The economic environment has become highly competitive prompting wind turbine manufacturers to cut their margins, and the pressure is likely to increase in 2012. The Chinese market has become far too tight to allow all the local players to survive; therefore the Chinese will probably employ fierce competition tactics on the international market.
The only route open to Europe’s wind power industry is to continue internationalising its activities by entering new markets and strengthening its positions in the emerging markets. A number of European industry majors have changed course by forging strategic alliances with the main Chinese utility companies to develop projects outside China. These manufacturers seek to take advantage of the financial clout of these utilities that create opportunities to enter new markets.
The manufacturers’ strategic repositioning has a bearing on the siting of production capacities as we witness plant closures in declining markets and the opening of new plants close to emerging markets.
However there are subtle variations in Europe, such as those countries that have made the strategic choice to develop the offshore segment on a grand scale (primarily the UK and Germany) are now attracting investment from many firms that are constructing infrastructures prior to the capacity build-up of this market (see above). The offshore segment should re-invigorate the activity of a number of concerns and encourage the rise of new players (Bard, Areva, Alstom, etc.) who for many years have been preparing for this huge market to open up.
Vestas in the throes of reorganisation
Last year, 2011, was another tough year for the Danish manufacturer, as it was forced to announce two profit warnings after it delayed the commissioning of its new generator factory at Travemünde, Germany. This led Vestas to postpone handing over a number wind farm projects, mainly in Europe.
Vestas finally announced a sales figure of 5.8 billion euros (com¬pared to its initial forecast of 7 billion euros) and an operating profit of 0.7% (compared to its initial forecast of 7%). Vestas deli¬vered 5 217 MW of turbines in 2011 (45.1% in Europe-Africa, 35.4% in America and 19.5% in Asia-Pacific), which is a poorer performance than in 2010 when the company delivered 5 842 MW.
In November 2011, Vestas announced that it would implement full strategic reorganisation during 2012 to restructure its governance model, adapt its production capacities to market momentum and get as close as possible to its customer base. In hard terms this reorganisation will entail the shedding of 2 335 jobs, mainly in Denmark and Europe.
The company aims to reduce its annual overheads by 150 million euros. In the group’s view, this reorganisation should enable Vestas to generate more profitability despite the tighter economic context and the risks of slowdown in its key markets. Vestas is keen to point out that its order book with a volume of 7 397 MW (which equates to 7.3 billion euros) at the start of 2012, is looking quite healthy, and on this basis it will recapture global leadership of the wind turbine industry.
The company warns that its presence in a country will be determined by the local business dynamics and its growth prospects. Therefore in the event that the Production Tax Credit is not renewed in the United States, it will shed a further 1 600 jobs in its American plants. Vestas also wishes to expand its extremely profitable services businesses (especially after-sales service), which generate about 700 million euros, i.e. 10% of the group’s sales turnover.
As for forming alliances, Vestas has signed an agreement with manufacturing giant American Caterpillar, so that the latter can machine and deliver components of its aging wind turbines. This service should start in the United States and be extended to Europe and Asia. The agreement sends a strong signal from Caterpillar that it is entering the wind energy market after being outbid by General Electric for the acquisition of Enron Wind in 2002. The Danish group is also pursuing its conquest of the South American market with the opening of a sales office in Argentina and a new assembly plant in Brazil and has also opened new offices in Romania and Singapore.
Turning to technology, the group will launch a new-generation offshore wind turbine in 2012. The wind turbine’s initial capacity is 6 MW, with a rotor diameter of 164 metres, designed to reach 7 MW. Construction of the first prototypes of this V164-7 MW is scheduled for the end of 2012 and mass production should start early in 2015.
The international market pulls Gamesa’s sales
Gamesa has managed to maintain positive profit growth by gaining market shares abroad. By 30 September 2011, its sales volume (2805 MW for 2011) had already covered its forecasts. Operating income (EBIT) on the turbine sales volume was valued at 4.8% (5.4% over the first nine months of 2010) and should hover around 4–5% for 2011. The Spanish group posted sales of 2 015 million euros compared to 1 786 million euros during the first nine months of 2010 (wind turbine sales and wind farm deliveries).
The company ascribes its strong performance to its expanding activities on international markets, as 94% of the capacity was sold outside Spain. International sales have risen by 26% over the last nine months. The Indian market – which commands 20% of the sales – expanded by a factor of 2.8, while sales in Latin America were multiplied by a factor of 5 (16% of its sales). The company made good showings in the Eastern European markets (13% of its sales), primarily in Poland and Romania, and also has footholds in China (21% of its sales) and the United States (14% of its sales).
Gamesa was able to announce a 23% increase in the number of MW sold (1 965 MW) over the first nine months of 2010 and expects volume sales of 2 800–3 100 MW for the whole of 2011.
