Wind turbines manufacturers business model

Today I’ve been asked by a reader about the business model of wind turbines manufacturers (also called OEM, Original Equipment Manufacturer).

As I think it’s interesting question, I decided to write a post about it.

In a nutshell, wind turbine manufacturers are selling a product.

This product is assembled pretty much like a car – thousands of components are purchased from a myriad of subcontractor.

In general OEMs are competing to offer a lower cost of energy (cheaper turbine, or turbines producing more energy). However, they can also choose to fight for a specific market niche (for instance, turbines making less noise that are apt for installation in urban areas).

Usually turbines (WTGs) are offered in one of these formats:

Supply only: only the WTG is sold, directly at the factory (Ex Works), at the wind farm area (delivery on site) or somewhere in between. The customer must provide the infrastructure (roads, MV reticulation, substation, etc.) and the cranes for erection.

Supply and installation: the WTG is sold “ready to produce”, installed, erected and commissioned. Customer must provide the infrastructure (“balance of plant”) following the manufacturer specifications.

EPC / Turnkey: the customer is paying for a full package all inclusive. This solution is obviously much more expensive but with less risk and hassle for the purchaser.

The contract itself is usually quite detailed about terms, conditions, roles and responsibility of the parties – for instance, customer must provide all necessary permits, access to site, grid must be available for commissioning, etc.

Payment terms are another topic open to discussion - usually a relevant down payment is asked (somewhere around 20%) and after that other standard milestones for payments are the delivery of WTGs at site, the commissioning of the turbine, etc. As in every business, the seller tries not to be “cash flow negative”.

Another relevant part of the business model is the O&M (operation and maintenance). Basically, it’s a multiyear contract between the turbine manufacturer and the customer where the manufacturer takes care of the maintenance of the equipment. This includes standard, periodic works (such as change of the oil of the gearbox) but also emergency interventions. The level of service provided can vary – usually several types of O&M contracts are proposed to the customer, and there is flexibility to change the scope.

The huge benefit of these contracts is that they provide the turbine manufacturer with a steady, predictable cash flow.

Finally, some wind turbines manufacturers are also developers. That is, a subsidiary of the manufacturer develops a wind farm (do the engineering, apply for the permits, etc.) and then the project is sold at some stage of its life.

Going Glocal: how to create local content

Wind farm local content

It is not unusual for public tenders in the renewable energy industry to request for a certain percentage on “local content requirements” (LCR).

This  requirements exist (and are usually very demanding) in the majority of countries in South America (Brazil, Uruguay, Argentina) and in several other emerging countries (Morocco, Russia, etc.).

The required percentage can be something reasonable (20%-30%) all the way up to an “almost impossible to reach” 65% set by the Russian government.

Laws and regulations on local content can include a minimum required value, a bid score bonus for offers with an high local content or both.

What are bidders doing to increase local content?

For a wind turbines manufacturer, an easy start could be to source locally as much balance of plant as possible. This strategy make sense if commodities like steel, concrete, earthworks, cabling, etc. are considered in the definition of the local content.

Some more stringent requirements can include in the definition of local content only the wind turbine (in an effort to develop specialized factories in the country) or only “good and services that can be produced locally”, making the life of the procurement guys much more complicated.

After the balance of plant, the next logical step would be to produce steel or concrete towers locally.

Towers and towers manufacturing facilities are usually something with a low technological content, easy and uncomplicated (I hope my colleagues in the Tower Department will not hate me for this).

They do however represent a significant share of the cost of the project.

On top of that, they can usually be manufactured by existing company doing similar products (like steel chimneys).

With both BoP and towers you can easily land somewhere between 30% and 40% of the total cost of the project.

It can be complicate to do more locally.

Another trick I’ve seen is to open a “nacelle assembly plant” in the country. More expensive, but it can give a huge boost if you can declare the full nacelle as “local”.

The following step, much more risky, is to manufacture blades locally.

This strategy usually require a much bigger investment, and it’s justified only in case of VERY big tenders (like the case of Siemens in Morocco). Only large, solid pipelines can absorb the cost.

