Economic slowdown: threats and opportunities for the wind industry

Tuesday, December 30, 2008

Alina Bakhareva, Frost & Sullivan

No industry is immune to a world financial and economic meltdown, although there are some that are better positioned to withstand it and emerge fitter to embark on new frontiers. The wind energy industry seems to be one of the lucky few.Financial factors set the rules in the short termInevitably, the industry landscape at every segment of the value chain is set to change with new players moving into top positions and many wind assets changing hands. Several key, inter-related financial factors will influence decision-making, in the short and medium term:• Level of financial leverage, schedule of debt maturity, availability of re-finance options• Available cash• Credit rating and interest rates available to various playersThe need for financial resources varies greatly across the wind value chain. Equipment manufacturers may have favourable post payment terms with the component and raw materials suppliers and in some cases, pre-payment for their wind turbine shipments. This reduces their need for external finance to expand their production capacities, M&A activities, etc.Players engaged in wind farm construction are in greater need for funds as it could take up to three years until their assets start generating power and cash flows. Typically, wind farms are financed with 30% of equity and 70% of external finance, leaving players at the upper value chain segment most exposed to feel the financial market squeeze.Independent investors and project developers with high levels of leverage and low cash levels may be first to fall prey to the tightening market conditions as they will find it increasingly difficult or expensive to turn to debt markets for re-financing or new debt. A few examples include:• Novera Energy, a mid-tier renewable project developer based in the UK, may sell some of its projects or stakes in its projects to the Utilities. However, as of October 2008 the company, mainly producing electricity from landfill gas, was still positive about its wind development programme aimed at increasing its wind power capacity from 15 MW to over 250 MW by the end of 2011.• Theolia, a French renewable energy developer, announced on October 18th a sale of its 55.5 MW wind farm in Germany to enhance internal cash generation for financing future growth.• Babcock and Brown Wind Partners, an Australian listed wind developer whose assets span six countries, has agreed to sell off its assets in Portugal as part of a large-scale disposal programme.While some players have to consider selling rather than buying, there is another category that seems to be able to benefit from the existing markets. Cash-rich Utilities may choose not to approach banks or debt markets as they can fund projects off their balance sheets. If they prefer to turn to debt markets, often the interest rates they are able to obtain are lower than those offered to other companies. At cheap credit times, Utilities could pay as little as 0.15 percentage points more than government bonds for their money. As of October, 2008 that spread rose to 3.5 percentage points.While some Utilities are revisiting their development strategies, others are busy increasing their foothold in wind markets. Those include:• RWE Innogy is actively expanding its business in Poland. Following its September acquisition of the rights to develop some 300 MW of wind parks, it has gained access to a further 150 MW as of mid-November.• ENEL is planning to construct a 90MW wind farm in the region of Sardinia, Italy.• EDP Renovaveis entered the Romanian wind energy market through the acquisition of 85% of two Romanian wind developers, which own several wind projects.So, tightening financial markets seem to accelerate the trend of the changing structure of wind asset ownership where the Utilities share is rapidly expanding. Private investors, especially German, used to own over 50% of the wind assets back in 2002. Their share plunged to about 30% in 2006. Going forward Utilities and IPPs (Independent Power Producers) will see their market share expanding further.Long-term industry positioningRenewable energy, including wind power as the most mature technology, will continue to grow and could well become one of the growth engines to drive the economy out of the recession by generating new jobs in all value chain segments: equipment manufacturing, construction and installation and post commissioning services.As of November 2008, EU has reiterated its ambition to source 20% of its electricity from renewable energy sources by 2020. The 2nd Strategic Energy Review, calling to make the best use of the EU’s indigenous energy resources, named renewable energy “the EU’s greatest potential source of indigenous energy”.Also, EU leaders at the October 15th meeting, agreed that the Union should not weaken on its 2020 targets for renewable energy deployment despite some of the Members, mostly from Eastern Europe, expressing concerns in light of the current economic conditions.As far as