The company is involved at every stage of the value chain. It has built up a wind energy project sales department that achieved sales of 286 MW in 2011 (operating profit of 9 million euros) and provides service and maintenance for 15 000 MW (adding 1 400 MW in 2011) which guarantees recurring earnings of 250 million euros.
The company’s internationalisation has an impact on its headcount which stood at 8 267 around the world in the third quarter of 2011, including 41% abroad, whereas in the third quarter of 2010, the headcount was 6 934, including 35% abroad.
Gamesa forecasts double-digit sales growth in 2012 with a volume ranging from 3 000 to 3 500 MW. The emerging markets of Latin America and India will continue to drive short-term demand in 2012. They will be bolstered by new markets in Asia, Oceania and Africa that will flesh out in 2012. By way of illustra¬tion, the company announced it had taken an order for 200 MW worth of projects in the Gulf of El Zayt on the Red Sea coast. The Spanish company has already installed a total of 406 MW in Egypt, primarily on the Zafarana Wind Farm site.
Gamesa explains that while growth should remain positive in 2012, the level of activity should be affected by the regulatory uncertainties of wind energy’s key markets in the short term, possibly alluding to the Spanish, Italian and French markets. The wind energy industry is currently operating in a complex environment where the economic and funding conditions are tighter, making positioning and strategic choices crucial. Gamesa asserts that its future growth will be achieved through even more globalisation. Thus it is planning to reduce its pro¬duction capacities by 1 250 MW in Spain and to open new factories in buoyant markets.
The manufacturer has announced the construction of a nacelle assembly plant in Brazil, a new rotor blade factory in India and a sixth factory in China, on the Tianjin site. This sixth site will raise Gamesa’s production capacity in China to more than 1 000 MW. The company has also decided to join forces with Chinese companies such as Lonyuan, China Resources Power and Datang, to take part in their international development outside China, involving up to 900 MW of projects.
Turning to innovations, Gamesa started manufacturing its G97-2 MW simultaneously in four markets (Spain, United States, India and China). It has also launched its new 4.5-MW G136 turbine designed for low-wind sites. It will install its first G11X-5 MW offshore wind turbine prototype in 2012 in preparation for the capacity build-up in the huge offshore market. Its offshore technology centre will be located in Glasgow.
Siemens keeps its lead in the offshore wind turbines market
While many companies are attempting to establish themselves in the offshore wind farm market, Siemens is now in the best position in this market segment. In 2011 alone, the German company, which bought out Danish company Bonus in 2004, clinched 1 400 MW worth of offshore contracts for projects in Europe and Asia.
Siemens reckons that by 2030, European offshore capacity is likely to be in excess of 80 GW, which should enable the manufacturer to secure its growth.
In 2011 the company had a total of 11 billion euros’ worth of orders across the world including 1 300 MW of projects in Germany. The manufacturer delivered the wind turbines for Germany’s first commercial offshore wind farm (Baltic 1 – 48 MW), which opened in May 2011. We can mention two of the forthcoming deliverables – Amrumbank (288 MW) off Germany and West of Duddon Sands in the Irish Sea (389 MW, a project developed by Dong Energy and Scottish Power Renewables). Siemens has also won its first Chinese offshore wind turbine contract and will deliver twenty-one 2.3-MW turbines (48.3 MW) for a project off the Jiangsu Province coast.
At the same time Siemens has signed a partnership agreement with Shanghai Electric to improve its position in the Chinese market. Siemens believes that China has great potential for har¬nessing onshore and offshore wind, especially along its southeast coast.
According to CREIA, China should expand its offshore wind farm capacities from 5 GW in 2015 to 30 GW in 2020. Siemens launched its new 6-MW direct drive offshore wind turbine in 2011. The SWT-6.0 will come with rotor dia¬meter variants from 120 to 154 metres. The first turbine of this type, whose nacelle and rotor weights have been reduced to a total of less than 350 tonnes to forestall the new weight standards for offshore wind turbines, was installed in Høvsøre, Denmark.
It is Siemens’ view that the reduction in weight will lead to lower offshore wind farm installation costs thereby optimising wind farm installations from vessels. This conviction persuaded Siemens to take a 49% share of A2SEA, the world’s lea¬ding offshore wind turbine installer and related services provider in 2010. Last September, Siemens restructured its renewable energy division into two separate units, a Wind Power division and a Solar and Hydro division. The Wind Power division will operate out of Hamburg.
Chinese companies fall prey to domestic competition
The world’s biggest market is also its most cutthroat one, especially as this competition is primarily geared to the per kW price, leaving a lot to be desired of quality standards in China. A study produced by Roland Berger Strategy Consultants shows that the average price of Chinese onshore wind turbines is now less than 600 euros per kW, compared to the standard European price of 1 000–1 200 euros. The price war is creating problems with-in the Chinese market that is now suffering from excess capacity.
