Maturity spawns responsibility

The wind industry may have fought its way into the mainstream of the electricity business but there was little time to celebrate at this year's European Wind Energy Conference. Wafer-thin profit margins, technology failures, shortages of major components, and the knowledge that not all wind projects produce as they should made for a sober event wheresolving problems had greater priority than expounding the vision

Out of the margins and into the mainstream, but with visionary thinking elbowed out in favour of concentration on getting the product right, meeting demand and improving profits. This was the snapshot of the wind industry today that delegates took home with them from the annual European Wind Energy Conference and exhibition, held in Greece last month. "Never has the need for wind energy been stronger; energy is high on the political agenda," said conference chairman Ian Mays at the opening. He was the first of many speakers throughout the four day event to emphasize the opportunities for wind against a background of high fossil fuel prices and concerns for security of energy supplies. EWEC 2006 was held February 27 to March 2 in the marble halls of the Megaron Concert Hall and conference centre in Athens.

A video from the European Wind Energy Association's "No Fuel" advertising campaign made for an inspiring start to the conference, with its emphasis on wind's potential under the current fuel crisis. Wind energy technology has grown 100 times in the last two decades, said Europe's Environment Commissioner Stavros Dimas. Thanks to the support of governments, the cost of wind energy production has dropped by 80%, European companies supply 90% of the global wind market and wind energy is now competitive with traditional sources of electricity, he said. "But more can be done." The European Commission is debating a new target for renewables from 2007, he said. "The European parliament has already stated we should have a goal of 25% by 2020. My personal opinion is that this target is ambitious, right and can be achieved, and we should consider it."

European Wind Energy Association (EWEA) president Arthouros Zervos also highlighted the industry's leap forward. Three years ago at EWEC 2003 in Madrid he referred to wind as "coming of age," he reminded delegates. "Now the energy sector and decision-makers consider it to be a mainstream energy source." Europe now has over 40 GW of wind installed, with 60 GW worldwide. Ten years ago wind was practically ignored by utilities and big investors -- and even five years ago the perception was that it could only play a marginal role, he pointed out. "Today big energy players and investors are a major part of the wind industry." These include GE, Siemens, Areva, Shell, BP, EDF, Allianz, and Babcock & Brown.

More sophisticated

The change in attitude of wind's competitors and opponents has been more subtle, said Zervos. In the past wind was labelled an unreliable technology that could only play a marginal role. Today, it is called "intermittent," by detractors, who also claim it creates problems when introduced in large scale and threatens the safe operation of electricity grids, he said. "But this large scale integration of wind is already happening." In Denmark it satisfies 20% of demand, in Spain wind capacity exceeds that of nuclear and combined cycle gas, and in Germany the state of Schleswig-Holstein gets 30% of its power from wind.

The constraints on wind's penetration in the market are not technical, continued Zervos. They are regulatory, institutional and market-related. There is a need to deal with distortions and inefficiencies related to the structure of Europe's power market, he said. He pointed out that the European Commission identifies four key reasons for lack of success in achieving a competitive power market: lack of cross border transmission links, the dominance of existing integrated power companies, biased grid operators and low liquidity in wholesale power markets.

Turning to the "intermittency myth," Zervos stressed: "Wind is not intermittent. It is of variable output." And variability of electricity is nothing new: "It has been a feature of the system since the beginning." Both electricity supply and demand are variable, he said. "It is not important what one wind turbine does; it is not important what one wind farm does; it is important what all the wind farms are doing on the system." And the wind is always blowing somewhere.

But getting this message across is difficult, added EWEA's new Chief Executive Officer (CEO) Christian Kjaer. "Our industry's problem is this question: What happens when the wind stops blowing?" he said. "The question is easy to ask; the answer is a lot more complicated."

chevron attack

Wind is a disruptive technology -- but not to the electricity system as some of its opponents claim, said Kjaer. Rather it is disruptive in the eyes of oil producers, such as Chevron, who see it as threatening the future of polluting fossil fuels. He found it "comforting" that Chevron felt it necessary to attack wind in its advertising campaigns. But if the wind industry wants to be large scale it needs to engage with the big players in the oil and gas sector, some of which have already embraced wind. To reach EWEA's 2020 target for wind of 180 GW installed meeting 13.4% of Europe's power, will require EUR 215 billion of investment. This equates to two years and nine months' worth of the combined annual profits of Exxon Mobil, Shell, BP and Chevron -- or three years of subsidies to the fossil fuel and nuclear sectors, he said. Kjaer was confident that at some point even Chevron will come on board; the question is, he said, quoting the oil giant's own slogan: "When will you join us?"

