Big players and big money taking over

Wind's repositioning away from the fringes and into the mainstream of power generation was much in evidence at this year's European Wind Energy Conference, EWEC 2004, in London. That wind is becoming increasingly big business was illustrated in presentations highlighting the consolidation of manufacturers into bigger publicly owned players and the growing domination of large independent power producers and energy utilities in wind farm ownership.

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The future rubbed shoulders with the past at the European Wind Energy Association's 2004 conference and exhibition, as grassroots members of a movement for change came face to face with big business turning vision into reality

Wind's repositioning away from the fringes and into the mainstream of power generation was much in evidence at this year's European Wind Energy Conference, EWEC 2004, in London. That wind is becoming increasingly big business was illustrated in presentations highlighting the consolidation of manufacturers into bigger publicly owned players and the growing domination of large independent power producers (IPPs) and energy utilities in wind farm ownership. The proof was to be seen in the number of professionals attracted to the accompanying exhibition and in the amount of business being conducted and deals done.

Becoming a mainstream energy source is the real prize for the industry, said Corin Millais, CEO of the European Wind Energy Association (EWEA). "We must establish wind as a regular power source like any other -- like oil or gas or coal. We have to shed the alternative tag. We are not the hippy fringe," he said.

The industry is scaling up, said Millais. The average size of wind farm was 20 MW five years ago. Today there are proposals for offshore projects of 500 MW and 1000 MW in the UK. At the same time, the cost of wind power has come down by 50% in 15 years. "We haven't quite closed the gap, but we are within spitting distance of conventional energy," he said. "The achievements of the wind power industry are all the more remarkable because we are on an uneven playing field."

Attendance was the highest ever for a wind energy event. Over 4200 participants from 44 countries flocked to the Wembley Conference and Exhibition Centre in north London during November 22-25. After a relatively slow first day of scene setting sessions and politicians, the conference got into its stride with up to four parallel sessions offering something for everybody. With some 40% of delegates from academia and research institutes, the scientific and technical sessions were well attended. "There has been a good, strong focus on meteorology. Overall, the sessions show that there is a lot of good research and development work being done," said Neil Douglas of consultants Natural Power.

The UK, as host country, fielded some 40% of conference delegates, by far the largest national contingent. Many were first timers at a major wind event and keen to learn more about Europe's fastest growing energy sector. The presence of so many from the City -- London's financial hub -- was a fillip to Britain's wind industry, which is on the cusp of taking off. As Millais said, the UK market is set to grow by a massive 1000% by the end of the decade.

Business in Britain

The British government means business about creating a market for renewables, stressed UK secretary of state for trade and industry Patricia Hewitt at the conference opening. Support through the Renewables Obligation and exemption for renewables from the climate change levy add up to £1 billion by 2010, she said. "We are seeing more investors backing renewables because they can see the government means business and is committed to the development of this market in the long term."

Today wind powers 400,000 homes in Britain. By 2010 it will power one in six households, she said. As a major part of the UK renewable mix, wind will help meet the government's energy goals of diverse and secure supplies in competitive European markets, Hewitt said. Indeed, wind's role in aiding energy diversity and security of supply plus the move towards improved competitiveness for wind were among the strongest themes to emerge through the four day event.

Speaking particularly for the benefit of a wider UK audience outside the conference hall, Hewitt attacked the anti-wind lobby whose objections put at risk the country's goal to cut emissions. "I respect those who exercise their right to object. All I ask is that objections are based on accurate information. I hope we can see an end to the myths that are peddled in the name of debate," she said. Hewitt then nailed the myth that wind is unreliable because it is a variable supply. All sources of energy trip off the system at times, she said, pointing out that the country has two nuclear power stations out of commission at the moment. "Wind is no different. Achieving our 2010 target requires little additional back-up or cost."

Intermittent generation is one of the issues that, according to Millais, make grid issues a potential show stopper for wind. Eddie O'Connor of Ireland's Airtricity shared his concern. Intermittency is the aspect of wind energy that is least understood, he said. "I get it everywhere -- from public and politicians; they ask how can a source of power which does not blow all the time ever replace fossil fuels. This is the biggest issue we have to explain."