Sell a service, not a product: the Indian way to wind energy

Top 10 country 2016 wind power installed capacity

India is becoming a very big market for wind energy.

After the decline of many European markets (Spain in primis) India is now fighting with Germany to be the third bigger nation in terms of yearly installed megawatts (somewhere around 3600 MW).

You can see the other in the graphic above, that I've stolen from the GWEC (Global Wind Energy Council) report 2016.

What is interesting (at least for me) it’s the “double role” of some companies.

As it happens in China, where energy utilities are also wind turbines manufacturers (like Guodian with United Power) also in India there is an “hybrid situation” where companies like Suzlon are also wind farms developers and providers of construction services.

As the developing of a wind farm is notoriously a mess (lot of contracts to be negotiated, lot of financial and technical risk, and in general lot of uncertainty – above all in “new” markets) Suzlon in India is selling the “full package turnkey solution”, including development risk, to his customers.

This is a model that has been used much more unfrequently by other competitors such as Vestas and Siemens/Gamesa.

Basically, the concept is to start from the very beginning: from wind analysis to land acquisition, all the way up in the chain (PPA, BoP, wind turbine supply, service, etc.).

This approach is particularly attractive for people with money, but without specific competence in the wind business.

In a nutshell, you have single counterpart who is selling a service (or maybe, more appropriately, proposing an investment).

This could be one of the factors that allowed them to get a very big market share in their home market.

In the word of the wind turbine manufacturer this is an end-to-end solution:

The major sections of the delivery process where Suzlon can add value are Micrositing, Grid Connection, HV/Substation creation, Electrical (Reticulation), Laying Roads and Foundations and Project Scheduling. (…) In India, Suzlon's end-to-end solutions start at wind mapping and land sourcing and extend right across the entire value chain.

Top 5 owners of wind turbines

Ever asked yourself who is buying wind turbines?

There are quite a lot of customers profiles – from tiny companies (or even a couple of farmers joining their strengths and lands in a renewable energy project) to professional developers, factories interested in using the energy produced all the way up in the ladder to the “maxi-macro-utilities”.

Predictably, utilities are the bigger purchaser (and in some cases, producer) of wind turbines.

If you are familiar with the business you will not be surprised by the country appearing more often in the list – they have been in the top 3 market quite a lot of years.

 

This is the list of the 5 bigger players:

 

#5: Datang (China, 10 GW). One of the 5 macro utilities providing energy to the Chinese market.

#4: NextEra Energy Resources (USA, 12 GW). Their logo is really ugly, but they own almost 90 wind farms in the States.

#3: Huaneng (China, 12 GW). Another of the famous Chinese utilities.

#2: Iberdrola (Spain, 14 GW). As they own 20% of Gamesa, it’s not a surprise that they work mainly with their WTGs.

And the winner is…

#1: Guodian (China, 21 GW). The state owned company use their own wind turbines (United Power), in the 2.5 MW range.

Chinese wind turbines - are they coming?

Well, apparently the answer to this question is "not yet".
I've been through an interesting article from Bloomberg - the  images of this post are taken from the same source.
As you can see, in addition to a new reshuffle in the top 3 (Vestas up again, together with GE), there is another important piece of information: Goldwind (and other Chinese companies such as Guodian United Power) are big but they are selling mainly in China.
European manufacturers have not been able to penetrate the Chinese market, but also the opposite is true.
Nevertheless, maybe the wind is changing: for instance, Envision has been recently awarded 4 wind farms in Argentina.

 

Ineffable concepts: bankability of a wind farm project

Wind energy, as probably all niche sector, is full of acronyms and hard to define terms.

One of them is the “bankability” of an EPC project.

In a nutshell, it express the idea that the lenders are fine with the development and are ready to put on the table a relevant percentage of the money (easily up to 70% or more), normally with a consortium of financial institutions.

In this post we will focus on the “Capex” part of the problem: we will ignore all analysis related to the expected cash inflow (PPA, wind data, financial models, etc.) and Opex (basically, Operation & Maintenance of the turbines and substation for 20 years).

