x While Europe's policy makers are pondering how to implement their road map for increasing renewables' share of energy in the decades to come, the European Wind Energy Conference in Milan last month revealed a sector with an unstoppable momentum all its own. With record levels of new wind installation and record levels of interest from investors, Europe's major constraint on growth is the inability of wind turbine manufacturers to keep up with demand.
The shortage of turbines and components was one of the themes to dominate the conference and exhibition, held May 7-10 at the Milano Convention Centre. But finance, cost reduction and integrating wind power into existing power systems also figured prominently throughout the four day event.
Last year Europe built 7,588 MW of new wind plant, bringing the combined installed capacity to 48 GW -- some 3% of EU electricity consumption, pointed out Arthouros Zervos, president of the European Wind Energy Association (EWEA). The future is bright, he said, explaining that while Europe's first mover countries -- Germany and Spain -- continue to perform well, second wave markets including Italy, France, Portugal, the UK, and Ireland are growing strongly; last year they accounted for nearly 50% of new capacity compared with just 20% in 2002. Wind is second only to gas as the generating option of choice in the EU, accounting for 30% of all new installed generating capacity over the past five years.
Turning to Europe's new 20% target for renewables share of energy consumption by 2020, Zervos exclaimed that the wind industry accepts the challenge of supplying the major share of the target. According to EWEA's estimates, wind will be capable of supplying between 12 and 15% of EU electricity by 2020, with a total installed capacity of some 180 GW, a third of which will come from offshore wind. Moreover, provided the same level of growth continues, wind capacity is set to rise to 300 GW by 2030, he said.
Small wonder then that with this amount of potential, the wind business is attracting unprecedented interest from the finance community. "In my ten years of financing wind, I can categorically state that this is the busiest time I have ever experienced in the market," said Nick Gardiner from Fortis Bank. He welcomed Europe's new 20% target. "The overwhelming message that is coming across -- driven by institutions, governments and major corporates -- is that renewables is here to stay."
There is no lack of encouragement for wind and no lack of capital, agreed David Jones from Allianz Specialised Investments in the UK, a division of the German Allianz insurance group. "Indeed, from my perspective as an investor, there's too much capital chasing too few good project opportunities." For institutional investors such as Allianz, he said, wind is seen as a strongly growing asset class with proven technology and offering long term cash yields which match long term liabilities such as pensions.
While Allianz belongs to a group that has focussed on picking up individual wind projects, others have chosen to buy up wind development companies lock, stock and barrel, including their project pipelines. American companies have being buying up in Europe, Europeans have been cherry-picking in America, while the Japanese have been busy on both continents.
John Dunlop from HSH Nordbank dubbed this large scale entry into the European and North American markets as a "wind farm asset grab by institutional investors." Funds have an almost insatiable appetite for wind power assets, with investments in wind farms in the EU and North America alone last year amounting to EUR 15 billion, he said. Currently almost EUR 1 billion worth of assets are up for sale, estimates Dunlop. And with more buyers and sellers in the market than ever before, a record number of transactions are taking place at record prices.
Institutional investors, however, are having to compete for wind assets with utilities who see renewables as a core area for growth, said Jones. For utilities, wind mitigates their exposure to volatile fossil fuel prices. "Whatever the oil price -- wind is always free," he said.
As utilities increase their hold on wind power generation throughout Europe, the nature of the business is changing. In a session devoted to the trend, Per Holmgaard from Denmark's Dong Energy said utilities are only interested in large power plants of 100-200 MW. "This means that projects are growing much bigger," he said. "With a project of 200 MW you have to be sure delivery is on time and to quality and that reliability of the farms will be high enough." To meet utilities' demands, manufacturers are channelling their efforts away from producing bigger turbines into improving reliability, he said. This was confirmed by one of the major manufacturers. "The race for size has slowed down. We are working more on quality," stated Andreas Nauen, CEO of Siemens' wind business.
"The mantra of the wind business until now has been bigger and bigger," said Andrew Garrad from international wind power consultant company Garrad Hassan. "The mantra now is better and better." The emphasis on making more reliable turbines, along with mass production, should result in cheaper wind power he told a packed workshop on cost reduction. "Commodity turbines have started to appear." At the moment though, because the commodity is rare the price is high.
Garrad added that there is still a long way to go on the engineering side before a consensus is reached among manufacturers on the optimum wind turbine technology. Wind turbines may look similar externally, but inside they are very different, which has direct cost implications. "There is a lot left to do before we get to something like the car industry where all the cars are pretty much the same and the cost is minimised."
The car industry analogy was also used as by Allianz's Jones in explaining that consolidation is a factor in any mature industry. As in car manufacturing, he expects the wind turbine market to evolve with a smaller number of large global companies together with a few smaller niche players. The industry is set to grow to five times its present size over a relatively short time frame, said Per Hornung Pedersen of Suzlon. "Logically there will be consolidation." With delegates mindful of the premium just paid to Goldman Sachs for American wind developer Horizon by Portuguese utility Energias de Portugal, Nauen pointed to the high price being asked by recent takeover candidates. "This is not cheap," he said, "Acquisition is not necessarily the name of the game right now."
