09
2010
FIGURE 6.3 Forecasted Global Annual Wind Installations (in gigawatts)Source: Global Wind Energy Counci, Global Wind 2006 Report, 2006, p. 8 and 13,http://www.gwec.net/uploads/media/gwec-2006 ﬁnal.pdf.
expected to account for 44 percent (9.3 gigawatts) of the annual marketand 55 percent of installed capacity.36 In Europe, Germany and Spain represent 50 percent of new investments and are the countries with the mostinstalled capacity, together representing 43.4 percent of global installedcapacity.37The region with the second largest installed capacity is North America, with a forecasted average annual growth rate of 24.6 percent for 2006to 2010 according to the Global Wind Energy Council.38 The United Stateswill be the largest national market in the world during this period, withan average of 3.5 gigawatts of wind power installed each year.39 More than$3.7 billion was invested in wind installations in the United States in 2006,40and income from landowners amounted to an additional $5 million to$9 million.41 Canada is also expected to show high growth rates, installing4.5 gigawatts of capacity during 2007 to 2010.42Asian markets have shown spectacular growth rates in recent years,driven mainly by India and China. India and China are expected to continueto lead the region and are each expected to install 8 gigawatts of capacityduring 2007 to 2010.43 Asia will have an average annual growth rate of 28.3percent for the period, making it the fastest growing region in the world
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8,0002003
2004
2005
2006
6,000
MW
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4,000
2,000
0Europe
Asia
North America
Latin America Africa & Middle East
Pacific
FIGURE 6.4 Installed Wind Capacity by Region (2003–2006)Source: Global Wind Energy Counci, Global Wind 2006 Report, 2006, p. 8 and 13,http://www.gwec.net/uploads/media/gwec-2006 ﬁnal.pdf.
according to the Global Wind Energy Council.44 Figure 6.4 illustrates hownew capacity has evolved in recent years for each regional market.
THE ECONOMICS OF WIND POWERWhile wind turbines require a high initial investment, ongoing operationsand maintenance costs are low since no fuel needs to be purchased. Thecost of electricity produced by wind power is calculated by adding up allthe costs of the project (land, construction, operating costs, etc.) and dividing those costs by the expected electricity output over the lifetime of theequipment. This produces the expected cost of the electricity produced bythe wind farm in terms of cents per kilowatt-hour.In 1980, wind turbines cost 80 cents per kilowatt-hour generated.45Since then, much research has been done, and today’s turbines are more efficient and have lower costs of about 3 to 5 cents per kilowatt-hour (including both the construction and maintenance costs). A study by the BerkleyLab measured the price of electricity sold by wind projects in the UnitedStates for 1998 to 2006.46 The study found that wind power costs were
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6.1 cents per kilowatt-hour in 1999 (measured in 2006 dollars) and thenfell to 3.6 cents per kilowatt-hour in 2006, with a majority of installationsfalling between 2.3 cents and 4.9 cents per kilowatt-hour.47The study also showed, however, that wind power costs have actually risen in the past several years due to the rising costs of raw materialsand component shortages. For projects started in 2002–2003, average windpower costs fell as low as 3.1 cents per kilowatt-hour. However, prices havesince increased and reached 4.9 cents per kilowatt-hour in 2006.48 Theseprices include the benefit from the U.S. federal government’s ProductionTax Credit (PTC), explained later, which significantly reduced wind powercosts. Without these credits, the prices for projects started in 2006 wouldhave risen to an average of 7 cents per kilowatt-hour, with a range of 5.0 to8.5 cents.49The prices in this study included transmission costs. Regarding transmission costs, there is an industry problem worth noting that involves interconnection congestion and “rate pancaking.”50 When electricity fromwind power needs to travel over long transmission distances, as it usually does, it can pass through various operators’ transmission systems. Access charges are billed every time a new operator is involved. By the timethe power reaches its destination, several charges may have been addedinto the price, which is referred to as “rate pancaking” because the variouscharges have stacked up. The American Wind Energy Association (AWEA)is working to solve this problem by proposing pricing modifications to existing transmission policies.51Regarding the more general issue of wind power costs, wind powerproduces an additional cost for the utility stemming from the intermittentsupply of electricity since the utility company must get power from somewhere else quickly if the wind power system is not operating due to lackof wind. The utility will need to quickly start a backup power plant or buypower on the wholesale market. The overall amount of this cost dependson the percentage of power that the operator gets from wind power. Forsystems with less than 10 percent reliance on wind power, costs are raisedby an average of 0.2 cents per kilowatt-hour. This cost increases to 0.3 to0.6 cents per kilowatt-hour for systems with a 20 percent or more relianceon wind.52Figure 6.5 illustrates that wind power has become a very significantsource of power in a number of countries, primarily Denmark, Spain,Portugal, and Germany. Figure 6.5 shows the percentage of overall powerthat a country receives from wind power. Critics of wind power point to itsintermittency as a fatal flaw, but Denmark has proven that a grid can function well even if more than 20 percent of the country’s power is derivedfrom wind power. This graph also illustrates the upside potential for windpower if large countries such as the United States, India, China, France, the