Warming to wind

Electricity utility umbrella body, Eurelectric, has warmed to wind over recent years, said the association's Gwyn Dolben. "We see it as playing a big part in energy portfolios in the future." However, he took issue with the view from EWEA and the Commission that institutional problems and "biased TSOs" (transmission system operators) are the major impediment to wind's progress. "If that was the case, the most competitive markets would have the most wind energy," he said. "In my view the reason that wind has developed in some countries rather than others is because of political support. Grid issues, planning issues and institutional problems come a long way behind that."

Nonetheless, progress is being made around Europe on unbundling of generation and transmission, as well as integration of wind into transmission systems, claimed Dolben. "It is important to realise that this is a process, not an event," he said. "As TSOs become more confident in managing wind, things will get better." He restated Eurelectric's preference for "market based" mechanisms for supporting renewables. "Feed-in systems do not exert competitive pressure and could result in problems in the market," he said of legislation requiring utilities to buy wind power fed into the grid at a fixed premium price. "We would like a move over time towards a European harmonised system [of support]."

"Eurelectric keeps calling on renewables to start competing across borders," said Kjaer. "We do want to compete but there is no competitive electricity market for us to compete in." EWEA is a strong supporter of a European liberalised power market with real competition, he said. "On paper this will be established in 2007, but success will be measured by how many people will have access to choosing their supplier."

It was clear several times during the conference that a number of delegates were aching to start the all too familiar European debate on the relative merits of mandating fixed premium prices contra mandating fixed quotas of renewables in the supply mix as the best way of structuring markets for green power. Kjaer was having none of it. "We tend to get into the same discussion: this system versus the other." EWEA agrees that in the end Europe should pursue a harmonised support system, he said, but it is too soon to implement. Meantime, he favours the Commission's approach of trying to encourage clusters of co-operation between countries with compatible support systems. "Let's have three or four years where we have cross border trading unilaterally," he said.

Meantime, EU member states still need to get their support systems right. In 25% of member states support is too low for renewables to take off, said Beatriz Yordi from the Energy Directorate at the European Commission. In another 25% there is enough support but grid and administrative barriers stand in the way. She warned that the Commission is preparing legal actions against those countries which are still defying the EU's Renewables Directive by not dealing with these obstacles.

The design of the electricity market is key to increasing take-up of renewables, said Yordi. "Truly independent TSOs and DSOs (distribution system operators) are essential for fair grid access and grid development," she said. "And we need higher interconnection capacity which can reduce the need for balancing power." These factors, along with better forecasting of wind plant output, shorter "gate closure" times for trading electricity and fairer balancing costs will ease wind's integration into power markets, she said. "The internal electricity market and support for renewables are not enemies any more."

View from the top

Lack of vision was a criticism from a number of delegates of the usually popular Chief Executive Officers' roundtable session. A line up of heads of mostly wind turbine manufacturers was challenged to comment on the state of the industry, upcoming markets, and their priorities. But with Ditlev Engel, CEO of Vestas, the world's number one wind turbine manufacturer, openly declining to actively engage in the debate, many complained about the lack of leadership. Engel, aware that every word he uttered would be weighed by stock market analysts in the run up to Vestas' much anticipated end-year report, said he was unable to comment on Vestas' behalf until after the release of the company's 2005 results on March 29. Although on the platform, he remained largely silent during the session.

With the huge rise in demand for wind turbines, driven by expanding markets in the US, China and India, the manufacturing capacity of the industry will be a limiting factor to growth this year and next, said Esteban Morras from the wind division of Spanish construction giant Acciona, which not only develops projects, but also operates them and manufactures its own brand of turbine. The unavailability of turbines was not necessarily healthy for the sector, he said. Manufacturers need to improve their products before hastening their growth. "We need to improve the product, we need to improve reliability, we need to improve profitability for shareholders," stressed Morras.

