Global Wind sector- Approaching grid parity ::Macquarie Research,

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Global Wind sector
Approaching grid parity
Outlook mixed but improving from a dismal 2010
Most key drivers of the global wind industry have a mixed outlook: policy support
varies, financing availability is patchy, permitting and grid connectivity is getting
tougher and wholesale power prices remain depressed in the US but are
improving elsewhere.
We see established wind markets such as the US remaining difficult, but new
wind markets have emerged elsewhere, from Asia to Latin America. Overall we
expect new wind installations to recover from a very difficult 2010 and return to
~10% CAGR in 2011-13. But this will be far short of what is needed to address
global wind turbine manufacturing (WTM) overcapacity, which is currently 40%
and likely to increase further with Asian new entrants.
Turbine manufacturing overcapacity and price deflation
Chronic overcapacity is now prompting another wave of severe turbine price
deflation. Wind turbine prices are down almost 25% from their 2008 peak, but we
expect further deflation of up to 30% over 2011-12 for large orders. This is a
non-consensual view supported by channel checks and by bid information we
have received and studied for certain wind projects. The implications of this are
very negative for the WTMs and very positive for the wind farmers (WFs).
For the WFs, turbine price and maintenance cost deflation, in addition to longer
lives and higher productivity turbines, are driving up IRRs on new projects.
Indeed, the cost of new wind energy has fallen so far that we believe we are now
at grid parity in Europe, and at ‘pseudo grid parity’ in the US when one includes
the financial benefits of tax credits.
Our firm stance remains: long WFs, short WTMs
We are not arguing that wind installations are consequently about to surge. Wind
is neither a baseload nor a controllable power source, and this will always cap its
potential within a national power generation mix. But this significant change in
cost-competitiveness should in our view reduce the risk premium created by
fears over the withdrawal of policy support, and thus support WF share prices.
The implications of overcapacity and tumbling turbine prices are very challenging
for WTM earnings, however. In this report we downgrade our 2012-13 forecasts
significantly across the listed WTM space. We advise investors to still avoid the
wind turbine space, as we think margins and earnings are likely to come under
far more pressure than is widely anticipated.
Our favoured wind stocks are WFs. In Europe: Acciona and EDP Renovaveis,
both of which we now upgrade to Outperform (as our former top picks EDF
Energies Nouvelles and Iberdrola Renovables disappear). In Asia: China Suntien
Green Energy and China Longyuan Power. We think the current valuations of
both these Chinese WFs exaggerate concerns over interest rates and grid
connections, and undervalue their extremely strong growth prospects.