If there is one thing that investors hate it is risk. However tempting Germany's wind investment funds are looking these days, there remains the lingering fear that the wind turbines in any power station could suffer such serious defects that the financial structure of the project collapses. "Our overwhelming concern is to take as much investor risk out of wind projects as possible," is how one of Germany's major wind project financiers, Bobikiewicz and Partner, describes its business.
Wind turbine manufacturers selling to the German market are responding to this challenge in different ways. Most still offer customers a basic machine guarantee, with free inspection and maintenance for the first two years of operation, usually extendable to five years, at a price which is included in the purchase price of the turbine. For arrangements beyond year five, wind station operators must negotiate new terms.
Enercon, however, Germany's leading wind turbine supplier, has breached this tradition, prompting a review of the entire system of wind turbine guarantees by other companies on the German market. The "Enercon partnership concept," available in Germany since 1995, usually offers a ten year guarantee of turbine performance and technical availability in return for a share of earnings per kilowatt hour of electricity sold to the grid. Vestas Deutschland is considering introducing a similar mechanism, while Nordex is revising its guarantee philosophy and Enron Wind may alter its standard maintenance package. NEG Micon is keeping an eye on these various guarantee concepts, but it looks unlikely to make any fundamental changes to its insurance-based concept.
Enercon and Enron
Over the next decade and more, Bobikiewicz and Partner will use two of the wind stations for which it has organised financing to make a direct comparison of the pioneering Enercon maintenance mechanism on the one hand, with the traditional sales package offered by American competitor Enron Wind on the other. Enron owns the second largest manufacturer of wind turbines in Germany, previously sold under the Tacke name.
Typically, Enercon's guarantee package consists of a full maintenance contract in return for a share of earnings over ten years, while Enron Wind offers a standard five year guarantee, followed by a maintenance and inspection contract. The availability of a "full maintenance contract" as part of any financial structure adds important security for investors, says Bobikiewicz's Jörn Bold.
The Enercon "partnership" contract for the 25, E66 1.8 MW turbines at the 45 MW Bobikiewicz project, Borsum-Ahlerstedt in northern Germany, covers maintenance, inspection, repairs and replacement of worn components. It also guarantees both the wind station's performance and a technical availability of 97%, Bold says. If technical availability falls below 97%, Enercon covers any loss of earnings.
The Borsum-Ahlerstedt wind plant is divided into two, with 13 turbines at Papenburg in Emsland and 12 turbines at Ahlerstedt. It is projected to generate 81.5 million kWh annually, earning about EUR 7.4 million a year. The cost of the wind plant is EUR 59.6 million, of which EUR 19.2 million is being raised as limited liability capital and EUR 40.4 million in loans.
The Enron Wind project is financed through a similar investment fund, but on different purchase terms and along more traditional project financing lines. The 14 Enron 1.5 MW turbines in the Am Saubusch wind station, installed on a windy plateau in Saxony in January, are covered by a standard five year guarantee, the cost of which is part of the purchase price of the turbines, says Bold. Once the five year guarantee period expires, a new maintenance and inspection contract with Enron Wind has been agreed, for which the operator pays a premium. The total cost of the Enron plant is nearly DEM 54 million and is projected to produce 38 million kWh annually.
Furthermore, the 20 year financing structure for the Enron project allows for "high expenditure on maintenance, replacement of worn components and repairs," says Bold. Over 20 years, this amounts to DEM 10 million to cover the 14 turbines, with potential failures of components allowed for from year three, starting with rotor blades. A full overhaul or reconditioning is allowed for after year 11, including replacement of an entire nacelle if necessary.