Manufacturers should be concentrating their research and development on better technology rather than developing new machines, he said. Unreliable technology is the most significant problem facing the industry. "The most holy word in our sector is prototype," said Morras. "But with every new prototype there are lots of problems." His company has undertaken 30,000 retrofits so far on the fleet of 3500 turbines it operates; an illustration that reliability is more important than changing models every year, he said.

Per Hornung Pedersen of Suzlon agreed. "It is more important that we develop reliable products rather than making them bigger and bigger." He also pointed out that the industry needs reasonable profits to reflect the risks it is taking. "You cannot have an industry that runs on very low margins," he said, referring to the tough market in which wind turbine manufacturers have had to operate in past years.

Fritz Vahrenholt from Repower, on the other hand, said the industry had seen huge improvements. "We have learned our lessons. Compared with the 1990s there is a huge improvement in reliability and the technology. There is a march into professionalism," he said. With rises in fossil fuel prices, wind is becoming more competitive year-by-year. Indeed, Thomas Richterich from Nordex pointed out that in markets with fixed premium purchase prices for wind power, it is not unheard of for spot market prices for electricity to these days be higher than the so- called "premium" being paid for wind.

Meanwhile the change in the industry's profile is remarkable, said Vahrenholt. No longer are the majority of customers small-scale developers, but large groups like Allianz and GE Capital. He added: "They have different views on wind farms and we can foresee that the industry will be a main pillar of energy supply in Europe and also in the US and Asia." The move into wind of these large increasingly professional customers has brought more cash into the industry, pointed out Hornung Pedersen. "Three or four years ago there was an issue with lack of equity and funding. Today it is not so much of an issue; there is a lot of capital and investors," he said. "It has changed the whole industry. We are shifting gear. We are going into marketing now. We have been through the teenage stage and are becoming more mature."

Where they see growth

The CEOs see most of the growth in wind in Asia and America, but also in France, Portugal, UK, Italy and the emerging markets of the Baltic region and Eastern Europe. "We are no longer dependent on just two markets: Germany and Spain," said Vahrenholt. He believed that with increased pressure on President George Bush to take climate change seriously, it was inevitable that the US production tax credit (PTC) would be prolonged. "And the rumours are that it will be prolonged not just for two years but for five years," he said. Not all on the panel agreed with that view.

Nordex's Richterich foresaw the market for wind turbines changing completely over the next three years and becoming truly global, with Asia, America and Europe each accounting for around one-third of wind turbine installations. Manufacturers are facing a huge challenge as they set up local production and adapt their cost structures. "Also important is the internationalisation of the supply chain; in particular keeping quality up to European standards."

China will be the most important national market in future, but it may take a few years and will be a tough market for manufacturers, the CEOs agreed. "They need to install 50,000 MW of electricity capacity each year," pointed out Morras. But China needs to adopt a profitable renewables support system with a price that will attract investors -- and it needs to give project promoters freedom to look for the best sites for wind farms, he said, adding that the country must also improve its consenting process and legal tenure.

Views diverged on the subject of offshore wind. According to Richterich: "Offshore is a kind of myth in this industry. Until 2010 it will never have a significant stake." On the other hand, Morras argued that offshore is a big gamble, but a necessary one. "We want to be market leaders and must be involved offshore," he said. "We need to develop special technology and improve returns in the offshore sector." Vestas had made some investments in offshore in the past few years, and believes the sector will continue to develop, but not at the pace originally expected, said Engel. "We need to respect the lessons learned."

The main obstacle to offshore wind development is getting the power to the customer, said Vahrenholt. "In Germany it is a real disaster. If you build a coal fired power station, the grid is paid for by the grid owner, not the investor in the power station; that is not the case with a wind farm."