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25%
21.4%20%
15%
10%
8.8%7.0%
7.0%
1.5%
1.3%
0.8%
0.7%France
1.7%
US
5%
0.9%0.2%Total
China
Italy
UK
India
Germany
Portugal
Spain
0%Denmark
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FIGURE 6.5 Percent of Total Electricity Derived from Wind (2006)Source: U.S. Department of Energy, National Renewable Energy Laboratory, AnnualReport on U.S. Wind Power Installation, Cost, and Performance Trends: 2006, May2007, p. 5, http://www.nrel.gov/docs/fy07osti/41435.pdf. The chart takes into account that energy output is less than nameplate capacity, and is a rough approximation, which ignores transmission losses.
United Kingdom, and Italy were to boost their wind power usage up to 20percent or more of overall electricity usage.
GOVERNMENT-SPONSORED INCENTIVESThe wind power industry still depends heavily on subsidies for its growth.The U.S. federal government provides wind operators with (1) a 10-yearproduction tax credit (PTC) that is indexed to inflation and is currently setat 1.9 cents per kilowatt-hour; and (2) a five-year accelerated depreciationschedule for wind turbines (normally, the useful life of a wind turbine is20 years). The current production tax credit will benefit projects that become operational by December 31, 2008.The wind industry expects the U.S. federal government to renewthe production tax credit, but there is no guarantee this will occur. The
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production tax credit for wind power was first implemented in 1992. Sincethen, Congress has usually allowed the production tax credit to expire before finally getting around to rolling it over again. This resulted in a hit toU.S. wind turbine production in 2000, 2002, and 2004. For the first time,Congress and President Bush in 2005 rolled over the production tax credituntil 2007 before it expired, thus boosting U.S. wind power sales in 2005and 2006. It was rolled over once again in 2006, extending it for an additional year, so that the current expiration date is December 31, 2008.53The wind power industry is pushing for a long-term extension of thecredit of more than five years to give the industry some stability and prevent the stop-go government policies of the past.Another policy designed to grant U.S. wind power an economic advantage is the Renewable Energy Certificates (REC) program. These RECscan be used by utilities to meet their state Renewable Portfolio Standards(RPS), which require utilities to obtain a certain percentage of their electricity from renewable sources. The wind RECs can also be sold on a voluntary basis in the open market, thus improving the project economics forthe wind farm operator.54 Similar programs exist outside the United States.The U.S. government also provides additional support by funding research and by partnering with manufacturers and universities to conductresearch. These wind research programs are administered by the NationalRenewable Energy Laboratory (NREL), and the Sandia National Laboratories (SNL).55In Europe, feed-in tariffs have been popular in Denmark, Germany,Italy and Spain. With feed-in tariffs, a wind farm operator is guaranteeda fixed price for electricity generated by the wind farm, thus guaranteeinga minimum return on investment for the project and making it easier forthe project owner to obtain financing.56China was slow to enter the wind market but wind power there is nowgathering momentum. China started out with a feed-in tariff system, butthen shifted to a tendering, or competitive bidding, process. Tendering hasworked well in some European countries. However, a potential problemwith tendering is that a wind operator may bid too low to get the contractand then lose money on the project, eventually going bankrupt and shuttingdown the wind farm.57While wind power currently depends on government incentives to becompetitive with fossil fuel technologies, wind power costs continue tofall. The U.S. Department of Energy has set a goal of lowering costs to 3.6cents per kilowatt-hour by 2012 for large (Class 4) sites without government incentives.58 The International Energy Agency estimates that costscan be lowered by 2020 to around 3.4 cents per kilowatt-hour.59 That pricing would be competitive with even the cheapest coal-fired power plants,particularly if the cost of building new coal-fired power plants is considered and if fossil fuel plants see a rise in costs due to a carbon tax or
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cap-and-trade system. In the meantime, strong government support forwind power is likely to continue and help the wind power industry to expand rapidly in coming years.
