Tackling issues of scale and scope

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Never at a European wind energy conference has belief in the huge potential of the technology been expressed more strongly by industry leaders and never has the participation of the financial sector been stronger than at EWEC 2008 Brussels last month. Across the board it was a record scoring event

Wind power is the fastest growing electricity generating technology in the European Union. Total installed capacity more than quadrupled between 2000 and 2007 to reach 57 GW, while that of natural gas, wind's nearest competitor, less than doubled. At the same time, while wind power saw a net increase of 47 GW during the period, fuel oil capacity fell by 14 GW, coal by 11 GW and nuclear by nearly 6 GW as plant were taken out of service. In 2007, wind energy for the first time took pole position as the largest contributor to net increases in power capacity in the EU, growing by 8.6 GW, more than natural gas at 8.2 GW.

Arthouros Zervos, president of the European Wind Energy Association (EWEA), hit delegates with this barrage of eye-opening statistics on the first day of the European Wind Energy Conference and Exhibition in Brussels, Belgium, last month. The impressive numbers provided a fitting backdrop to a dynamic and record breaking event that attracted more top-level press, media and political attention than at any time in its 25 year history

For all the evidence that wind power is forging ahead, however, delegates were also reminded of the many issues which still need to be tackled if the industry is to fulfil its potential. Not only the traditional questions of grid access and the need for technological development, but also broader industrial issues of supply chain constraints, skills shortages and financing. As EU Energy Commissioner Andris Piebalgs remarked in his opening statement, the industry "now needs to address issues of scale and scope."

Pure power

Zervos outlined three energy scenarios for the EU from a new EWEA report, Pure Power, which demonstrated once more that the wind industry is beating its most optimistic forecasts of just a few years ago. The association has again revised its targets upwards and now predicts 80 GW of installed wind power in 2010, 180 GW in 2020 and 300 GW in 2030. But regulatory uncertainty must be "minimised" if the goals are to be met.

Offshore wind power will account for 3.5 GW of the 2010 goal, 35 GW in 2020 and 120 GW in 2030. Depending how effective energy saving initiatives are, EWEA concludes that up to 14% of total electricity demand in the EU could be met from wind technologies by 2020 and perhaps 28% in 2030. Today wind contributes 3.7% of Europe's electricity.

The gains are not only confined to Europe. Wind has been driving growth in the energy sector worldwide, with global installed capacity increasing 145% over the last three years. Several records tumbled in 2007: the US added 5.2 GW in a single year, more than achieved by any country to date, China installed almost 3.5 GW and Spain just over 3.5 GW, making it the EU's most active market by far. Between them these three countries accounted for 60% of new capacity built last year.

Zervos believes this geographical shift will continue, with the EU having to work harder to maintain its position as the world's largest market for wind turbines. He noted that many EU countries actually added less wind capacity in 2007 than 2006, including Germany, Greece, Britain, Portugal and the Netherlands, leaving Spain as the main driver of growth. Over the next five years the US and China will continue to shoot ahead and by 2012 Asia and North America will account for 34.6% and 29.1%, respectively, of annual capacity growth, according to the Global Wind Energy Council, which also has Zervos as its president.

Challenges and opportunities

How to meet these challenges and opportunities was the theme underlying the four day EWEC event. Where all the turbines are going to come from was a central topic. Industry leaders, sharing their vision with delegates in a lively CEO "vision session," agreed that China presents a challenge with its enormous appetite for resources in general and wind turbines in particular. But the country is also set to become the world's main wind turbine producing nation in 2009. While much of that production will be absorbed internally, the increased supply will help satisfy what has become an insatiable global demand for wind power capacity.

Ian Mays of British Renewable Energy Systems, a veteran wind project developer in Europe and America, said he believed that supply will start to catch up with demand in a couple of years. That will require manufacturers ramping up at a compound rate of 17.5% a year to meet the projected 750 GW of turbine capacity required worldwide by 2020, he estimates. "I have confidence it is achievable provided we have investor confidence," he said, adding that political will and leadership is needed to drive the market forward.

The rising price of wind plant equipment was also a major concern. Manufacturers agreed that their customers' prime requirements are reliability and the cost per kilowatt hour. Andreas Nauen of Siemens said that he sees opportunity in the higher profits achievable in a market where demand is outstripping supply. Manufacturers now have the resources to improve current models, reducing costs where possible and at the same time develop larger, more efficient turbines. Nauen also believes the industry is on the verge of real mass production with no loss of quality, which should put prices on a downward trajectory once more.

