Economic Conditions

In the year under review the global economy remained stable, international gross domestic productBenchmark for the economic performance of an economy. The GDP states all newly available goods and services at their current market prices produced in the country by nationals and non-nationals within one year. (GDP) rising by 5.2% in fiscal 2007 according to preliminary VDMAVerband Deutscher Maschinen- und Anlagenbau (German Federal Mechanical Engineering Association) figures. This favorable performance is due above all to above-average economic growth in emerging markets such as China (up 11%), India (up 9%) and Russia (up 7.5%) Against this backdrop the developed economies in the EU (up 2.9%) and the United States (up 1.9%) formed a solid basis.

A moderate rise in interest rates on the financial markets did not have any noticeable negative impact on the economy. Even the American subprime crisis, which put the capital market under pressure in the fourth quarter of 2007, has not (yet) reached the nonmonetary economy. However, at the moment it is not clear whether further depreciation will put a brake on growth. So far banks have written down some USD 100 billion in this connection. According to Standard & Poor´s, further losses of up to USD 165 billion are possible.

The wind industry also continued to record a robust demand. According to preliminary surveys by the Global Wind Energy Council (GWECGlobal Wind Energy Council - international umbrella association for wind energy.), in 2007 some 20,000 megawatt1 megawatt equals 1,000 kilowattss (MW) in new capacity were installed worldwide (2006: 15,000 MW), equivalent to 33% growth. Many of the projects completed in the year under review were already ordered from the manufacturers in 2006.

 

The strong demand, which continues to outstrip new building capacity, increased massively, basically for the following reasons:

• The cost of producing electricity by power stations driven by fossil fuels has risen dramatically due to an increase in the cost of fuel. For instance, since 2004 the price of crude oil has increased by a factor of 3.2, from USD 29.6 to USD 100. This was brought about by a drop in oil reserves, a surge in demand in the emerging markets of China and India and concern about a shorter supply against the backdrop of increasing political tensions in the production regions.
  
  

• An increasing number of countries are imposing strict conditions on the emission of greenhouse gases. For instance, in the coming allocation round for the European Emission Trading Scheme (ETS) the member states of the European Union plan to issue many fewer emission rights – and, above all, no longer free of charge. If rights trading become obligatory worldwide and the price per ton of CO2 emitted rose to around EUR 30, electricity from wind energy would have lower production costs than coal and gas-fired power stations (source: EER). The certificate price on the electricity exchange currently stands at EUR 19 per ton (source: EEX, February 2008). The governments of more than 20 US states have set clear targets for the amount of energy fed in from regenerative sources. However, as yet these so-called Renewable Portfolio Standards (RPS) do not included any sanctions for exceeding targets or, for instance, the purchase of emission certificates. Comparable instruments also exist in China, where the government plans to cover some 10% of electricity demand using regenerative sources in 2010 and 15% in 2020. At the moment the figure stands at 8% (including hydroelectricity). However, the effect of controls is greater in China as the utilities are state-owned.
  
  

• The remuneration structure for the statutory feed-in systems in force in Germany and France, for example, were adjusted last year.

The 33% increase in new turbine construction in the wind industry exceeded the expectations of market observers, whose projections of power station expansion were more conservative. This is particularly in case for North America, China and Spain. Business in the United States is dominated principally by utilities and other major power station operators. Although the so-called PTCProduction Tax Credit. The PTC guarantees a tax credit on the income tax to be paid in the United States for companies operating wind power systems there. The current PTC stands at 1.9 US cents per kilowatt hour. (Production Tax Credit) for producers of green electricity is currently in force until the end of 2008, at the moment there are no indications of a drop in the demand for new wind farmWind farms comprise of several wind turbines operated in tandems. For one thing, many market observers expect the scheme to be continued in some form and a decision on this could still be taken in the first half of 2008. For another, most of the project plans should still turn a profit even without the tax credit. The capacity of newly installed turbines in United States stood at an average of 1.65 MW in the year under review. For Nordex this opens up good opportunities for selling its 2.5 MW technology to American customers in large numbers.

The demand in China is being driven mainly by the enormous growth of the economy. The country is trying to meet the demand for additional sources of electricity as far as possible on the basis of domestic energy sources. These are primarily coal-driven and hydroelectric power stations. However, the government is also increasingly drawing on wind energy. According to the National Development and Reform Commission, NDRC, the highest state planning authority, the government has to invest around USD 280 billion by 2020 on developing “green” power stations in order to meet its target of increasing the share of renewables to 15% by the year 2020. The state utilities are already acting on the basis of this target. For foreign suppliers local value-added structures are essential in order to have a chance in NDRC tenders.

With the exception of Spain, the markets in Europe developed as expected. The strong growth in Spain (up 120%) was triggered by an amendment to the electricity feed-in rates (Decree 661/2007) in May 2007. As the new arrangements did not take effect until January 2008, project developers brought their investments forward and implemented as many mature projects as possible in the year under review. Whereas new construction in Germany, at a high level, declined again (down 25%), new installations in Italy rose sharply (up 45%). The key to this contrary trend was the market price level in the respective countries. Feed-in prices for green electricity were high in Italy (electricity market price plus green certificates) while the rates in Germany dropped. The German government has recognized this and plans to increase tariffs in the EEGRenewable Energies Act. The EEG has regulated the feeding of regenerative energy into the German power grid since April 01, 2000 amendment. Offshore the rate is to increase from 9.1 ct/kWh initially to 14 ct/kWh and onshore for modern machines from 8.1 ct/kWh to 8.7 ct/kWh. Parliament still has to approve the amendment before the law can come into effect from 2009. France has established itself as the third largest market in Europe. A higher capacity factorTheoretical number of hours per year in which a wind power system is able to operate at full load at a given location compared to Germany (full-load ratio of a power station per annum) of 25% on average and higher reimbursements for feeding in renewable electricity make France an attractive market for the coming years, too. The decline in the UK (down 32%) is due mainly to uncertainties on possible changes in the rate of reimbursement for on shore wind farmWind farms comprise of several wind turbines operated in tandems, which are resolved in the second half of 2007.

In 2007 the positive economic trend led to a considerable boom in the manufacturing industry. Thus the VDMAVerband Deutscher Maschinen- und Anlagenbau (German Federal Mechanical Engineering Association) projected 8% real sales growth for the mechanical engineering sector in the European Union and an increase of as much as approx. 11% in Germany. As a result of the strong demand, this was reflected in increasing commodity prices. For instance, the price of heavy plate rose by some 15% in 2007, which was also evident among suppliers of tower plates, who increased their prices by between 8 and 28%. At year’s end prices stabilised at a high level.

The procurement costs for core components of wind energy systems, for example gearboxThe gearbox is located between the slow rotor shaft and the fsat generator shaft. It causes the generator shaft to rotate 90 times faster than the rotor shaft.es, also increased further. Apart from the cost of raw materials, this was also attributable to the huge increase in demand. The investments made by sub-suppliers also had an impact. For instance, the specialist service BTM Consult projects that capacity for wind gearboxThe gearbox is located between the slow rotor shaft and the fsat generator shaft. It causes the generator shaft to rotate 90 times faster than the rotor shaft.es will treble over the coming three years. The second-largest gearboxThe gearbox is located between the slow rotor shaft and the fsat generator shaft. It causes the generator shaft to rotate 90 times faster than the rotor shaft. manufacturer alone plans to spend up to EUR 650 million on extending its facilities in this period.

Thanks to higher prices for renewable generated electricity the situation on the markets improved for turbine manufacturers in the year under review. However, manufacturers had to compensate for the increased costs of raw material and components.