WIND INDUSTRY ISSUE: COMPONENTSHORTAGESThe wind power industry is experiencing such tremendous growth that theindustry is facing a serious shortage of various components. The component shortages mainly involve gearboxes and bearings.60 The componentshortage has limited the industry’s overall growth rate and resulted in largebackorders for wind turbine and system manufacturers. At the end of 2006,wind farm developers had to wait 12 months for turbines to be deliveredand this delay may grow to 18 to 24 months.61 Demand in 2007 is expectedto be 20 gigawatts and supply is only expected to be 17 gigawatts, resultingin a 3-gigawatt shortage according to the Global Wind Energy Council.62The industry consensus is that these component shortages will last until atleast 2009.63There are three reasons for the component shortages: political, technological, and economic. From a political standpoint, the unreliability ofsome government-sponsored wind support programs, such as the U.S. production tax credit, makes component manufacturers reluctant to spend thecapital that is needed to permanently expand their manufacturing capacity.From a technology perspective, there is strong demand for technologicallyimproved products and not all manufacturers can keep up with these improvements. From an economic standpoint, raw materials costs (e.g., steel,copper, and carbon) have risen sharply and have made it difficult for component manufacturers to plan production and pricing.
WIND INDUSTRY PLAYERSThe wind power industry can be separated into three types of players: (1)wind turbine manufacturers, (2) component manufacturers, and (3) windpower operators. The following sections describe each in detail.
Wind Turbine ManufacturersThe wind turbine industry has seen a large number of mergers and acquisitions (M&A) in the past few years. The M&A activity has been driven bywind turbine manufacturers trying to (1) grab geographical territory and
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market share from other turbine manufacturers (horizontal acquisitions);and (2) acquire control of component suppliers to ensure component availability and R&D improvements (vertical acquisitions).In 2006, 13 M&A transactions took place totaling 35 gigawatts of capacity. That was up from nine transactions in 2005 (12 gigawatts) and fourtransactions in 2002–2004 (under 4 gigawatts).64 Acquisition activity hassometimes caused market shares to change quickly. For example, Siemenswas only a minor player in the United States in 2005, but after acquiringBonus Energy A/S, a Danish wind turbine manufacturer, Siemens quicklyjumped to second place in the United States in 2006 with a market shareof 23.0 percent.65 Market shares for the top wind turbine manufacturersare shown in Figure 6.6 for the global market and in Figure 6.7 for the U.S.market.There are three large global conglomerates that are actively involvedin wind power: General Electric (NYSE: GE), Siemens (German Xetra: SIEGR), and Mitsubishi Power Systems, a subsidiary of Mitsubishi Heavy Industries (Tokyo: 7011 JP). Wind power represents a very small portionof these conglomerate’s revenues and profits, so it doesn’t make muchsense to buy stock in these companies to gain exposure to the growthin wind power. GE Wind, a subsidiary of GE, has a large market share
28.2%
VestasGamesa
15.6%
GE Wind
15.5%
Enercon
15.4%
Suzlon
7.7%
Siemens
7.3%
Nordex
3.4%
Repower
3.2%
Acciona
2.8%
Goldwind
2.8%4.6%
Others0%
10%
20%
30%
40%
FIGURE 6.6 Wind Turbine Manufacturer Global Market Shares in Percent for 2006(Total Market Size: 15.016 GW) Note: The market shares added together equal 107percent—this is caused by the fact that 7 percent more capacity was supplied during2006 than was recorded as installed in the market.Source: BTM Consult ApS, “Press Release: International Wind Energy Development,”March 26, 2007, http://www.btm.dk/documents/pressrelease.pdf.