another big green energy development hub is concerned, the US is waiting for the President elect to walk into the White House and to start putting his ambitious New Energy for America plan into action.With all the limitations the implementation of the plan could face, it signifies a political will to change America’s energy landscape. And where there is a will, there is a way. The plan calls for 10% of electricity to come from renewable energy sources by 2012 and 25% by 2025. Also, the Federal Production Tax Credit (PTC), one of the few federal support mechanisms in the US, is envisioned to be extended by five years. If implemented, this will become a major change from the present situation when the PTC is extended for a year every year. Five year extensions will provide much aspired long term stability to all sectors of green energy, including wind.Other countries, especially emerging economies in Asia and the Middle East have seen their energy consumption soaring in recent years. Rapidly developing power gaps even threatened to set back economic growth rates in some of the countries. The threat made governments, especially in the Middle East, turn to renewable energy and take it onboard when planning the future of the national power industries.Thus, government support, one of the most important drivers for the industry, stays strong during the cloudy economic conditions and this will reinforce confidence among market participants and investors.Does the economic slowdown have positive sides?First of all, equipment prices will inevitably follow the raw material prices that sharply decreased in September-November 2008. For example, wind towers accounting for up to 20-23% of the total wind turbine cost, the second most expensive element after blades, are predominantly made of steel. Steel prices after reaching an all time historic maximum in June-September 2008 crushed down to December 2007 levels in less than 3 months.Another factor contributing to a fall in prices is an increased level of competition along the value chain. The new reality will foster a fiercer competition between the suppliers, creating a growth opportunity for those who are capable of reducing their costs and prices faster.Secondly, delivery and construction times will see a huge improvement which, in turn, will make the project lifecycle shorter, allowing for faster commissioning and a shorter wait until the project delivers its first revenues.Lastly, the asset valuations that jumped out of control recently, will return to sensible levels. Those interested in growing their wind portfolios will have a chance to acquire existing and new projects at a reasonable price.Do winds blow outside the EU and the US?For the first decade, the wind energy industry history was written by a handful of European countries joined by the US. More countries are joining in as wind turbines take root around the world. A 2007 success story is China which has jumped out of nowhere into 5th place reaching close to 6 GW of installed capacity. India keeps its position close to the top, with a total installed capacity close to 8GW in 2007.Other countries experiencing significant growth, range from Canada to New Zealand, Brazil, Egypt and Australia. Despite tightening credit market conditions there is a lot of wind energy activity around the world. Some of the recent news includes:• September 2008, Tunisia. Gamesa’s MADE signed a Euro 200 million agreement with STEG –Tunisian Gas and Electricity company for supply of 91 of Gamesa’s wind turbines for a wind park which promises to become Tunisia’s largest.• October, 2008, Ethiopia. The Ethiopian Electric Power Corporation (EEPCo) signed a Euro 210 million contract with Vergnet Group for the construction of a 120MW wind power park.• November, 2008. Chile Mainstream Renewable Power entered into a joint venture with Andes Energy to develop 400 MW of wind farms in the country. 200 MW is expected to be built by 2010.• November, 2008. Canada. Finavera Renewables signed a deal with GE Wind for supply of wind turbines for its wind projects in British Columbia.ConclusionAlthough, wind energy industry growth rates will slow down, it does not mean the industry will stall. While unfortunate for certain industry players, the economic slowdown will turn out to be a growth opportunity for others. Cash-rich companies and those with a higher credit rating will be able to extend their wind portfolios at reasonable prices.Cheaper equipment available at shorter lead times for new installations, as well as wider availability of specialised construction services and fiercer competition along every segment of the value chain will force total project costs down. Once the economic outlook brightens, lower project costs are likely to make the investments into wind power more attractive for a wider range of countries and type of investors.During the next few years the industry will have the chance to take a breath, rectify remaining technical and operational drawbacks, train more technical personnel and enter a new market phase well equipped for a new wave of growth.