In the last week I've seen reports that two of the biggest wind power developers in the world, Spain's Iberdrola Renovables and Portugal's EDP Renovaveis, plan to reduce their wind power investments in the US for at least the next couple of years. That's significant because these two firms together accounted for just under a third of the 5,115 MW of new wind turbines installed in the US last year. This isn't for lack of opportunities or incentives, but for some very old-fashioned reasons: low demand and competition from other energy sources. It's an important reminder that renewable energy can't just be viewed as a set of technologies; they are also businesses, and as such are subject to the normal ups and downs of the market. It also highlights the limitations of government incentives.

Wind power had been on a tear in the US as recently as 2009, when a record 10,010 MW of turbines were installed, extending an enviable 5-year run of 40% average annual growth in wind capacity. Last year that growth slowed to 15% as new installations fell by half. That occurred in spite of the federal stimulus program that converted tax credits for renewable energy projects into up-front cash grants, paying $ 3.5 billion to wind developers out of a total of $4.2 billion expended in 2010. Although eligibility for that benefit was due to expire on 12/31/10, it was subsequently extended through 2011 under December's "lame duck" tax legislation, largely on the strength of arguments that it would keep wind and other renewables growing at a brisk pace. What happened?

At least two major factors related to the business environment are weighing on wind development, as well as another factor unique to renewables. First, electricity demand that was depressed by the recession is apparently still at least 1% below pre-crisis levels. That doesn't sound like much, but the difference is roughly equivalent to the entire amount of electricity generated from wind power in 2008. As a result, utilities have become less keen to sign long-term offtake agreements, or "power purchase agreements" (PPAs), with new wind farms. Both EDP and Iberdrola cited this problem in reference to their 2011 plans.

Wind power also faces strong competition from cheap natural gas, as you've probably heard many times by now. Despite some resistance to shale drilling in states like New York, there's every indication that US gas output will continue to expand. Last year the US produced more natural gas than in any year since 1973, and the end of this boom is not in sight. Although advocates may claim that wind is now cost-competitive with gas, that remains a best-case analysis for locations with excellent wind resources and good access to transmission. Natural gas at $5 per million BTUs yields electricity at 5¢/kWh from a combined-cycle gas turbine. That sets a pretty tough bar for wind, especially when gas turbines can produce power on-demand, 24/7, while wind turbines generate power an average of 30% of the time, intermittently.

Unexpectedly, wind power may also be facing competition from solar power. In a recent interview the CEO of NRG Energy Inc., a large power generator, pointed to the greater opportunities for innovation in solar, compared to wind. The cost of installed photovoltaic modules, particularly in utility-scale applications, has fallen much faster in recent years than the cost of wind turbines. That's not to say that power from solar is cheaper than from wind, but solar is starting to look like a better investment for utilities, which have been signing PPAs with solar project developers in droves. It's also noteworthy that for the first time last year more solar power was installed in Europe than new wind power, by a healthy margin.

It's probably premature to conclude that the US wind boom has ended, and that wind capacity is now likely to grow at lower, more normal rates in the future, compared to its extraordinary past performance. This could just be a lull, as the enormous additions of the last few years are absorbed into a power grid that is still modernizing and remains a long way from the smart grid that will be needed to accommodate much larger contributions from intermittent renewables of all types. At the same time, it's worth noting that government incentives can't eliminate every obstacle that renewables face, and that arguments that the Treasury cash grants in lieu of tax credits should be extended beyond 2011 should be assessed with much more critical judgment than was possible in the scramble of a lame duck Congressional session.