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GE Wind
47.0%
23.0%
Siemens
19.0%
Vestas
5.0%
Mitsubishi
4.0%
Suzlon
Gamesa
2.0%
Others 0.1%0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FIGURE 6.7 Wind Turbine Manufacturer U.S. Market Shares for 2006Source: Depart of Energy, National Renewable Energy Laboratory, Annual Report onU.S. Wind Power Installation, Cost, and Performance Trends: 2006,” May 2007, p. 7,http://www.nrel.gov/docs/fy07osti/41435.pdf.
globally and in the United States and GE’s 1.5-megawatt wind turbine in2006 was the world’s best-selling model.66 As mentioned earlier, Siemensgrew in the wind industry by the acquisition of Bonus Energy A/S in 2004,the oldest wind company and the pioneer of offshore wind farms and arcticturbines.67 Siemens recently entered into an agreement to produce floating offshore wind turbines with Hydro,68 a Norwegian energy companywith little experience in the wind industry, but with approved constructionlicenses.69There are only a handful of pure-play publicly traded wind turbinemanufacturers in the world at present, most of which trade outside U.S.markets. Table 6.1 shows the largest pure-play companies, ranked by market capitalization. For easy comparison, the monetary quantities in thistable have been converted from local currencies into dollars at currentexchange rates. All of the companies are wind turbine/system manufacturers and installers, except Zoltek and American Superconductor, whichare wind power component suppliers.Vestas Wind Systems (Copenhagen: VWS DC). Vestas Wind (www.vestas.com) started making wind turbines in 1979 and has grown to be thelargest wind turbine manufacturer in the world. It is a leading playerin Europe and the Americas and consolidated its leading market shareposition by acquiring its rival NEG Micon in 2004.70 Vestas Wind has
140DenmarkIndiaSpainGermanyUnited KingdomGermanyUnited StatesUnited States
$12,550$10,350$9,350$2,750$2,000$1,750$1,400$750
Market Cap
$5,241$933$3,250$751$7$628$92$52
Revenues
$446$209$559$40($20)$23($10)($32)
EBITDA
$151$185$269$17($21)$10($66)($35)
Net Proﬁt (Loss)
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* American Superconductor ﬁscal year ends March 31, 2007.
VWS DCSUEL INGAM SMNDX1 GRCWP LNRPW GRZOLT USAMSC US
Ticker
January 12, 2008
Source: Company ﬁlings and Bloomberg.
