The world’s largest wind turbine manufacturer is laying off employees due to over capacity in the market from competition from Chinese suppliers and lower demand in European and U.S. markets as unsustainable subsidies decline. Strong headwinds are blowing against the industry as governments have been forced to reduce the overly generous subsidies they have provided to wind producers.
Vestas Wind Systems, a Danish firm, plans on closing one of its 26 factories and laying off 2,335 workers, about 10 percent of its 22,362 person work force. Vestas expects a target of ‚Ç¨150 million (about $190 million) in cost savings by the end of 2012 from the layoffs and streamlining of its operations. The job cuts include some 1,300 redundancies in its Denmark factories. After the layoffs, Vestas will employ about 20,400 people globally, including 5,300 in Denmark.
The Vestas layoffs include 182 U.S. and Canadian workers (7.8 percent of the total cuts). Further, the company threatens to lay off an additional 1,600 employees in the United States—about half of its U.S. workforce—if the U.S. does not extend the production tax credit for wind which pays wind companies for each kilowatt hour of power produced. The tax credit expires at the end of 2012.[ia]
Oregon. Vestas’ American operations are headquartered in Portland, Oregon. Specifics of the Vestas job cuts are expected to be announced on February 8, but include an undetermined number in Portland. It is expected that most of the cuts in the United States and Canada will be front or back office positions that support sales and service, manufacturing, research and development, and supply chain operations.
Colorado. Vestas has spent more than $1 billion building four factories in Colorado that could be affected if Vestas needs to make further cuts in the United States due to poor wind turbine sales.
Massachusetts. Government officials in Marlboro, Massachusetts are worried the company’s plans to build a research facility in their city will fall by the wayside. Vestas employs 34 people in research and development in Marlboro and Hudson. In the $16 million research facility proposed in Marlboro, Vestas intends to develop generators and drive-train technologies for next-generation wind turbines. The new facility, if constructed, would provide an additional 66 jobs. In exchange, Marlboro granted a 10-year tax incentive plan to Vestas, which takes effect when the research facility is built.[ii]
Vestas faces tough economic times in the United States because they over-expanded in reliance on on-going and ever increasing subsidies. The problem is that the federal government is deep in debt and getting deeper, making subsidies more and more unsustainable.
The production tax credit for wind energy is set to expire at the end of this year. This subsidy provides a credit against taxes of 2.2 cents per kilowatt hour of wind power produced for the first ten years of the plant’s operation. That is more than 20 percent of the average retail price of electricity and over 30 percent of the average cost of a new natural gas-fired combined cycle unit. Tax credits are especially desirable for wind producers because unlike tax deductions, tax credits are paid to people even if they do not have a tax liability, unlike tax deductions. The government will literally pay wind companies cash for each unit of electricity they produce. This is on top of the mandates by various states requiring utilities to buy the product.
The credit has been extended seven times since 1999, sometimes retroactively. The last time the production tax credit expired before Congress reinstated it was at the end of 2003. Due to the expiration of the tax credit, U.S. wind installations declined to 397 megawatts in 2004 from 1,670 megawatts in 2003. According to Jacob Pedersen, an analyst at Sydbank A/S, “The production tax credit is incredibly vital to the U.S. market. If it isn’t there, no one will invest. If you don’t get the tax credit, the return on investment is lower.” In other words, Pedersen is admitting the wind industry is unsustainable without lavish taxpayer support.
Budget experts indicate that the credit to wind producers costs U.S. taxpayers roughly $1 billion a year unless it is offset by cutting other spending.
Another incentive that expired at the end of 2011 is the U.S. Treasury Department’s 1603 cash grant program that provided 30 percent of development and construction costs for wind and solar plants as an immediate rebate. The program paid out $9.6 billion in taxpayer money through October 2011 to support more than 22,000 projects. The loss of the 1603 program is expected to lower “clean energy” investment for it provided an immediate rebate on investment rather than obtaining it over a 10-year period.[iii]
Bloomberg New Energy Finance estimates that the United States added 7,300 megawatts of new wind capacity in 2011 and projects that wind additions may increase to 8,000 megawatts in 2012 before declining to 5,500 megawatts in 2013. The North American wind turbine market was strong in 2011 due to these subsidies and state mandates, with announced orders of 812 wind turbines by Vestas. The company hired almost 700 workers in the United States and Canada during the past eight months, many for manufacturing positions.[iv] This trend is not a surprise, for whenever subsidies for wind are slated to expire; there is a rush to complete projects in time to cash in on the tax credit.
Clearly, with decades of U.S. taxpayers’ money pumped into subsidies for the wind industry, and state mandates on utilities guaranteeing wind companies a market, one would think that the industry would be economic on its own by now. The Vestas story tells us that it is not the case.
Further, while the Obama administration preached that federal money would support American companies, we find that that is also not the case. Vestas is an example. As a Danish company, it is now worried about Chinese wind turbine manufacturers undercutting their market to gain a greater share of the subsidized and guaranteed market. Instead of focusing on propping up unsustainable businesses, the federal government should get out of the costly energy finance business. U.S. taxpayers need a break.
Uncertainty in European and U.S. subsidies and competition from Chinese manufacturers has caused an oversupply of turbines. According to Tom Murley, head of the renewable energy team at HG Capital, “There will be more supply than demand probably for another five years in the wind sector.”
This story is similar to the overcapacity that the solar power sector is experiencing brought on by China’s manufacture of photovoltaic solar cells less expensively than its competitors and uncertainty in government subsidies and loan guarantees for solar power. (See IER’s blog on “Overcapacity plagues solar industry.”)
The Chinese have seen that Western countries will buy their products because of artificial markets created by cash payments, mandates and loan guarantees.¬† It is highly probable that they have a similar saying to our own that “a fool and his money are soon parted.”¬† If the United States is giving away money foolishly, they will gladly take it.
Wall Street Journal, Wind Giant Vestas Cuts Back, January 13, 2012.
[ii] Boston Herald, “Gone with the Wind? Layoffs cloud co.‘s Marlboro plans”, January 13, 2012.
[iii] Bloomberg, Vestas jobs threat pressures Obama to extend tax break, January 13, 2012.
[iv] The Oregonian, Renewable-energy misery spreads to Vestas, as the Danish wind turbine maker slashes jobs, some in Portland, January 13, 2012.
The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.
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