For Eddie O'Connor, a former owner of developer Airtricity, "China is, of course, the key to everything." But the West cannot rely on massive numbers of Chinese turbines flooding into its markets, he warned. It needs to solve its own supply problems through technical innovation. He advocates producing simpler turbines with more centralised control instead of requiring each machine to be a highly sophisticated power generating unit. He also advocates encouraging small start-ups.

Several speakers pointed out that the supply chain difficulties are rooted in a shortage of main components and skilled staff, especially engineers. Nauen noted that Siemens needs to recruit roughly ten people for every additional megawatt it builds, which translates to a workforce of around 10,000 people for Siemens alone in a few years. Here again he saw opportunity in Chinese companies entering the component supply chain and, in the longer term, driving technological innovation and competitiveness. "I may not like it as a manufacturer in the short term, but in the longer term competitiveness will drive down prices and help the wind industry," he said. For Vic Abate of GE Energy, the pool of engineering talent in India and China's industrial expertise also represent important resources to be tapped.

The great policy debate

In the wake of the recently proposed new EU renewables directive (Windpower Monthly, February 2008), the topic of EU targets for wind power and how to meet them was discussed in a number of conference sessions. "In terms of speed and cost there is no alternative to wind power," said Nauen. Mays added: "Wind is the only technology that can make a significant difference." No one disagreed with Piebalgs' assertion that what is needed is "a long term and stable framework so that the industry has the confidence to invest," and that time is of the essence in getting national action plans approved for meeting the directive's demands.

But opinions differed markedly over the issue of whether interim national targets on the way to the overall EU goal of 20% renewable energy by 2020 should be binding in law, or not. Britta Thomsen, member of the EU parliament, argued that they were necessary and that "there should be a clear monitoring and evaluation mechanism so that the Commission can act against member states which are not fulfilling their goals." Zervos agreed.

Piebalgs, however, said that although he would not object to mandatory interim targets, if that is what is decided, he thinks they are unnecessary. "The Commission can start infringement procedures at any stage," he said, "not just if a country fails to meet its targets, but if it fails to grant priority access to the grid, if administrative procedures are too complicated or if the path towards its target is too slow." O'Connor also felt the threat of infringement actions should be enough. He sensed a political change across Europe based on concerns about global warming and security of supply. He also felt that Europe was recognising the wind industry's enormous potential for job creation.

A subject eliciting even sharper differences of opinion was how to speed up development of a fully integrated grid network in Europe, also for offshore wind power (next story). In addition to the grid, challenges facing offshore development include improving planning and consenting procedures, bringing down costs and reducing maintenance risks, said Piebalgs. "We need a real breakthrough in offshore wind, and we need it fast," he added. Underlining the problem, Zervos pointed out that the rate of offshore development in Europe was higher back in 2003 than in 2007 and he did not anticipate it growing significantly until around 2020.

The advantages of a strongly interlinked network for making good use of the resource in the windiest areas of Europe were stressed by O'Connor. "If you build a big enough grid, wind power becomes nuclear in its certainty and flatness," he said. Jürgen Schmid of the European Academy of Wind Energy called for priority to be given to integrating wind onto the grid at a European level by means of more advanced technology, such as smart grids that can flexibly manage variations in power input, and the uptake of wind energy into transport and other innovative uses.

Markets versus subsidies

The debate over grid issues fed into discussions about the continued need for market support mechanisms. Georg Wilhelm Adamowitsch, EU coordinator for offshore wind integration, provoked lively reactions when he suggested that investors were chasing after subsidies rather than good projects. He worried this would result in splitting the electricity market in Europe into one for renewables and another for conventional generation.

"Renewables will have a great chance if they are integrated into one European electricity market and we need to find solutions to achieve this," he stated. A system based on subsidies, he argued, "is the end of the chance of survival" and Europe needs to discuss when they should end.

The general feeling in reply was that support mechanisms are necessary, at least in the short-to-medium term to ensure investor confidence and allow the industry to deliver the capacity. Mays felt that incentives would be needed until Europe's carbon emissions trading mechanism was well enough developed to become a fundamental driver for the use of carbon-free sources of energy. O'Connor agreed that while Airtricity had proved it is possible to build wind farms without subsidies by selling green power directly into wholesale markets and that this leads to more robust companies, most projects cannot compete against fossil fuel generation developed in conjunction with transmission wires, where "you cannot see what you are competing with." He urged for a more wide-ranging and informed debate about subsidies in Europe.