Consolidation has already changed the market, commented Fortis' Gardiner, with the strongest wind turbine manufacturers increasing their market share over the past few years. In 1994, the top five had 67% of the market by sales. "Last year, the top five held 82%." He expects to see not only further consolidation in the manufacturing and supply sector but also new turbine suppliers. Already some smaller suppliers have started emerging in Europe and the US. Given investors' preference for proven technology and sufficient financial strength of turbine supplier, "the reaction of the finance market to these new suppliers will be interesting to note," he said.
The China factor
Meantime, Asia -- and China in particular -- remains the big unknown. It is possible to do business in China, but the prices need to improve there, said Suzlon's Pedersen. Opinions on China's ability to compete in western markets differ. "It is one of my fears," admitted Nauen. "If the Chinese really get going it could be an interesting game." Jones pointed to the example of the solar panel industry in China. "I think that very soon they will be making quality wind turbines at cheaper prices." Giving a utility point of view, Holmgaard pointed out that utilities are conservative in their buying choices; for the time being they will be opting for proven technology. "Chinese manufacturers are building up a substantial amount of capacity but they are not where western manufacturers are quality-wise," maintained Hornung Pedersen. But against the background of the inability of western manufacturers to keep up with demand, Pedersen conceded the established industry may have something to learn from the Chinese.
The manufacturers expected the current turbine supply gap to last for at least two to three years, probably more. Nauen said it would be difficult to source adequate quantities of components at the right price and quality before 2009-10 at the earliest. "There are different bottlenecks in the supply chain," he said, at times transformers, at times cables. "You cannot pinpoint just one problem." Rich Reno of GE added: "Other generating sectors are competing for the same equipment."
Mete Maltepe from GE Energy pointed out that costs have gone up across all power sectors as tremendous global demand for new infrastructure pushes up the cost of materials. He did not believe that wind would be disadvantaged in comparison. "The spike you have seen in the cost of wind turbines, you are going to see for other technologies as well." But another factor is driving up prices he said: "The cost of trained engineers is going up faster than materials."
Other turbine makers were also concerned by the skills shortage. "Those of us on the manufacturing side are experiencing it," said Pedersen. "And I think it will spread down the value chain. We need to get closer to universities and institutes to attract people to bring this industry forward and grow it from the 74 GW [globally] end last year to some 450 GW in 2016."
Jos Beurskens from the Netherlands Energy Research Centre warned that the industry is competing with all technology sectors for skilled manpower. "We need humour," he said. Without it the sector is less attractive. "A sad by-effect of having an increasing unanimity of policy issues is that there is no discussion, fewer disputes, less excitement and less humour," he said.
How the electricity networks will cope with rapidly increasing penetrations of wind power was a recurring theme throughout the conference. The grid is the key for the future, Garrad said. And while politicians and policy makers, the finance community and utilities, appear convinced of wind's credibility as a mainstream energy source, the operators of Europe's transmission systems (TSOs) are still often cited as a barrier to wind's deployment. According to Garrad, that may be changing.
Charting wind's path to "respectability," Garrad started in the 1980s when wind's environmental benefits were recognised, but it was initially ridiculed by TSOs. By 2003, ridicule had turned to animosity as the proportion of wind wanting to connect to the networks increased. But by 2005, hostility had eased as the security of supply benefits came into focus. "Recently we have seen co-operation," he said. "So wind started at clean but laughable, moved to clean but pretty annoying then to quite useful and maybe we should take some notice of it." He believes that with a bit more cost reduction, by 2012 there will be a least-cost argument for wind. "I call this the respectability trajectory," he said.
Meantime, the myth of wind's perceived "intermittency" needs to be exploded, Garrad stressed. TSOs and policy makers regard the technology as intermittent and therefore costly. Intermittency means on and off, he said. "Conventional power is on and off, so conventional power is intermittent, not wind power," he said, pointing out that one or two wind turbines might be down, but seldom a whole wind power plant. The wind is variable but it is also predictable, he said. Day ahead forecasting can accurately predict output from a portfolio of wind farms. "The aggregation of different wind farms through the grid is vital. Grid aggregation is the key to cost reduction." The message that renewables are variable, not intermittent, needs to be transmitted to utilities, regulators and the TSOs to bring about a more realistic appraisal of the cost of integrating renewables into the standard grid, he said.
Illustrating Garrad's point about aggregation, Ignacio Láinez Aracama from Spain's NEO Energia, part of Portugal's EDP group, agreed that it is vital. Speaking from experience of Spain's liberalised electricity market, where any differences between forecast and actual power output has to be resolved through the balancing mechanism, he said: "The portfolio effect is the most important tool for reducing forecasting errors." The company found it reduced errors by 50%, he reported.