Vestas Wind SystemsSuzlon Energy LtdGamesa Corporacion TecnologicaNordex AGClipper Windpower PlcREpower Systems AGZoltek CompaniesAmerican Superconductor*
Country
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TABLE 6.1 Global Pure-Play Wind Power Manufacturers (for FY 2006, in millions of U.S.$)
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recently been expanding its business in China, with the installation ofa blade factory in 2006. Even before this factory was completed, Vestasdecided to double its capacity due to increased demand.71 Vestas Windis currently in the process of trying to deal with component shortagesand improve its profit margins.Suzlon Energy Ltd (Mumbai: SUEL IN)—Suzlon (www.suzlon.com) isbased in India but targets the European and American markets. Thecompany’s manufacturing plants are in India, which results in significantly lower costs and higher profit margins than its Europebased competitors.72 In 2007, it signed one of the largest contractsin U.S. wind-power history, agreeing to provide PPM Energy, a subsidiary of Iberdrola, with 700 megawatts of wind capacity over twoyears.73 Suzlon acquired 33.85 percent of REpower Systems AG sharesin June 2007 and through voting agreements controls 87.1 percentof voting control.74 REpower is a German company that is developing a prototype 5-megawatt wind turbine. Its business is concentrated in Europe and in Asia/Pacific through subsidiaries and affiliatedcompanies.75Gamesa Corporacion Tecnologica (Madrid: GAM SM). Gamesa (www.gamesa.es/index.php/en/) is a Spanish company with over threequarters of its revenues coming from wind turbine sales. It has salescommitments with Iberdrola and Babcock & Brown to install 4.5 gigawatts of wind power capacity worldwide during 2007–2009, 60 percent of which will be installed in Europe and the remainder in theUnited States and China.76 In 2006, Gamesa started the construction ofseven new wind power parks in various locations including the UnitedStates, Spain, and China.77Nordex AG (German Xetra: NDX1 GR). Nordex AG (www.nordexonline.com/en/) focuses on larger turbines, constructing 2.3 to2.5 megawatt wind turbines. Its business is mostly in Europe and it isgrowing quickly in America and Asia/Pacific. It leads the French windindustry with a 33 percent market share, the largest in that country.78Clipper Windpower (London: CWP LN). Clipper Windpower (www.clipperwind.com) is a relatively new company that produced 2.5megawatts of wind turbines in 2006. The company currently has firmagreements to deliver over 1 gigawatt of wind turbines through 2011and has about 4.5 gigawatts worth of contingent or joint developmentsales.79 Clipper Windpower has formed a long-term strategic partnership with BP Alternative Energy80 to supply turbines and wind powercapacity to BP. BP intends to become one of the world’s leadingwind developers by 2015 with help from Clipper Windpower and otherpartners.
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Wind Turbine Component ManufacturersWind power component manufacturing involves a complex web of companies, with few pure-play stock opportunities. Most of the component manufacturers are large companies where wind power represents a small portion of their total revenues. Many turbine manufacturers have respondedto component shortages by producing their own components or by acquiring companies that manufacture these components. The table in Table 6.2lists the primary component manufacturers for each of the major turbinemanufacturers.
r Rotor blades. LM Glasfiber, a private company, had a market share ofabout 27 percent of the rotor blade market in 2006.81 Most of the largeturbine players manufacture their own turbine blades since that is acomplex and proprietary process.r Gearboxes and bearings. The gearbox market is controlled mainlyby Winergy (40 percent market share) and Hansen Transmissions(30 percent market share).82 Those companies were acquired bySiemens Wind and Suzlon, respectively.83 The bearings market forwind turbines has two main suppliers: SKF AB and FAG KugelfischerAG.84 SKF AB (Stockholm: SKFB SS) is a Swedish bearing and seal specialist that also trades in the U.S. over-the-counter market as an American Depositary Receipt (ADR) under the symbol SKFRY. Although only2 percent of its business comes from wind power, it is their fastestgrowing segment.85 FAG Kugelfischer AG (www.fag.com) was acquired by Schaeffler Group (www.schaefflergroup.com) in 2001, whichis a privately held German company.Generators. The major wind turbine players generally manufacture the generators in-house due to importance of the generator tothe overall operation of the wind unit and the need for R&D improvements. The independent producers of generators used in the wind industry include ABB Ltd (NYSE: ABB) and Loher GmbH. ABB is a largeSwiss-based company (www.abb.com) that provides the wind industry with many components for turbines, including generators, and withgrid connection components as well. Loher (www.loher.de) is a privateGerman company, which also supplies generators to the wind turbineindustry.Towers. Regarding wind tower manufacturers, NEG Micon wasbought by Vestas in 2004. Another wind tower player, DMI Industries,is exclusively dedicated to wind tower manufacturing and is ownedby the Otter Tail Corporation (Nasdaq: OTTR). Otter Tail owns severalcompanies in diverse industries, including plastic and food ingredient
Vestas, LM
LM, Tecsis
Gamesa, LMEnerconSiemens, LMSuzlonLMNordex
Vestas
GE Energy
Gamesa
Enercon
Siemens Wind
Suzlon
REpower
Nordex
Loher
N/A
Suzlon, Siemens
ABB
Enercon
Nordex, Omnical
N/A
Suzlon
Roug, KGW
KGW, SAM
Siemens, KKElectronicSuzlon, MitaTeknikMita Teknik,ReGuardNordex, MitaTeknik
Enercon
Ingeletric(Gamesa)
GE
Cotas (Vestas),NEG (Dancontrol)
Controllers
Table notes:1. Towers are often produced locally where projects are built.2. Names in bold indicate in-house supply or ownership of supplier by turbine manufacturer.