Green is not enough

Being clean and green is not enough; the industry needs to sell itself more vigorously, urged Aidan Cronin from Vestas. And it needs to understand and influence the different drivers and "stoppers" which impact the wind business, he added. The global energy sector is a mess, so all the more reason for pushing for a renewable energy policy. "Policy work is vital to our industry," he said, but it should not be thought of as marketing; it is a strategic tool to shape the future market. "If we do not have a proactive renewable energy policy strategy, less wind will be built in the future."

With a media-savvy anti-wind movement and the short term nature of politics influenced by negative press coverage, the industry must win the media war and at the same time sell a real world view of the current energy situation, Cronin warned. The job cannot just be left to others. "There is a lot of misinformation about the energy sector, so over time we have to sell wind; we have to inform about energy from its basics," he said. "We are not the answer to everything but we are the answer to a lot of things."

More research needed

The need for more investment in technology research and development (R&D) continues to challenge the industry, said Cronin. "We are building the largest rotating machines in the world and we have no technology left to borrow from other industries. We have to drive development and it is extremely important we invest in R&D at the European level and at a national level."

Wind's progress to date is a huge achievement considering that only 1% of all R&D funding in the OECD countries over the last three decades was channelled towards wind, compared to over 80% for fossil fuels and nuclear, said Britta Thomsen, a member of the European Union parliament and vice-chair of the European parliament's Industry, Research and Energy Committee.

The parliament is pushing for more funding for renewables under the EU's seventh research program, FP7, which runs from 2007. Since the 1980s, research funding for renewables has dwindled, she said. "Dramatically increased funding for renewables is essential -- at least on a par to that set aside for conventional technologies" She pointed out that the International Energy Agency (IEA) is calling for all energy R&D budgets to be restored to 1980 levels -- the time of the first oil crisis. "If this logic is followed across the board, it would mean nearly tripling current funding levels for renewable energy research."

Packed finance session

The huge investment potential in Europe's growing wind market was a message that came over loud and clear in a well attended finance session. Over EUR 5 billion of new projects are coming on stream this year alone, said Mark Henderson of Investec Bank in the UK. The industry needs more than EUR 1 billion of equity every year to build projects as well as additional capital to fund project development, he said.

Yet compared with other capital investments, wind is "quite a risky thing," according to Lars Kolte of Denmark's Export Credit Fund. Production of electricity from a wind power station can vary 30% from one year to another. "That is something that no bank would usually touch." The industry needs to attract new financing partners into the sector such as pension funds, he said. "My main plea is that we start thinking about who is going to finance this industry because otherwise it will not get off the ground."

Frank Trauboth from Envisory GmbH in Germany said wind is still, and will be for the foreseeable future, the "best in class" for equity finance among renewables. This is due to its proven technology, project size, the range of tools available to assess and finance projects, and the attractive risk/return profile. But institutional investors are not keen on projects below 20 MW or offshore wind, perceived as too risky. In Germany, with its myriad of small projects looking for new owners, the problem is not lack of debt finance, but a lack of willing equity, he warned.

Today some 95% of wind capacity is project financed, said Trauboth, with the remainder being financed through export credit agencies, leasing, mezzanine finance, or bonds. Just five countries -- Germany, Spain, Denmark, UK and Italy -- account for 85% of the 40,000 MW worth of European projects and loans. "The next wave of interesting countries [for investors] in Europe are those five to eight countries just below the 1500 MW threshold of installed capacity," he said. Looking at trends for 2006-07, the internal rate of return (IRR) will dominate demand for projects -- particularly in safe haven countries such as Spain and Denmark, he predicted. The market will also see more warehousing, more portfolio deals with bundling of assets and refinancing, and project developers will act more as independent power producer players, rather than selling their projects on to investors.

Emerging markets

"Attitudes towards renewables are changing as we speak," said Peter Hobson from the European Bank for Reconstruction and Development (EBRD), referring to the countries of Central and Eastern Europe where EU legislation and security of supply worries are driving interest in renewable energy. The EBRD is the largest investor in the emerging east European markets, said Hobson. He reported that wind markets are emerging in Poland, Hungary, Croatia, Bulgaria, Czech Republic, Romania and the Baltic states. "There is a strong advantage in the emerging markets for early movers," he said.

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