Investment issues

More detailed aspects of financing, insuring and investing in wind energy were the subject of a well attended series of "finance forum" sessions which kept delegates in their seats until the final whistle. The five sessions looked at the impact of wind on electricity prices, public and private markets, project finance and risk assessment. Various speakers came up with estimates for the value of the market. According to EWEA, the EU alone will need to invest around EUR 31 billion in the sector from now to 2010 and EUR 340 billion by 2030 -- a sum greater than the GDP of Belgium or Turkey.

Where the money is to come from -- and what effect the American economic downturn and linked global credit crisis will have on the sector -- was a topic for much deliberation. In the words of Vittorio Perona of investment bank Dresdner Kleinwort Wasserstein, 2008 will be a challenging year for renewables and the market. In recent months a number of companies in the sector have cancelled initial public offerings (IPOs) and speakers felt there would be fewer flotations in the immediate future. In addition, the credibility of project development portfolios up for sale will come under far more scrutiny than previously, with more awareness that "bragawatts" are not the same as megawatts.

There are signs that investors in the public markets feel safer putting their money into projects with utility sponsorship than in medium sized power producers, making it more difficult for the independents to raise capital. On the manufacturing side, some newer technologies may suffer in the flight to tried and tested quality, while developers of more marginal projects, particularly in some offshore markets, may find investors in short supply.

On the other hand, companies with "a strong franchise and reasonable valuations will continue to find capital," argued Philippe de Weck of the Swiss asset management bank Pictet. It was a point underlined by Mortimer Menzel, of London-based merchant bank Augusta & Co. He also emphasised the importance of a strong and experienced management team in securing higher valuations for project portfolios. Likewise, banks are now more careful about their lending, but also more sophisticated, inventing new structures and solutions to spread the risk, according to Jérome Guillet of Dexia, which specialises in project finance.

A welcome credit crunch

While there was some disagreement about whether project prices were generally heading up or down, a number of speakers considered the present financial crisis might hide a silver lining. "There has been far too much froth in the market," said David Jones of insurance group Allianz, which is steadily building a European wind farm portfolio. The credit crunch, he said, is "making people think a bit more about risk than in the last years of a huge oversupply of capital, both debt and equity." He believes a "more sensitive re-pricing of assets" will now come about. Guillet also felt the wind sector will benefit. To some extent the current problems in the world markets are due to a lack of risk analysis, he argued, whereas the risks and the revenue streams in the wind sector are well understood. This could lead to a "rush to safety as a sector that was seen as boring is now seen as safe."

Andrew Garrad of consultants Garrad Hassan pointed out the dangers of inexperienced investors throwing money at wind projects without doing their homework. "Is there too much money available? Is it intelligent money?" he asked. "Wind energy is attracting lots of investment. I feel that it's possible that the wrong money may be finding its way into projects." He criticised the lack of adequate wind monitoring by developers: "As the investments get bigger, as the wind farms get bigger and as the turbines get bigger, the amount of measurements gets smaller. That's a pretty stupid thing to do if you want to reduce your risk," he said. "There is a responsibility on the industry as a whole to do a much better job in instrumenting and characterising their wind farms before they either build them or they ask someone else to lend money on them."

Operational risk is another problem for wind investors. Over the past five years, warranties offered by manufacturers have reduced from three or five years to around one year for some projects, Garrad pointed out. This makes the ability to secure spare parts critical. A further risk is posed by new turbine manufacturers without a track record -- particularly those without financial strength or the backing of a substantial parent company, he said. "There is a danger now that everybody's so keen to build, own and lend on wind farms that they are taking what could be unacceptable risks."

The technology challenge

Rounding up the conference, EU Commissioner for science and research, Janez Potocnik, noted that, while research into new concepts must continue, there are still plenty of problems to resolve with technology in use today. "For example, every manufacturer or project developer has to deal with similar gearbox problems and with every enlargement of the wind turbine size new questions about aerodynamics are raised." He noted that "the current mechanisms and models of co-operation for wind energy are insufficient to meet the challenges faced."

Raffaele Liberali, research director of the EU Commission, agreed, arguing that turbine manufacturers must put aside their mutual distrust and co-operate on fundamental research in order to meet climate change targets. "Competition and co-operation can exist," he declared.

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