are innovating in the key areas of Aerodynamics; Drive Train and Intelligent Operation.

We will cover these issues in the next part of this series.

About the Author:
Chris Varrone is a former McKinsey consultant who specialises in wind energy technology. His firm, Riverview Consulting, advises on topics including product/market strategy and financing.