Subsidy stalls, orders rise for wind-turbine markers
Posted on Thursday, March 13, 2008
General Electric Co. and Vestas Wind Systems A / S, the world’s two biggest wind-turbine makers, are reaping benefits from record orders by U. S. utilities racing to add generating capacity even as they face the loss of subsidies.
GE, Vestas and Siemens AG stand to gain although the extension of the production tax credit, due to expire in December, is stalled in Congress. Four years ago, the last time the credit wasn’t renewed, orders came to a near standstill. Now, rising natural gas prices and state greenhouse-emission laws are fueling a surge in demand for wind power, which accounts for 30 percent of new generating capacity and may boost GE’s wind-turbine sales 25 percent to $ 6 billion this year.
Xcel Energy Inc., the biggest U. S. provider of wind power, is buying 67 GE turbines for a Minnesota wind farm because the state requires it to get almost a third of its electric power from nonpolluting sources. That will help GE reach operating income margins of 17 percent on wind turbines based on this year’s sales, as much as 5 percentage points greater than those of Danish competitor Vestas. Wind is the fastest-growing unit at GE Energy, the world’s biggest power-plant equipment maker.
“Customers are giving billions of dollars of orders already because they’re afraid they’re going to lose their spot in line,” said John Krenicki, who runs the GE Energy division. GE posted more than $ 4. 5 billion in wind-turbine sales last year, the most since it bought the business in 2002 for less than $ 300 million from Enron Corp. GE’s total revenue last year was $ 172. 7 billion.
GE became the biggest U. S. supplier last year with 45 percent of the market and has announced $ 1. 7 billion in orders since Feb. 28.
GE Wind’s profit margin will eventually be about $ 1 billion, Vice Chairman John Rice said at an investor conference last month.
If it reaches that this year, when sales are forecast to rise to $ 6 billion, the profit margin would be 17 percent. Vestas said Feb. 28 that earnings margins this year before interest and tax will be 10 percent to 12 percent.
Since 2004, General Electric’s wind-turbine production has increased sixfold and sales have quadrupled.
“The markets for the first time are willing to take a bet” even if subsidies aren’t renewed by December, said Rice, who oversees the wind division as part of GE Infrastructure.
U. S. utilities last year added wind turbines producing an estimated 5, 244 megawatts, a 45 percent increase, according the American Wind Energy Association.
Installations this year may equal last year’s record as companies rush to finish projects before the credit expires, the trade organization said.
Almost all of GE’s U. S. orders last year went to states with renewable energy standards, Victor Abate, who runs the company’s wind, solar and other renewable units, said in an interview.
Xcel must get 30 percent of its power in Minnesota and 20 percent in Colorado from lowor no-emission sources such as wind, solar or nuclear by 2020. The federal tax credits will allow the company to deduct 2 cents for each kilowatt-hour generated.
“Right now the manufacturers are making great profits and allocating capacity and the developers are taking on the risk that the credits won’t be renewed,” said Kevin Landis, chief investment officer at Firsthand Capital Management in San Francisco, which manages $ 750 million including Vestas shares.
Funding to renew the tax credit, part of the energy bill, passed the House of Representatives on Feb. 27 and has yet to make it through the Senate. President Bush has threatened to veto any legislation that pays for the credit with funds now used to subsidize oil and gas exploration.
Investors and company executives are betting that the credit will be restored after a new U. S. president takes office.
“Partisan bickering isn’t going to kill the production tax credit,” said Jim Halloran, who manages about $ 35 billion at National City Private Client Group in Cleveland, including 12. 7 million GE shares. “Nobody who matters in Washington is opposed to it.” Information in this article was contributed by Rachel Layne, Christopher Martin, Jim Polson, Greg Chang and Daniel Whitten of Bloomberg News.
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