In a EPC project the money will normally flow from the banks through the developer to one or more subcontractors.

The banks will check several different features of the contracts between the developer and the subcontractor, being  the most important point a fixed completion date and price. To reach this target, they will try to minimize the ability of the subcontractors to claim extensions of time and additional costs.

If unable to reach completion on time, the subcontractor(s) will have to pay delay liquidated damages (DLDs). These DLDs are normally expressed as “dollars per day of delay”. The amount is obviously project specific, but is usually several thousand USD per day and I’ve seen project with over 50K USD/day. Obviously banks likes high DLDs.

Another type of liability is the performance liquidated damages (“PLDs”) that the contractor will have to pay if it fails to meet the performance guarantees. These are usually linked to power curve and an availability guarantee for the whole wind farm, but can also (and do often) include other concepts more directly related to the civil and electrical works of the BoP.

Banks also like large caps on liability – being “uncapped” the best scenario for the lenders (which never happen in the real word).

Connected to these concepts there is the need for the lenders (and the project sponsor) to be able to get money from non performing subcontractors. Therefore, some kind of security (often in  the form of a Parent Company Guarantee) is requested to the main EPC contractor.

Bank also appreciate proven technologies, and like to pay for wind turbine with extensive track record.

In general, a project  may become “bankable” even in a situation where the bank is not 100% satisfied if the sponsor (the wind farm developer, or the shareholders behind) are ready to put a bigger percentage of money, lowering the risk profile for the bank.

Cost drivers in Electrical Balance of Plant

Due to my education as a Civil Engineer there I already wrote a substantial number of posts regarding cost of the civil BoP.

However I do not want to neglect the electrical side, which as you might already know is usually accountable for approximately 50% of the total cost  of the balance of plant of a wind farm.

I went through the cost of several projects I’ve worked at in the last 6 or 7 year together with a very good friend that I’ve left in Madrid to see if it was possible to find a recurring pattern in the numbers.

Unfortunately, the Electrical Works costs are much more fragmented than the Civil Works, where few “usual suspect” such as concrete, steel and earthworks dominate the scene and are the key cost drivers.

If you are working in the wind business you will be probably thinking  that the most expensive items will be the main transformer.

This is not always the case: in project where we had to quote a long overhead line, it absorbed up to 40% of the electrical budget, quite an impressive figure. Even shorter overhead lines could easily end in the 10% to 20% range, that in a multimillion project  is obviously a big number.

The second item competing with the transformer in the Top 3 is the medium voltage cabling system.

Obviously is extremely difficult to give a number because it will depend on the layout of the wind farm (will it be a row of WTGs or a “cloud” of scattered positions?). Nevertheless, numbers in the 3 to 4 million USD are not unusual even for medium size wind farms.

Then you have the transformer, the last of the Top 3 items. This is the easiest item to quote, usually somewhere around 1 million USD.

Last but not least we have “the rest”. This include everything from the switchgears to the high voltage equipment to the capacitor banks, substation facility and other fancy equipment in the substations.

The impact of all this item can be huge, from 30% all the way up to 70%. Obviously, with such fragmentation it becomes clear that from the cost structure point of view Civil Works and Electrical Works are totally different.

EBoP vs CBoP - where is the money?

There are several recurring questions that I normally hear at least 3 or 4 time each year.
Some are variants of things like “How much does it cost 1 Km of road in Brazil?” - this was asked by my ex colleague Pau many, many years ago but it’s still a classic for me, and a reminder of the fact that in the wind industry BoP is something ancillary to the core business and not really understood by the majority of the colleagues.

Other questions are more interesting (or at least, it is possible to try to answer them in a more elaborate and complete way).
This is the case of the question “What is more expensive, EBoP or CBoP?”
If you are reading this blog you will probably know the meaning of the acronyms:

EBoP: Electrical Balance of Plant – that is substation, medium voltage cables, step up transformers (if any) and in some cases overhead line.