From the European Commission, Alfonso Gonzalez Finat reminded delegates that a wide range of potential solutions already exist to integrate large quantities of wind power into the mainstream electricity system. "Too often debate has focused only on the need for grid reinforcement and for back-up provision of conventional generating capacity," he said. "We need to look into the potential contributions of improved weather forecasting, better interconnections between national electricity grids, updated grid codes, dynamic demand management, conventional and innovative energy storage techniques... the list could go on."

reality kept at bay

Despite his identification of the issues and the admitted urgency of dealing with them, the presentations on wind integration were a disparate collection, swinging from an airy sketch of an offshore wind "super grid," through a highly focused view of Nordic wind energy reserve costs, to a glimpse of the complexities of building stochastic wind energy into power system modelling. From Airtricity, Paul Dowling's "super grid" vision sidestepped the issues of today identified by Finat. Marcel Krämer of the German ForWind research centre also had grand ideas. Variable wind, he said, is the same as variable demand, but to manage it a new system of scheduling electricity is needed. Germany's use of base, medium and peak load energy and the "artificial system" of ordering balancing power is obsolete and should be abolished. Like Dowling, Kramer seemed to be calling for revolution, not evolution.

The session dropped to earth with a contribution by Hannele Holttinen of the Finnish VTT technical research centre on the need for more reserve requirement as wind power penetration levels increase. Her research revealed that in the Nordic power system, reserve requirement grows to 1.5-4% of wind capacity at a wind penetration of 10% of gross electricity demand. The increased reserve energy cost is about EUR 1/MWh at 10% penetration and EUR 2/MWh at 20% penetration, or half these figures if only the increased use of existing reserve capacity is taken into account, rather than the cost of new reserve capacity. She pointed out that her cost estimates are less than those that have come to light in previous studies in the UK and elsewhere, attributing this to the large area of the Nordic system, which covers four countries and helps smooth the output of large scale wind power production.

Attempting to pull together the disparate threads of wind integration is a mega EU project dubbed GreenNet, aiming to push least cost integration of green electricity into the European grids. Presenting some initial results of GreenNet, Hans Auer reported on the cost of reserve for smoothing wind's lulls in output and the cost of capacity for securing the system. He quoted EUR 2-4/MWh for systems with only 10% wind generation and EUR 5-6/MWh for high wind penetration of more than 20%. "Publication of higher additional system operation costs due to large scale integration, as in Germany, have to be reviewed critically," he warned. In a breakdown of the costs of wind energy published on its website, major German energy company and network operator E.on says it will cost EUR 15/MWh to secure a system with significant volumes of wind power, plus EUR 7/MWh for balancing power -- at EUR 22/MWh a far higher total than assessed by GreenNet.

Another EU study, dubbed Wilmar, is looking at the impacts of speedy wind power integration in liberalised electricity markets. Peter Meibom of Denmark's Risø national laboratory said a modelling tool will simulate solutions and help decision making by system operators, power producers and others. He underlined the difficulties of including hydro and wind power and combined heat and power generation from fossil plant in one model. His answer: split them into separate hydro and wind models, and refer delegates to the Wilmar website for more details.

Vision at the top

Greater efforts in the industry to bring down turbine prices, more consolidation of turbine manufacturers and a greater level of adaptation to a more diverse global market place were among the trends that company leaders expect will shape the industry over the coming years. In an eagerly anticipated CEO session, the panel reflected the divergent views of the industry from companies keen to embrace an expanding but changing market place to the older guard focused on quality rather than cost-cutting and small-scale private ownership of wind plant.

Many delegates lamented that the panel lacked heavyweight bosses, particularly representatives from the three largest wind turbine manufacturers -- GE Energy, Siemens and Vestas. Others said they would have liked prepared presentations from each panel member. Yet a tighter question and answer format focused panel members on the most topical issues of the day.

Anders Christensen from LM Glasfiber predicted the industry will be increasingly driven by huge demand from Asia and the Americas. Manufacturers will have to rethink their business models and source more components and hardware from around the world. The trend towards a smaller number of large turbine manufacturers will not necessarily benefit the rest of the industry: "We are going to be left with a handful of 900 pound gorillas. And what does a 900 pound gorilla do? What he likes!" he said.

From Spain's Iberdrola Energias Renovables, which operates the largest volume of wind power of any company in the world, Pedro Barriuso sees wind farm ownership becoming the domain of big players, such as utilities, as projects become larger and more complex. Quality of electricity supply will be increasingly important. Utilities are confronted with similar set of problems and issues for developing wind plant as for nuclear and gas, he said. "Developing a 1600 MW combined cycle gas turbine (CCGT) plant takes around five years; developing a wind farm of 50 MW takes almost the same length of time. The amount of effort, expense and suffering is enormous. If politicians want to reach 20% of electricity from renewables, they need to be willing to create the conditions to be more flexible and allow us to move faster."

