Technical Explanation: The open circuit voltage produced by your generator is too low to drive any current through the LED.
Straightforward Explanation: Your problem is probably that there aren't enough volts produced by the generator, even when the LED isn't connected. You can measure this with a simple multimeter when spinning the generator. Set the multimeter to 20V AC or DC and see what voltage you measure. To get the LED working you should see at least 1.4 volts for a RED LED, 2.5 volts for blue, or 3 volts for a white LED.
Others have suggested a resistor is necessary to prevent damage to the LED. Normally, this would be true, but in this case as the LED starts to light up, it will slow down the wind turbine, protecting itself in all but the strongest winds. Additionally, most generators have the equivalent of a resistor inside them.
One suggestion is to use a microcontroller/capacitor. The problem with this solution is you will not be able to get a high enough voltage to power up the microcontroller.
My solution:
Use a Red rather than white/blue LED.
Use no resistor (or if you do, choose
something below 300 ohms)
Spin the generator faster - use gears
to up the speed and lower the torque
if necessary
Get a different type of generator
designed for slow speed use.
If you have multiple LED's, connect
them all in parallel (ie. every LED
connects direct to the generator)
Make sure you're spinning the
generator the right way - test
spinning it backwards, or connect the
LED the other way round.
Note: Human eyes are very sensitive - if the output voltage of the generator is high enough, even a tiny current flow will cause the LED to visibly light up in the dark.
Additionally, there are many types of generator, AC/DC, brushed and brushless etc. In this situation, it doesn't really matter which you choose.
There is NO problem with the neutral conductor remaining connected. Most electrical codes REQUIRE the neutral to remain connected between the main (grid) supply and the backup supply. Also note that the neutral conductor is bonded to earth ground, usually at the meter socket.
Be aware that most electrical codes require the use of a transfer switch between the grid and backup supply. This is a switch that has mechanical interlock to guarantee that under no circumstances will you ever back-feed generator power back into the utility lines.
Best Answer
The term derating generally refers to over specifying a device or component in order to build in a certain level of tolerance or to increase the lifespan of the device.
Specifically, with a generator, you will have a finite amount of power it can produce. When you approach that power limit the generator starts to labour more and more - like a car driving up a hill - and this puts extra strain on the generator and ultimately shortens its lifespan.
To derate it you would basically specify a more powerful generator than you need, so that when you are at your peak power consumption the generator isn't struggling.
There's no hard and fast rules about it, just what is easy and "available".
Say you have a peak power consumption of 9.8KW. A 10KW generator would do, but only just. Any unforeseen power consumption could have a critical effect, and during peak consumption the generator would be running pretty much at maximum.
Moving up to the next easily available generator, say a 12.5KW generator (whatever the shop has), would ease some of that burden and give you an extra margin for error.
Derating can also help to offset the unforeseen environmental changes, such as a heat wave, causing tolerances to become more critical, especially in heat producing equipment like a generator.