Heather Johnstone, Senior Editor
There is little doubt that wind energy has become mainstream, with global wind capacity set to increase from 74 GW in 2006 to more than 200 GW by 2011. Furthermore, over the last 15 years wind energy has accounted for 24 per cent of new power generation in Europe, and looks set to make an increasing contribution in the future.
The world wind energy market is, however, highly concentrated, with the top ten producing countries currently accounting for 85 per cent of the total capacity.
Europe is the largest combined market with an installed capacity of over 48 GW 65 per cent of the global total. Within Europe, Germany and Spain are the two largest markets, constituting 50 per cent of the region’s installed capacity. Germany is in fact the world’s largest market, with a total installed capacity of just over 20 GW.
However, several new markets are growing fast. The country that has seen the highest growth rate in installed wind energy capacity is the USA. In 2006, it added a healthy 2454 MW of capacity, bringing its total installed capacity to over 11.6 MW, putting it marginally ahead of Spain. The USA is a clear target market, with excellent wind resources and a low current penetration rate representing less than one per cent of electricity generation.
The growth in wind energy in a country renowned for its reliance on fossil fuels is being encouraged through the extension of the production tax credit system, whereby renewable energy producers receives a 1.9 per cent tax credit per kWh to December 2008 (and in all likelihood will be further extended) and the introduction of renewable energy standards in 21 of the 52 states, which require a certain proportion of power generation to come from renewable sources. For example, in California the target is 20 per cent by 2017.
By the same token, the United States is an attractive market for wind turbine manufacturers, and in recent years a number of companies have opened manufacturing and assembly plants in the USA.
The Asian markets, and in particular China and India have shown a robust growth in recent years China added 1334 MW in 2006, bringing its installed capacity to 2588 MW, while India added 1840 MW, increasing its total capacity to 6228 MW. This trend is expected to accelerate going forward.
The Chinese government’s ambitious targets for wind-powered generation (5 per cent from non-hydro renewable energy by 2010 and 10 per cent by 2020), is clearly encouraging growth in this area it is expected to show a compound annual rate of 46 per cent to 2011.
Chinese wind turbine manufacturers continue to hold the biggest market share (41 per cent in 2006), but Merrill Lynch anticipates that their market share growth will slow down in the next two to three years as international manufacturers build out capacity in China.
Wind Asset Ownership
There has been a noticeable shift in ownership of wind assets away from the traditional Danish/German model of financial investors towards utilities and large independent power producers.
According to data from New Energy Finance, the 20 leading European companies all have aggressive wind power expansion plans, and accounted for over 60 per cent of new capacity additions in 2006 (Figure 1).
Figure 1: Both European and global energy companies are agressively expanding their wind power capabilities (source: New Energy Finance)
The picture is very similar at the global level, with the top twenty global owners holding 32 per cent or 24 GW of capacity as of May 2007. From published plans, the capacity of this core group is set to double over the next five years, with the addition on a further 29 GW of capacity (Figure 1).
To achieve these targets, Merrill Lynch anticipates that there will be a relatively intense period of consolidation of wind asset ownership, and in the more mature wind markets, such as Spain, this process has already begun. According to figures from New Energy Finance, between 2001 and 2006 almost $20 billion was spent acquiring wind power assets, with Europe accounting for the largest proportion of this with $15 billion of acquisitions. Focusing on the purchasers, New Energy Finance found that 29 per cent of acquisitions was made by specialist renewable energy power generators, while 19 per cent were made by conventional utilities.
An interesting consequence of this surge in demand is the increasing acquisition of assets in an early stage of development (Figure 2). More than 80 per cent of the capacity acquired in 2006 was at a very early development stage, with essentially the acquisition of only development rights in place, i.e. sites without permits in place and grid connection rights established.
Figure 2: Acquisitions of wind capacity is increasing, especially of those in early stage development (source: New Energy Finance)
Turbine manufacturers response
Turbine manufacturers now have a very sophisticated customer base that is looking to sign long-term framework agreements with sizeable advanced payments to secure supply. How are the manufacturing industry responding to this shift?
One interesting response has been an increase in the average size of wind turbines, with a growing demand for turbines in the 1.5-2.5 MW range (Figure 3). This is because many utilities want to scale up their wind portfolios and achieve critical mass quickly. There is also the practical reason that the power output potential of a turbine is determined by the square of the rotor diameter, so a large turbine delivers more power that two turbines with a rotor diameter half the size.
Figure 3: The major growth in demand for wind turbines has occurred in the 1.5-2.5 MW range (source: New Energy Finance
Another reason for the switch to larger turbines is the emerging offshore market. Although the development of this market has been significantly slower than initially forecast, the medium term prospects are looking brighter, with several new projects already under construction. It makes economic sense to have the largest possible capacity on each foundation because the cost of the foundation makes up a significant proportion of the installation costs per MW. Logistically also it makes sense to installed the fewest possible number of turbines for a required power output.
Merrill Lynch expects the trend towards larger turbines to become even more marked, with the repowering concept taking off in the more mature markets towards 2010, as developers replace small turbines with larger units on the same site.
Another develop is that a certain consensus on the basic design of a turbine has been reached an evolution from the original widely used design which was stall regulated, fixed speed with gear transmission to the current pitch regulated, variable speed design. Thus, most manufacturers now produce more or less the same basic design with some specialized components aimed at optimizing their machines and differentiating the products.
The changes in design features have largely been driven by the need for better power quality output (variable speed delivers greater energy capture), lower noise and less gearbox problems.
Conditions are certainly bullish for wind turbine manufacturers, but surely everything is not smelling of roses?
Key constraint: Component supply
Over the last couple of years bottlenecks in the supply of key components has become an issue that manufacturers have had to deal with, and with the annual installed capacity projected to increase from 15 GW in 2006 to 33.5 GW by 2011, supply constraints will only become even more acute.
Component suppliers and their sub-suppliers have had to not only face the challenge of building out their capacity to cope with the demand from wind manufacturers, but also cope with further product development demands, particularly from larger turbines. The main bottlenecks have been for large bearings and gearboxes.
As turbine manufacturers are increasingly signing framework agreements with wind farm developers, i.e. a commitment to supply a set number of turbines over a set period of time, they are also signing such agreements with their component suppliers, particularly gearboxes and bearing suppliers to ensure that they can meet their commitment.
Another route that some manufacturers are taking to avoid supply bottlenecks is to become more vertically integrated. A number of wind turbine manufacturers are choosing to build components such as blades and control systems in-house.
Generators and gearboxes have historically been sourced from large industrial companies, but in recent years this is changing, with two of the largest gearbox suppliers having been acquired by turbine manufacturers.
Ensuring A competitive edge
In the near term, the world’s wind energy market will favour turbine manufacturers with a high level of vertical integration because component supply is clearly one of the key constraints. In terms of cost base, while vertically integrated companies will tend to have higher labour costs and higher levels of capital intensity, these are likely to be negated by their major competitive advantages of lower component cost and security of supply.
The article was based on a report by Merrill Lynch ‘Wind turbine manufacturers: Here comes pricing power”, which was published in August 2007, and data from New Energy Finance.