Eddie O'Connor of Airtricity called for more leadership from the industry's leaders. Lack of vision is holding the sector back, he said. Europe is too accustomed to seeing itself as a fossil and nuclear fuelled society, whereas onshore and offshore wind power could supply 50% of Europe's power by 2040 if the grid infrastructure was built. "If we believe in it, attitudes will change and the grid will have to follow," he said. "Ministers and public are looking to us to see us change the way we generate electricity right now."

But people are reluctant to change, argued Aloys Wobben, the owner of Enercon of Germany, the last remaining privately owned wind turbine maker with a sizeable slice of the market. Industry and governments should work to raise public acceptance and awareness of the need for wind energy, he said.

Stock markets

Consideration of whether stock markets understand the wind business highlighted differences of opinion on the panel. O'Connor pointed out that the investment needed for huge offshore wind farms and the associated grid infrastructure will have to come from the public markets. "There isn't an alternative. We are a normal business and normal business gets money from stock markets," he said. Although still a privately owned company, O'Connor expects Airtricity to be floated in five years and to operate wind capacity 20 times the size of its present portfolio.

Iberdrola, the only publicly quoted company represented on the panel, is making strenuous efforts to explain to market analysts what is driving the wind business, said Barriuso. There is a lot of money in the market to be invested and the big finance houses are eyeing the sector, he commented. The industry is at a crucial juncture, he said. If it can demonstrate it is a serious business, the capital markets will invest.

Christensen explained that the stock market appreciates growth, low risk and stability. "But most of all they appreciate cash generation. And this industry has been burning cash year after year and that has to come to an end," he said. "We cannot pick up money from the capital market just to invest it in work in progress and inventory; we have to put that money to work." He was, nonetheless, optimistic that the wind business would prove to be as "attractive and sexy" to investors as the communications sector.

Alone on the panel, Wobben was adamant that he had no intention of floating his company on the stock market. He revealed he is not attempting to compete all-out with stronger rival manufacturers. There is always room for a small player in wind turbine manufacture, he said. Stressing that the life-time and quality of the manufactured product is all important, he warned: "There are machines on the market that will not survive 20 years."

Fewer and bigger

Wobben's thinking runs counter to the trend towards public ownership highlighted in a session on markets by Bruce Woodman from small UK consultancy Pure Energy Professionals. He showed that all the world's major turbine manufacturers are today either publicly-owned or subsidiaries of public companies with the sole exception of Enercon. Today's position contrasts with 1992 when the major manufacturers were private companies, with Mitsubishi Heavy Industries the single exception.

An increasing proportion of global wind turbine sales is concentrated in the hands of five manufacturers, which in 2003 accounted for 77% of sales, said Woodman. This pattern is set to continue at the expense of smaller players until perhaps just three to four players are left. Over recent years, wind turbine prices have firmed. There are few signs of the expected greater efficiencies from consolidation leading to lower prices, or that fewer larger players are using their market dominance to push up prices, said Woodman.

Over 20 countries or regions have invested more than EUR 100 million or equivalent in wind energy, he continued, so the industry is becoming truly global. Like Christensen, he believes competitive pressures will lead to localised assembly of wind turbines. Larger and better capitalised players can be good for customers, said Woodman, because of the increased security they bring to the market.

Consolidation is also taking place in wind farm ownership as more utilities and IPPs enter the market, reported Keith Daniel Hays from Emerging Energy Research in Spain. Wind is getting more share of the utilities' generation strategies -- no longer is it a little brother to nuclear, he said. Twenty companies now account for 27% of wind energy capacity in Europe -- or 54% if Germany, which has a tradition of small-scale individual wind farm ownership, is excluded, he said. But the flood of small German investors is beginning to dry up, while institutional investors and utilities are taking a larger share. Traditional developers are also feeling competitive pressure from utilities and IPPs who are acquiring their own wind development teams. It is utilities and IPPs that are bringing much needed financing capability to grow the sector, said Hays.

Illustrating his point was Danish Oil and Natural Gas (DONG) national energy company, which is building up its wind development business and aims to be one of the leading owners and operators of wind stations on land and offshore in northern Europe with at least 500 MW of capacity by 2010. "We see energy in Europe being very much focused on renewables and gas for environmental reasons," said DONG's Henrik Balle. "We are in for the long term; wind is the way forward." Outside its home market, the group is looking at Germany, the UK, Norway and Sweden.