The bottom line
An initial comparison of the cost of the financing structures for the Enercon and Enron projects reveals that the owners of the Borsum-Ahlerstedt wind station will pay up to around DEM 1.6 million a year to Enercon as the price for operational security of the 25 turbines over a fixed period. Enercon's standard period for its guarantee arrangement is ten years, with the option to extend this period under a new contract. The cost of guaranteeing Enron's turbines at Am Saubusch is DEM 15.5 million over 20 years, or DEM 1.1 million a turbine, including all basic maintenance,which is a cost added to the DEM 10 million over 20 years. This, however, does not include the cost of the initial five year guarantee, which is part of the price of the turbines, nor the price of the maintenance and inspection contract once the five year guarantee period has expired.
The guarantee philosophies affect investors in different ways. The Enercon concept looks more expensive, but arguably offers more security to investors, provided the turbine maker can honour its commitment to keep the turbines running in all circumstances, also if it suffers financial failure. If the turbines give no problems, Enercon pockets the cash. If the Enron Wind machines run well, on the other hand, the investors benefit because the provisions not used can be returned to them. The risk to investors is possibly greater, but so are the gains.
Two independent fund analysts, Check and Gesellschaft für Unernehmensanalyse und Beteiligungsmanagement (GUB), both based in Hamburg, have rated the Saubusch wind fund as "good," while GUB has given the same evaluation to the Borum-Ahlerstedt structure, says Bobikiewicz and Partner. "Time will tell which concept is the cheaper," comments Bold.
The standard terms of the Enercon "partner concept" allow for a payment of DEM 0.02/kWh to Enercon by the operator, says Volker Kendziorra of Enercon Service. The operator is billed at the start of each year for a sum based on generation by the turbine in the previous year. If at the end of the year, generation exceeds the previous year's figure by more than 10%, Enercon submits a bill for DEM 0.02/kWh for the additional generation.
The levy per kilowatt hour is not fixed over the ten year standard contract period but is linked to the price of manufacturing industry goods if their price index shows an increase of more than 2% in any one year. The oil price hike last year has led to a 2.5% increase in the price per kWh this year, says Kendziorra. Enercon also recommends an additional machinery insurance tailored to the partnership concept, which it says is "significantly cheaper than normal machine insurance policies."
Enercon customers have a choice between the Enercon partner concept or a one year guarantee and maintenance contract for the E40 (500 kW/600 kW) machine or two years for the E66 (1.5 MW/1.8 MW) machine. "The partner concept is more popular," says Kendziorra. Of the 2425 gearless Enercon machines installed in Germany at the end of 2000, 80% were covered by the partnership concept and just 20% by maintenance contracts.
Ulrich Schomakers, head of Enron Wind Service, emphasises the flexibility of Enron's package. It offers a service maintenance contract that runs for a minimum of two years and a maximum of five years and covers two inspections a year. The cost of the contract varies according to its length and the size and number of turbines covered, and is divided into a basic charge and three separate all-in charges for cleaning, oil analysis, and wear and tear and small parts.
The basic charge for a 1.5 MW machine covered under a contract for two to four machines is DEM 13,500 a year. On top of that the customer pays three all-in charges of DEM 700 for cleaning and small repairs, DEM 350 for oil analysis and DEM 800 for wear and tear and small parts. The basic charge increases by DEM 200 a year for a single turbine and decreases by DEM 200 per turbine per year in contracts covering five or more machines.
A further option, popular among customers with large turbines, is round-the-clock remote supervision by modem from the Enron headquarters at Salzbergen. This costs DEM 1000 a turbine a year regardless of the number of machines the customer has included in the contract.
If requested, Enron Wind includes maintenance of the wind station transformation station in its service maintenance contract. This costs DEM 1200 a year. The maintenance work is subcontracted to other specialist firms, says Schomakers. Enron is currently reviewing possibilities for additional maintenance packages, he says.
The competitors -- Vestas
The attraction of the Enercon concept for investors prepared to pass on the risk to Enercon, instead of spreading it among themselves, has not escaped the notice of Vestas Deutschland. It currently has three standard guarantee options, but is preparing a fourth that looks similar to the Enercon partnership concept. The first is a standard two year guarantee with inspection and maintenance included in the price of each turbine; if desired customers can pay a price premium to extend the service over five years. Or they can choose an option providing just a guarantee for only the main components from years three to seven. These options do not include insurance.
