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Reaping the whirlwind? Europe's big wind subsidy race

COPENHAGEN -- For centuries, the winds howling at high speeds during most of the year over the North Sea have been a challenge for those sailing these waters, but now they present a big opportunity for utilities: a free power source.

If you combine that with relatively shallow water, which makes offshore construction cheaper; close proximity to crowded urban markets; and consumers already accustomed to paying a high price for electricity, it gets still better.

Then add the European Union's goal of cutting its carbon emissions by 20 percent from 1990 levels by 2020 and fold in the fact that government subsidies for wind farms in the area are rapidly rising as Denmark, Germany, the Netherlands and Great Britain compete to have projects built in their territorial waters to meet carbon dioxide reduction targets.

What you get is a recipe for disappointment to experts who hoped that electricity from wind power will soon be competitive with more conventional energy sources. "Wind power is not competitive without subsidies. That's clear," said Per Lekander, head of European utilities research at UBS.

"How uncompetitive it is depends on wind conditions and alternatives. An extreme situation is if you put up a windmill at a Moroccan coastline where there are not many alternative fuels and wind speeds are high and constant, you can get in the territory of being competitive. But in most of Europe, you need subsidies."

Denmark was one of the first supporters of wind technology. A steady government hand sustained the industry through lean years in the 1980s and early 1990s, which paid off when local companies Vestas and LM Glasfiber grew to become the world's largest wind turbine maker and largest windmill wing maker, respectively.

'Green jobs' and royal favors

The wind industry employed nearly 30,000 workers in the country of 5.5 million people in 2008, the last year with available data. Since then, Vestas, LM Glasfiber and others have cut hundreds of jobs due to the global recession -- and had exports worth $7.7 billion, according to the Danish Wind Industry Association. The country proudly says wind power covers about 20 percent of its electricity consumption.

A symbol of the success of that government support is the Horns Rev 2 offshore wind farm, which was opened with great fanfare last fall in the Danish sector of the North Sea. Crown Prince Frederik and Prime Minister Lars Løkke Rasmussen took foreign journalists and photographers by boat 20 miles off the country's western coast to showcase the 91 wind turbines, which can churn a maximum of 209 megawatts, making Horns Rev 2 the world's largest offshore wind farm.

It was all made possible thanks to a subsidy of 9 U.S. cents per kilowatt-hour the farm will receive for the next 12 years, according to Danish Wind Industry Association data.

"If you have a feed-in tariff, that's a very low-risk investment because you know exactly your revenues," Lekander said. "You have some operational uncertainty, but it's very small. We've seen project returns of 12 percent to 15 percent, far above the cost of capital."

But now others are upping the ante in the subsidy race. Horns Rev 2 is set to be easily outpaced by Britain's London Array project, which will be nearly five times bigger. The 1,000-megawatt behemoth 12 miles out in the Thames Estuary will power 750,000 homes and become the world's largest offshore wind farm. DONG Energy owns 50 percent, E.ON 30 percent, and Masdar, the state-owned renewable energy company of Abu Dhabi, United Arab Emirates, 20 percent of the project.

It may produce power as early as next year, and the first phase of 175 windmills will be fully commissioned by 2013. Some calculations show that the power produced here could cost more per megawatt than that from a nuclear plant. And that's where the government subsidy comes in. The whole London Array project was in doubt and an early investor, Shell, even pulled out before Great Britain increased its subsidy for offshore wind power to about 18 cents per kilowatt-hour, making it profitable.

Upping the ante in a high-stakes game

"In the U.K., for sure, they wouldn't build London Array if it wasn't for the subsidies, which have been very generous," Lekander said.

E.U. targets require Britain to get 15 percent of its energy from renewable sources by 2020. In 2006, Britain was getting just 1.5 percent of its energy from renewables. When it comes to electricity production alone, Britain has set itself a more ambitious target: 35 percent should come from renewables by 2020, which is impossible by all accounts without offshore wind.

Some experts estimate Britain needs to increase its wind power output tenfold to 30 gigawatts to reach its renewables target. Theoretically, it is possible, as Britain's coastal waters have space for up to 7,000 more wind turbines than are already planned, according to an environmental impact study -- enough to supply power to almost every home in the country.

But in the slow winter months, some of the existing wind farms operate at 10 percent of capacity, and projects demand the financial security of a government subsidy to invest the billions of dollars offshore farms require.

Faced with similar economics, Germany and the Netherlands also have introduced higher subsidies for wind power. In Germany, the regular subsidy is 18 cents per kilowatt-hour, with another 2 cents in a so-called "sprinter bonus" added for offshore wind farms that enter production before 2016. Just as in Denmark, the subsidy is granted for 12 years.

Germany is currently considering boosting incentives for offshore wind even higher to reach a potential 25,000 MW installed offshore by 2030. The biggest offshore wind subsidy among North Sea states can be collected in the Netherlands -- 24 cents per kilowatt-hour for a period of 12 years.

A race for investment and esteem

"They have to have higher subsidies because they want to attract investment in their countries. It was a strategic move, especially by Germany and Britain," said Rune Birk Nielsen, chief spokesman at the Danish Wind Industry Association, who added that he is not worried that other countries now offer higher offshore wind incentives than Denmark.

"We don't need to be world leader in offshore wind," he said. "We're very small, and offshore wind power is very exciting, but it's not the end of the world. But we do need to maintain our leadership as the country that has integrated the highest amount of wind power in its electricity consumption. We need to remain a showcase for that so we can stay at the forefront on the technology side. Then Germany, the Netherlands or the United States will look at Denmark and see that's the way to do it."

The European Union has earmarked more than $8 billion in structural and agricultural subsidies for renewable energy over a 13-year period ending in 2013. Taking a page from the same book, last year's $787 billion U.S. economic stimulus package included about $80 billion for energy programs, such as $2.3 billion in tax credits for solar panels and wind turbine manufacturers.

The subsidies can go a long way in making a wind project profitable. A standard 2 MW turbine costs about €2.75 million to build and earns about €275,000 a year from electricity sales at the market rate. But the government incentives in some cases can double that revenue. The Danish Wind Energy Association's Nielsen defends the practice.

"In a historical view, not a single coal or nuclear power plant has been built without government support," he said. "And not one will be decommissioned without government support. A purely private investor-funded energy system is ridiculous. There is no such thing. It's in the society's interest to have a solid energy supply, and you need government support at least in the short run."

Eventually, he says, the subsidy level will go down.

'Someone is paying for it'

"In five to 10 years, at least in Denmark, government support will not be as necessary as it has been in the past because the demand for green energy will be growing very rapidly," he said.

And if energy demand doesn't do the trick, mounting bills for cash-strapped governments just might.

"The more installations you get, the more the subsidies cost, and someone is paying for it," Lekander said. "If you take Denmark, it started to become very expensive for the state budget to pay these feed-in tariffs. You can't hide the fact that it costs money, whether it's the utility, finance ministry or the customer paying it. It will be interesting to see if wind power subsidies will really manage to be unchanged in Spain despite the problems there with the budget deficit."

Spain, which has been in recession since the second quarter of 2008 and has the euro zone's third-largest budget deficit, has promised renewable energy companies €5.9 billion this year from revenue collected from tariffs, a 63 percent increase from €3.6 billion in 2009, according to a proposal put forth by the Industry Ministry in December.

To pay for the subsidy, the ministry proposed raising tariffs on access to the distribution network by an average of 16.2 percent. Spain cut subsidies for solar power last year and is negotiating with the industry further cuts for 2012.