With many speakers focusing on the new entry of global energy giants, Carl Tishler from Babcock and Brown, an investment company based in London, pointed out that missing from the presentations was any mention of the place for independent players. "There is a need to have multiple voices in the market for effective lobbying. In terms of independence, you don't simply need larger industry players; you do need diversity," he said.

Security of Supply

Against the background of rising prices for coal and gas and increasing fuel imports to Europe, the need for wind to add to energy diversity and security of supply has never been more urgent, the conference heard. It was a theme common to presentations by all the politicians as well as many of the industry's leaders.

With the price of oil reaching record levels, Klaus Rave from Investitionsbank of Germany wondered why Europe had not learned from the oil price shocks of the 1970s. The industry needs to get the message across of what wind can achieve in securing energy supply, he said. Europe's dependency on imported fuel has risen dramatically in 30 years. It is now the world's largest importer of fossil fuels with an annual energy bill of EUR 120 billion.

Reducing exposure to fossil fuel price risk is the most important aspect of wind energy today, maintained Shimon Awerbuch from Britain's Science and Technology Policy Research Unit at the University of Sussex. Wind and other renewables in a national energy portfolio deliver lower overall electricity prices despite their higher costs, he said. This is because their costs are upfront, fixed and predictable, unlike fossil fuels, whose prices, as recent months have shown, are volatile.

Fuel price volatility hits GDP growth, said Awerbuch, pointing out that according to G8 estimates, around 45% of the $160 billion of renewables investment required for OECD countries is offset by savings from avoided GDP losses. "It means that for every kilowatt of wind installed, we can expect to avoid $200-300 in avoided GDP losses." He added that the cost to Europe of oil spikes between the years 2000-2004 amounted to some EUR 700 billion. This would have been enough to provide all the investment needed to meet 20% of Europe's electricity from renewables by 2020. But these benefits from wind and renewables are not always recognised, he warned. "Policy makers seem aware of fossil fuel price volatility, but do not see the connection to renewables."

Walt Patterson from the UK's Royal Institute of International Affairs (RIIA) argued that wind energy ought to be a key feature for policy for any government that wants to keep the lights on. This is because it is what he termed "infrastructure generation," meaning that most of the costs are upfront investment, unlike fuel based generation where fuel makes up a good part of the cost of the electricity. Today's electricity market is misconceived, he said. "It treats electricity as though it were a commodity and overlooks the crucial factor that electricity above all is a question of infrastructure." To treat infrastructure generation -- which also includes hydro and photovoltaics -- as though it were fuel based grievously distorts the value of such assets, he claimed.

Finding the finance

The capital requirements of the European wind industry over coming years will be huge and the sector is going to require different financing techniques, said Jonathan Johns from Ernst and Young in a well attended finance session. Some innovative wind energy financings have already been achieved by utilities and developers, he explained, such as the £300 million Beaufort Wind financing of RWE Innogy's wind portfolio in Britain, the groundbreaking EUR 170 million borrowing for greenfield development by Italian wind project developer IVPC, and the EUR 60 million Max Two bond market financing of a portfolio of international projects by Germany's Energiekontor.

Erik Atvars from HypoVereinsbank stressed that while financiers were comfortable with onshore technology, wind farms out at sea were a different matter because of the higher risks associated with them. The marine environment increases the complexity -- and costs -- of conducting the required "due diligence" examinations of a project's viability, he said. Technological innovations on multi-megawatt offshore machines in a more hostile environment introduce a much higher risk of series failures.

Banks will also be looking carefully at the reliability of offshore machines. Limited access to turbines at sea mean that failures take longer to fixe. Construction and operations and maintenance carry much higher levels of risk, said Atvars. So far, all offshore projects have been financed on balance sheet with big companies shouldering the risk. But, he expects to see the first project financing of an offshore wind farm within 12 months.

The banks will be looking for a good track record for the technology, strong quality assurance certification and performance and availability guarantees, said Atvars. From Eksport Kredit Fonden of Denmark, Lars Kolte warned that problems could arise if series failures occur on machines that manufacturers have supplied to a number of offshore wind farms. "If they default on the first wind farm, their guarantee is worth nothing on all the others," he said. But this problem can be overcome with the entry into offshore wind of better capitalised suppliers such as GE, the conference heard.

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