The fourth option, dubbed the "opti-save package," will be available from about mid 2001, says Thies Reimers of Vestas Deutschland, and be paid for by a kilowatt hour levy. The package, to cover the first five years of operation, will include a parts guarantee, inspection and maintenance of the turbine parts supplied by Vestas, and an insurance package. Insurance will possibly come from the Victoria or Gothaer companies and cover the complete wind turbine and transformer station, thus covering machinery that Vestas did not supply and install itself.
The purchase price of the wind turbine will probably be reduced for those taking advantage of the opti-save package, says Reimers. Customers will have the option of extending the package for a further five years, although this will usually involve a price adjustment, says Reimers. "The conditions of opti-save will not be negotiable because we firmly believe that guarantee and inspection and maintenance are areas where all customers should receive identical treatment," he says.
xBorsig Energy subsidiary Nordex offers a guarantee and free inspection and maintenance for the first two years of operation of its turbines. After the guarantee period expires, customers can sign-up to an inspection and maintenance contract which also covers materials. The annual charge is DEM 5300 for the N29 250 kW machine, DEM 13,000 for the N62 1.3 MW machine and DEM 20,000 for the N80 2.5 MW turbine. Alternatively, Nordex customers may choose a five year "carefree package" running from year three to year seven of operation. It provides a turbine guarantee, machine insurance cover and free inspection and maintenance, including materials. As with the annual inspection and maintenance deal, the "carefree package" costs rise according to the size of the machine. In 2001, the package for the N29 250 kW costs DEM 40,000, for the N62 1.3 MW machine DEM 120,000 and for the N80 2.5 MW machine DEM 240,000, payable on purchase of the turbine. There are no rebates if more than one machine is bought. None of the Nordex prices include sales tax.
In early 2001, Nordex was reviewing its guarantee and carefree package philosophy. "We want to improve the measures, taking into account what the competition is offering," says Kerstin Ulbricht from the marketing division. "Nordex plans to draw up a package that runs for a longer time period and that is more customer-friendly," she adds.
Like Borsig Energy, NEG Micon's standard offer is a two year guarantee including maintenance with two inspections a year. Where NEG Micon differs from Borsig Energy and other manufacturers is its close relationship with insurance companies. As an alternative to its standard offer, NEG Micon has a package with all-round insurance running for up to five years, says Ralf Breuer, managing director of NEG Micon Deutschland. This covers wear and tear on all components as well as service and maintenance, but not the normal machine insurance or productivity insurance, which covers losses when a turbine fails to live up to its guaranteed productivity curve.
"The package involves a form of reinsurance. Customers can see that we have paid the insurance premiums and know that, what ever happens, they are insured for the five years," he says. This contrasts with the practice at other companies, where provisions put aside to cover the guarantee period could be lost, for example in the case of bankruptcy.
NEG Micon works primarily with the Husum branch of insurance company Gothaer Versicherung, but also with insurance brokers VFU in Hamburg. The turbine manufacturer recommends its customers take out machinery insurance and loss-of profits-insurance with the same insurer. Machinery insurance primarily comes into play after a breakdown due to faulty products, materials or manufacturing or due to unforeseen external circumstances such as lightning, fire, flood or earthquake.
The five year package for an NEG Micon NM 900 turbine costs about DEM 100,000, a fixed sum per turbine with no rebates for larger numbers of turbines, says Breuer. The package can also be bought for three or four year periods. "A simple and transparent arrangement is important," Breuer stresses. He notes that other arrangements may cost less, but are complicated and have gaps in the cover they supply. NEG Micon Deutschland is considering other guarantee concepts but, in principle, prefers to stay with arrangements of up to five years "as this is the insurers' usual practice," Breuer says.