-----

Resources



Market News

 September 05, 2007
Global wind power capacity to double by 2011 - Merrill Lynch

 Global wind power capacities will more than double to a projected 33,500 MW by 2011 says a report by financial management and advisory company Merrill Lynch. This will place suppliers under more stress to iron out supply constraints. The company predicts growth would be underpinned by strong demand in the US and Asian markets. The report, "Wind turbine manufacturers: here comes pricing power", was released last month.

At the moment Europe is the world's largest wind energy market (accounting for 65% of total capacity), with Germany and Spain taking up most of the installed capacity. The US is the next largest market, but Merrill Lynch predicts Asian markets, in particular India and China, will accelerate the use of wind energy.

The Merrill Lynch report says the market for new installations grew by 42% in 2005, 30% in 2006, and is expected to grow by 25% in 2007.

New power plants in the post 2010 time period would "inevitably" be wind farms, as the expectation of high carbon prices, coupled with high oil prices, will turn companies away from fossil fuel fired plants.

Wind power was also far more suitable for large scale roll-out of renewable energy capacity, Merrill Lynch stated. The world's largest solar power plant was a 40 MW project, comprising a million solar panels, while the largest wind plant was almost 20 times the size at 780 MW.

The growth in the global wind energy market would put "tremendous pressure" on a stretched component supply chain, which the report noted was already at full capacity.

According to the report the main bottlenecks had been found in large bearings and gearboxes. "Most turbine manufacturers appear to have secured component supply for their 2007 needs and the build out of new capacity in gearboxes and bearings has begun but equilibrium is unlikely to be reached before the end of the decade," Merrill Lynch said.

It added that the move to larger turbines had aggravated this trend, as there was greater availability of component supply for smaller turbines than the 1.5 MW to the 2,5 MW, or mainstream, class. But, despite the market growing at double-digits, there had been very few new entrants, Merrill Lynch said.

The company is bullish on the prospects for the Wind industry also because subsidies required to support wind energy are limited: Wind energy is now fairly mature technology where the cost profile has been falling steadily with improvements in technology. For plants in the best locations, wind energy is already fully cost competitive with fossil fuels.

Key points from the Executive summary

Wind turbine demand fundamentals clearly positive

Increasingly stretched valuations on recent wind farm transactions and lengthy order books for the wind turbine manufacturers are key indicators of a 'hot' market. This is a highly concentrated market, the ten largest wind turbine manufacturers supply 95% of the market, and in addition a market with high barriers to entry. The listed names should discount a certain scarcity premium and after Suzlon's acquisition of REPower, we can't rule out further M&A activity.

Far greater visibility on demand for wind turbines

Utilities and large IPPs dominate the order backlog and for wind turbine manufacturers this means there is a core, highly visible client based evolving able to place large scale orders. 24% of all new generating capacity built in Europe over the last 15 years has been wind powered generation and this is very much a global trend, we expect 22% pa capacity growth to the end of the decade.

Supply constraints translate into superior pricing power

On average across our coverage universe, capacity is booked out now to Q1 2009 and all the companies report a trend to higher prices reflecting tight demand. Despite our view on higher warranty provisioning levels across the industry and higher steel costs, robust pricing power should mean that over the medium term, average EBIT margins of 9-10% are sustainable.

Assign a premium to security of component supply

With the market for new installations growing 42% in 2005, 30% in 2006 and we expect 25% growth in 2007, there is no spare capacity in the supply chain. Most of the companies in our coverage universe have aggressive growth plans but the best placed companies are either vertically integrated or have long term supply agreements for key components locked in. Within our coverage universe, Gamesa looks best positioned.

The report is available at: http://www.ml.com/media/81290.pdf



Source: Merrill Lynch .