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Winergy, Renk,EickhoﬀWinergy, Eickhoﬀ,Maag
Hansen, Winergy
DMI, Omnical, SIAG
Loher, GE
Gamesa
Vestas, NEG, DMI
Weier, Elin, ABB,LeroySomer
Indar (Gamesa),Cantarey
Towers
Generators
January 12, 2008
Winergy
Direct drive
Bosch Rexroth,Hansen, Winergy,MoventasWinergy, Bosch,Rexroth, Eickhoﬀ,GEEchesa (Gamesa),Winergy, Hansen
Gearboxes
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Source: BTM Consult ApS via European Wind Energy, “Focus on Supply Chain: Supply Chain: The Race to Meet Demand,” WindDirections, January–February 2007, p. 28,http://www.ewea.org/ﬁleadmin/ewea documents/documents/publications/WD/2007 january/0701-WD26-focus.pdf.
Rotor blades
Turbine maker
TABLE 6.2 Major Wind Turbine Manufacturers and Their Component Suppliers
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processing. The wind tower division of Roug A/S was acquired by Hendricks Industries ApS, a private holding company.Control systems. Mika Teknik is a private Danish company thatsupplies specialized control systems for wind turbines.There are two U.S.-listed companies that are suppliers to the windpower industry: American Superconductor and Zoltek Companies. Abrief profile of those two companies follows.
r American Superconductor (Nasdaq: AMSC). American Superconductor does not construct or install wind turbines, but instead designsand develops wind systems. American Superconductor also manufactures electrical components for wind power systems. The companyis focused on high-temperature superconductor wires and stabilizersfor power grids but recently expanded its product offerings for thefast-growing wind power business. In early 2007, American Superconductor acquired Windtec, an Austrian company that develops complete electrical systems for wind turbines. American Superconductoris therefore involved in several parts of the wind power industry: It designs and develops wind turbines; offers consulting services for projectdevelopment; manufactures electrical systems for wind turbines including voltage and power regulation; and manufactures other electrical components, such as power grid interconnection systems to copewith wind power fluctuations.86r Zoltek Companies (Nasdaq: ZOLT). Zoltek (www.zoltek.com) is a specialist in manufacturing materials and products based on carbon fiberand composite materials. Zoltek supplies carbon fiber materials to thecompanies that manufacture the huge wind rotor blades.87 For example, Zoltek has a long-term supply agreement to supply Vestas Windwith carbon fiber and carbon fiber materials worth $300 million overthe first five years of the agreement according to Zoltek.88
Wind Power OperatorsThere are two types of wind power operators: power utilities and independent power producers (IPPs). Independent power producers havebeen responsible for developing most wind farms worldwide.89 Independent power producers own wind farms and sell the electricity output fromthose wind farms to local utilities, usually on long-term power purchaseagreements. The top global wind power operators for 2006 are shown inFigure 6.8. Several of these are detailed as follows:
r FPL Energy. FPL Energy (www.fplenergy.com), a subsidiary of FPLGroup (NYSE: FPL), is an unregulated wholesale power merchant that
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Wind Plant Ownership0
1,000
2,000
2006 Added
3,000
4,000
FPL Energy
Iberdrola
MW
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Acciona
Babcock Brown
Scott