The Chinese market slowdown during the second half of 2011 has hit its companies’ earnings and the country’s major turbine manufacturers, i.e. Sinovel, Goldwind, Dongfang and United Power are now feeling the pinch.
For example, at the end of January 2012, Sinovel, China’s top turbine maker said that it expects its 2011 profit to be 50% down on its 2010 level of 2.86 billion yuan ($451.6 million). Another example, Goldwind’s third quarter earnings 2011 show net income 75% down year-on-year, having dropped to 190.4 million yuan (30 million dollars) from 759.2 million yuan the previous year. Sales in the third quarter are down by as much as 9% on the same period year-on-year.
It comes as no surprise that Goldwind blames this drop on the weaker growth of the wind energy market, the increase in competition and the reduction in turbine sales prices. The only way to ensure the future growth of the Chinese industry is to find orders abroad and prepare for the emergence of the offshore market with technologies that meet the quality standards set by western countries.
Last June, Goldwind announced that it would start full-scale production of its new 6-MW offshore turbine, and that six wind turbines of this type would be installed during the first half of 2012. The company, which has entered the US market, has increased its presence in emerging and high-growth markets (Canada, Australia, South Africa, Chile and Ecuador). Goldwind aims to be earning 30% of its gross profits abroad by 2015. In the third quarter of the year, it had firm orders for 3 581 MW and a further 3 412.5 MW of contracts waiting to be signed.
Sinovel’s stake in the offshore segment is also one of its priori¬ties (the world’s no. 2 turbine manufacturer in 2010). It installed its first offshore wind farm on the Donghai Bridge site, Shang-hai in 2010, and presented its brand new 6-MW SL 6000 off-shore turbine with a rotor diameter of 128 metres. Sinovel also announced that it had won two (600-MW) offshore contracts at Binhai and Sheyang, of a 1 000-MW tender put out by the Jiangsu Region. A cooperation agreement worth 450 million euros with the Greek electricity company PPC was signed in April 2011, for the installation of 200–300 MW of capacity in Greece together with an offshore wind farm.
The European political and financial context is still tough, lea¬ving many countries dealing with a debt crisis and the (albeit un-likely) spectre of the collapse of the eurozone is hitting investors’ confidence. These doubts are rattling the most exposed markets, limiting investment prospects. Wind energy is no exception, and despite the robust German market, the majority of the key Euro¬pean Union markets are losing speed or are even contracting.
The rigours of the economic climate are not the only reason for the European market slowdown. Most of the Member States have decided to improve their control over their domestic markets to take their best shot at the 2020 aims set out through adoption of the Renewable Energy Directive. Some Member States’ decisions to add new procedures for authorising new installations (such as France) or to limit investors’ visibility by delaying the implementation of new regulatory frameworks (such as Spain and Italy) have most certainly compounded matters.
The short-term future of the German market is also up in the air. Germany’s decision to pull out of nuclear power over time is good news for the wind energy sector. However the German onshore wind energy market is approaching saturation point because of under-investment in grid infrastructure, and will naturally end up declining. Until the offshore market starts developing on a large scale – the boom will only start in the second half of the decade – it will be impossible to reverse the trend. The grey area surrounding Europe’s key wind energy markets does not augur well for a swift return to strong growth.
One good way of gauging how much effort is still required to meet the demands of the Renewable Energy Directive, is to refer to the individual Member State National Renewable Energy Action Plans (National Renewable Energy Action Plan). A new summary report of these plans was produced by ECN (Energy research Centre of the Netherlands, NREAP summary report) at the end of 2011 taking into account the modifications made by a number of Member States.
This study indicates that the European Union’s wind energy capacity should reach 143.2 GW by the end of 2015 (126.7 GW onshore and 15.6 GW offshore) and 213.6 GW by the end of 2020 (168.8 GW onshore and 44.2 GW offshore). Judging from the capacity installed at the end of 2011, this target will call for annual average capacity installation of 13 300 MW. Thus the current market level is out of phase with the NREAP objectives. The 2020 forecasts made by the national experts contacted for the purposes of this barometer are generally in line with the NREAP targets. Accordingly we stand by our 220 GW forecast, anticipating acceleration in capacity installation between 2015 and 2020.
The current market weakness is not (yet) cause for concern. Most of the manufacturers agree saying that the European market fundamentals are good over the long term, with real political determination to develop the sector. The wind energy industry can meet any increase in demand very rapidly and return to a roadmap close to that enshrined in the NREAPs. This will be all the more feasible if growth is accompanied by even more efficient equipment and lower installed per kW costs. Nevertheless the future growth of the onshore and offshore wind energy market will not depend on production capacities and incentive systems alone, but will also depend on prior investments made in infrastructures (grids, harbours, vessels, etc.). Effective coordination of the stakeholders (manufacturers and politicians) will be essential if the targets are to be achieved. The European Union’s ambitions, with a threshold of 100 GW of wind turbines to be crossed by 2012, look plausible.