Monthly Archives: July 2017

Wind turbines manufacturers business model

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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

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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.

Type of towers – stiff, soft or soft soft?

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In the last month I spent a lot of time discussing about “soft soft” towers.

But what does it exactly means?

Steel tower for wind turbine are classified as stiff, soft, or soft soft based on the relative natural  frequencies of tower, rotor and blades.

You obviously want to avoid that your tower is excited by dynamic loads and start resonant oscillations.

The primary sources of dynamic loads on the tower are the rotational speed of the rotor (usually indicated with P) and the blade passing in front of the tower. The blade passing speed will obviously be 3P. I think that it’s worth mentioning that rotational frequency loads will arise only when the blades are unbalanced.

We call “stiff” (or “stiff stiff”) a tower whose fundamental  natural frequency is higher than that of the blade passing frequency. This is a very good thing (the tower is unaffected by  the rotor) but a bigger mass is needed – therefore the cost can be very high. Additionally, a stiff tower tends to radiate less sound.

“soft” is a tower whose fundamental frequency is lower than the blade passing frequency, but above rotor frequency.

“soft soft” is a tower whose natural frequency is below BOTH rotor frequency and blade passing frequency.

“stiff stiff” design is not usual.

Currently, towers in  the market are either “soft stiff” or “soft soft”.

Soft towers are usually lighter (= cheaper) but require more dynamic analysis.

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

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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

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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.