A further challenge for Europe's electricity grids will be the integration of power from large offshore wind farms. The EU Commission is counting on offshore wind to make a significant contribution to meeting the overall 20% target by 2020. "The offshore market will most certainly be the key element of wind energy development in the next few years," said Fabrizio Barbaso, deputy director general at the Commission's energy directorate. Zervos claimed that 60 GW could come from offshore wind by 2020. By 2030 this could rise to 150 GW.
EWEA is calling for construction of an offshore grid network to connect large wind farms out at sea with the European transmission network. But this is only one of the steps needed to bring offshore wind forward, said Zervos. Simplified administrative procedures, better land and sea planning, and "socialisation" of grid costs (placing a grid levy on all electricity bills) will also be tackled under an EU Action Plan on Offshore Wind to be developed by the Commission and member states.
"The biggest challenge is the offshore challenge," added EWEA's Christian Kjaer. He stressed that offshore wind is crucial for meeting Europe's renewables targets and to do so will require a 35% growth rate in offshore installations over the next 14 years -- just slightly higher than the 33% growth rate that onshore wind achieved over the past 14 years. Nonetheless, going offshore should not be a convenient excuse for abandoning onshore wind, he warned.
The perfect market
High on the EU Commission's agenda for this year are its deliberations on whether or not to move towards a single market framework for renewable energies, to be achieved by "harmonising" the very different (and mainly successful) support structures put in place individually by member states. But a key conclusion of the conference was that stability of existing regulatory regimes is more important for investors than the ease of operating in a large single market without regulatory hurdles at every border. "The number one criterion we are looking for in markets is reliability of regulatory regime," explained Jones from Allianz. After that comes speed and scale. Allianz's initial investments were in Germany, where the regulatory regime is probably the strongest and most reliable in the world.
"There is an awful lot of rubbish talked about harmonisation of incentives," said Garrad. The philosophy of the incentive does not matter. "The only things that matter are that people can see a consistent incentive and that they can make enough money out of it. If you get those requirements right you'll have a market." He noted, however, the importance of introducing widely tradable renewable energy credits. "Tradable credits are going to be key to allow you to put wind turbines where they are most useful," he said.
In a session devoted to harmonisation of incentive systems, the panellists agreed that a pre-condition for any move towards harmonisation has to be the creation of a single competitive European electricity market. "At the moment we have 27 national [electricity] markets and 27 different prices; a single market and a harmonised incentive mechanism must go together," said EWEA policy expert Isabel Blanco. She pointed out that the payment mechanism is not the only thing that is important for the success of renewables. Just as important are administrative procedures -- including permitting, grid availability, fair grid access and public acceptance.
From the International Energy Agency (IEA), Fabien Roques said the wind community needed to present crystal clear arguments when putting its case for continued market support. "The wind industry claims constantly that the cost has come down. So why is it arguing for subsidies at the same time?" Is it arguing that subsidies are needed because wind is not yet fully competitive, he asked, or is it saying that wind can compete, but subsidies are still needed to overcome other barriers to entry? "We are not asking for subsidies," said Zervos. "We are asking for compensation." His point was that polluting technologies are subsidised, but wind receives little economic recognition for its non-polluting benefits.
And the bigger picture
Visibly put out by the IEA's perceived criticism, Zervos gave Roques a hostile reception on the platform. He demanded to know why the IEA is so optimistic about oil prices staying relatively low and so pessimistic in its outlook for wind energy compared with other market forecasters. He also asked why the agency still groups wind power with "other renewables" in its scenarios for the future, instead of treating wind on a par with hydro.
Like Zervos, Ian Mays, of Renewable Energy Systems, believes the IEA's oil price forecasts are unrealistic. "We are now consuming three times as much oil as we discover," he pointed out. By 2030 the gap will be five times current production. "My belief is that there are political reasons, strong political reasons, for the IEA scenario," said Mays. From the Global Wind Energy Council, Steve Sawyer also strongly criticised the IEA. "Climate change will lead to massive economic collapse, probably by the middle of the century," he said. "At what point does the IEA stop making forecasts that we know cannot possibly happen?"
In response to the rapid fire from several quarters, the IEA's Roques, an energy economist with impressive credentials, said the real question is China and India and how they will power their growth explosions. "Models are only as good as their assumptions," he said. "I am not sure that oil prices will be used as the main driver," he continued. "I think the main driver for wind is political... it is not related to the economy."
China holds the key to energy use, said Roques. Before 2010 it will overtake the US as the world's largest emitter of C02, although its per capital emissions will still only be 60% of OECD countries. Half the world's new emissions come from new coal plant in India and China. "There is no sustainable or meaningful solution without having China and India on board," warned Roques.