CBoP: Civil Balance of Plant that is roads, WTGs foundations, crane pads, trenches and other fancy stuff that could be requested by the specific customer/project.

And the answer is… it depends.

In some project, you are requested to build 2 or more substations: one or more windfarm substation to collect the energy plus a substation to evacuate the energy to the grid. This type of layout will also need several Km of overhead line, in single or double circuit.
In situations like this, EBoP is usually more expensive – above all if you don’t need special foundations and earthworks are not particularly complicated (e.g. a flat country, like Uruguay).

The opposite case would be a situation where the EBoP is easy (maybe because there is an existing overhead line crossing the wind farm, or an even more lucky situation where you simply have to connect to an existing substation).
In this cases, if you also have expensive civil works CBoP will be clearly more expensive. This happened for instance in some project I’ve the pleasure to work at in Chile and Honduras.

You can see 2 examples in the pie chart at the beginning of the post.

By the way, if you really need to answer the question of Pau (“How much does it cost 1 Km of road in the country XYZ?”) the best answer that you can give is 100.000 euros.
If it’s a road in an expensive country, remote location, in the mountain, etc. increase the figure (150K – 200K euros), while if it’s in a cheap place it would cost around 80K.

The five most abusive prices I’ve seen in the last years

Having the opportunity of working at several project worldwide I already discovered that the idea of what is “cheap” or “expensive” may vary a lot depending on the country.

Also, huge countries like Brazil or Chile may show a relevant price dispersion depending on the area (Patagonia or Atacama desert?).

A third consideration is that, due to inflation, market situation, other project being constructed at the same time, etc. the prices may move a lot (downwards, but normally upwards) from one year to the following.

However, here you have my favorite top 5 of the most expensive price I’ve ever seen. They are totally crazy, even with all the above considerations.

 

Concrete: Mozambique (900€/m3)

Steel: Morocco (15€/Kg)

Embankment: Mexico (241€/m3)

Crushed stones base layer: Mozambique (450€/m3)

Overheads: Chile (50% of the project cost)

 

On the cheap side I'd like to mention Portugal: a country with a lot of skilled civil works companies, used to the renewable business - and with great food as well! 😉

Pareto principle in wind farm civil works price

Among the numerous fenomenous that follow a Pareto distribution (i.e., 80% of the effects come from 20% of the causes) there is the price of civil works in wind farms.

Through the years we’ve developed a really completed, exhaustive documentation for tenders. Our beautiful Bill of Quantities includes hundreds of items.

However, how many of them have a real impact on price?

Well, just 5.

Basically, around 70%-80% of the total price is driven by the following items:

  • Concrete
  • Steel
  • Cut
  • Fill
  • Crushed stones for base layer

I’m not saying that it would be a good idea to ask only these 5 prices to the subcontractors.

There are many reasons to produce a complete and accurate Bill of Quantities – for instance, to be sure that you are on the same page with the subcontractor.

Being a niche sector, often smaller local companies have an idea somehow distorted of what is included in a wind farm.

They might ignore the existence of something (“You need 50.000 kg of grout? For what?”) or overprice one or more items (20.000€ to assembly an anchor cage is a good example).

However, at the end of the day what will move the total price will be the 5 items listed above.

Concrete is usually the heaviest item. I’m including in it all types of concrete that might be found in a wind farm (lean concrete, foundation concrete, concrete used in roads, etc.).

Although obviously the numbers will vary depending on the project (a mountainous area with a lot of rock will have expensive earthworks, while a project with dozen of piled foundations will rise steeply steel and concrete price) I’ve seen that they can be used as a rule of thumb and are a useful guideline when I skim through the offers.

As I don’t know if it’s better to present a graphical example with a pie chart or bar diagram (and I enjoy playing with Excel) I attach both.

It’s a 50 MW wind farm quoted by a subcontractor who charges a lot Overhead Costs (which is perfectly fine for me: I don’t want to have them “scattered” where they don’t belong).

71% of the total comes from the 5 key cost drivers.