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Great breakdown of this industry.

What your wrote about the dominance of large players and the need for ensuring a level playing field vaguely --

Another obvious trend was how the industry is now dominated by the large players, in particular on the investor side - the business is essentially run by the big utilities, with a few independent developers remaining (and those that have good prospects are usually take-over targets for the bigger players right now). ... the fate of Vestas (still the largest wind turbine manufacturer overall, but a small company compared to the big indistrial groups) and Repower (focused on offshore, but whose main shareholder, Indian-based Suzlon, is itself a pure wind player and thus quite small as well) will certainly become a hot issue in the future. <...>

Thus we need to ensure at least a level-playing field, with stable regulation over many years...

<...>

The conference ... happened at the same time as an important German government meeting that decided to increase offshore tariffs to 14c/kWh, a strongly supportive measure which is likely to be the starting point of a massive wave of investment in the sector in that country. Interestingly, despite that decision, and the excitement it generated, the UK market is still seen as likely to be bigger than the German one over the next 10-15 years, with all other markets being somewhat smaller.

-- reminded me of something you wrote in Guillotines, da Vinci, peak oil and discount rates, but I am not sure if the former is really an instance of the latter:

We're all familiar with business cycles: there is growing demand for one product; prices can be very high; people rush to provide the good and offer the suppy that will fulfill that demand; the first comers get excellent prices; as new sellers come in and supply increases, prices goes down and more demand is created; the sector booms and more suppliers poor in; but at some point, prices become too low and new sellers are discouraged, and some of the existing ones drop out until demand can catch up, and prices can go back up.

When products are simple and easy to provide, an equilibrium of sorts can be reached, as supply and demand can ajust fairly quickly to price and other contraints, and the market can be quite stable. But in many industrial sectors, supply is far from being flexible: it can take years to build a new production factory, and thus market conditions may be quite different at the time of the decision to invest and at the moment the capacity acutally becomes available. In such cases, the economic cycles are much more pronounced: if demand grows in a situation of insufficient supply, prices will go up as there simply is no supply to respond to that demand, and thus demand must be restricted, which, for vital product (like electricity) means massive price hikes. Producers will then decide to invest to take advantage of these prices, but it will take a while for them to be ready. Many will do the same, all at a time of apparent undersupply. In the meantime, prices will be extremely high. But at some point that capacity will come on line: the early projects will get excellent prices and a great return on investment, but as the others catch up, you may suddenly get an oversupply and prices may eventually crash brutally, leaving producers with a lot of excess capacity and little to show for their investment - then the sector gets neglected, until demand catches up again, and the whole cycle starts again.

Many such cycles happened in the past, and they would trigger brutal economic crises. Our governments have slowly learnt to manage our economies so as to smooth out such cycles and avoid the worst of the boom-and-bust which is inevitable in pure market driven economies. The way they have done this is by boosting demand during busts (for instance, by providing income to those that lose out in such circumstances, via unemployment insurance or deposit insurance - to avoid banking crashes), and by trying to slow supply during the good times (by limiting money growth and trying to curtial credit at those times to avoid overinvestment). It's never been a perfect science, but by and large, macroeconomic cycles have become a lot less brutal in recent decades than, say, a century ago.

But even today, sectors like electricity or oil are prone to such cycles, due to the long lag time of investment decisions. In the late 70s, there was a boom in refinery building to take advantage of skyhigh gas prices; prices crashed and the oil industry had to nurse a lot of overcapacity for the following 20 years - until recent years when demand caught up and caused brutal price increases (and largely unfair accusations of gouging). Same thing in the power sector in the late 90s, when an investment boom in gas-fired power plants created a glut of power and rock-bottom prices that left a lot of investors (and their financiers) in the dust. Demand is now catching up after several years of little investment, and we again get brownouts or huge price spikes.

Can you describe how investment in and development of the wind industry fits into this analysis of business cycles?  Is it too simplistic to assume that since wind will never "run out", and since there is no international cartel controlling access to wind power, business cycles based on wind energy will have significantly different pattern than those based on fossil fuel energy?  Is the solary energy industry (e.g. using concentrated solar power) is similar to the wind energy industry in these respects?

Eat maguro. Your grandchildren will never know what they missed.

by marco on Fri Dec 7th, 2007 at 07:46:40 PM EST
Well, I think some things remain: demand for turbines can drop dramatically (be it for changes in regulation, or reaching saturation level in an area), leading to falling production, closures, reducing economies of scale, etc.; there could be cycles due to shortages in materials needed for turbines (steel, carbon fibres, semiconductors for power electronics).

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Sun Dec 9th, 2007 at 12:49:57 PM EST
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