With an oversupply of wind turbines, why are governments subsidizing new manufacturing plants?

In recent years, China has ramped up its efforts to become a world leader in manufacturing and installation of wind turbines.

But the other side of the story is that China has also idled 40 percent of its industrial wind turbine manufacturing capacity as a result of oversupply and plummeting prices.

In Europe, the world’s largest turbine manufacturer, Vestas, announced a bond issue of 600 million euros ($807 million). This is the first bond issue in the company’s history and it was due to slow growth.

Even with an oversupply of manufacturing capacity, and falling prices for wind turbines, taxpayer-funded investment in wind turbine manufacturing by foreign companies in North America has been moving ahead with great fanfare.

In Canada, Ontario signed a $7 billion dollar deal with South Korea’s Samsung to manufacture industrial wind turbines and develop wind energy projects in the province — creating 4,000 jobs.

A Chinese and American business consortium announced plans to develop 1,000 jobs with the support of $450 million in taxpayer stimulus funds as part of recovery spending.

Vestas took the unusual step of announcing that it would consider building a manufacturing facility to build turbines for Ontario Trillium Power – a wind farm proponent without the necessary approvals to install turbines, or sell power into the grid.

Last year Vestas cited an oversupply of industrial wind turbines as justification for laying off 1,900 European wind turbine-manufacturing workers.

China idling 40 percent of their wind turbine manufacturing capacity demonstrates the oversupply is severely impacting even the most competitive manufacturing market in the world.

Under normal circumstances, China’s competitive advantage should allow Chinese-manufactured turbines to meet the demands of the global market at the expense of less competitive jurisdictions.

But these procurement decisions are based on politics, not economics.

North American jurisdictions seeking “green” manufacturing jobs are selling the idea to voters as a means of developing a green manufacturing sector as part of an economic recovery.

The reality, as evidenced around the world, is that these jobs aren’t permanent and could not exist without extensive ongoing government subsidization and therefore involvement in the business decisions of this industry.

Until the industry addresses the oversupply and governments address ever growing subsidization rates, real turbine prices will continue to fall, oversupply will continue to grow and subsidization rates will move this industry even further from market principles other sectors follow.

The impact will be felt by jurisdictions that have embraced and financially supported the technology.

They will surely feel the pressure higher electricity prices place on traditional manufacturing sectors, and the eventual loss of these temporary jobs when the wind turbine manufacturer pulls out.

Photo shows the sun rising over a windmill farm in Palm Springs, California November 26, 2005. REUTERS/Lucy Nicholson

John Laforet is president of Wind Concerns Ontario, a coalition of 42 grassroots organizations aiming to curtail development of wind farms in the central Canadian province of Ontario.  He is also running for municipal public office.

Governments around the world are actively seeking private development of renewable energy projects by offering generous feed-in tariffs that often see developers paid many times the market rate for the power they produce.

This has encouraged a surge of applications, but the volume of applications and other challenges associated with these projects present potential risks to prospective investors.

Projects require transmission capacity to carry their energy to market, but the agencies accepting applications for a given jurisdiction often aren’t responsible for managing transmission systems.

In the Czech Republic, a boom of renewable projects has caused considerable challenges to the transmission system and has caused the grid operator to block future wind projects, while threatening to disrupt grid connections for existing renewable energy projects.

In Canada, Ontario’s inventory of projects under development, approved or in the proposal stage, does not consider existing grid capacity.

While individual proponents compete for feed-in-tariff agreements without guaranteed access to grid capacity, a multi-billion dollar investment by the government into the grid would be required to facilitate many of these projects getting off the ground.

In a time of plunging tax revenues and mounting deficits, and growing community opposition to these projects, this creates instability for investors.

Weak regulations designed to streamline approval processes and silence community opposition have resulted in legal action against proponents worldwide.

Developers are being sued in many jurisdictions, and in at least two notable examples, either lost in court or settled for millions of dollars.

A French court ordered the turbines in Cast and Châteaulin to be turned off between 10pm and 7am, thereby generating zero revenue or electricity during that time.

In Ontario, Canadian Hydro Developers settled a number of legal actions at a cost of $1.75 million as a result of individuals who complained of negative health effects. These include Barbara Ashbee-Lormand who says she and her husband found it intolerable to live in their home in Amaranth, a rural township that is host to 22 industrial wind turbines.

A growing number of American municipalities have banned the installation of industrial wind turbines in response to community opposition, including in North Carolina, and Liberty, Illinois.

Offshore, lake-based proposals in Ontario have faced two moratoriums in three years, and projects in Australia have seen endangered species legislation used to halt approvals.

While a feed-in tariff agreement may make investments in renewable energy look attractive, the lack of control project investors have over their ability to reach the market should give investors pause.

With potential for liability for negative health impacts, lawsuits from communities and growing interest from the courts, in addition to other instability built into the approval process, this is one “green” sector that could quickly turn red, at least for investors.

Photo shows Barbara Ashbee-Lormand’s mailbox in Shelburne, Ontario, with wind turbines in the background after the home was vacated in 2008. REUTERS/Handout