Wind Power Market Entry Strategies - build or buy?

Table of Contents

• DATAMONITOR VIEW
  • CATALYST
  • SUMMARY
  • SOURCES
• ANALYSIS
  • The biggest price reduction of renewable technologies and learning curves are generated in markets operating feed-in tariffs
    • Wind is more competitive with fossil fuel than ever despite higher turbine prices pushing up the cost of wind generation
    •  Feed-in tariffs have delivered the most wind capacity whereas quota and certificate mechanisms have under performed
    • The pioneering work of successful feed-in systems has shaped the recent record growth in European installed wind capacity
  • Wind power generation costs depend on key financial and technology-specific factors
    • Wind power economics depend largely on four key sets of parameters
    • Wind farm projects, both new build and M&A, are front-loaded and capital intensive
    • Wind power generation economics are highly dependent on wind conditions and turbine load factor characteristics
    • The cost of capital, reflected in the discount or interest rate, has a high degree of influence on wind turbine development costs
    • Project lifetimes coupled with discount rate have a significant influence over the annual costs of wind power generation
    • O&M costs vary widely and can be uncertain, yet they represent a significant part of a turbine' s annual levelized generation cost
  • The most competitive portfolio is one that builds offshore but buys existing onshore wind capacity
    • In a market characterized by price increases and turbine scarcity, growing portfolios successfully calls for diligent entry strategies
    • Developing wind farms is gradually becoming a high risk high reward business
    • Onshore wind is profitable provided the four key parameters are optimized, with appropriate support mechanisms in place
    • On paper, offshore wind is high margin, however present concerns have injected high risk into offshore wind prospects
    • Acquiring onshore wind can deliver more value for money than new build development, but not at any cost
    • The high premium paid for the acquisition of offshore wind farms often makes the overall investment less attractive than new build
    • Despite recent escalating wind power generation prices,wind power has never been more competitive against thermal power
  • A case study of UK and German wind power markets reveals that the subsidy price alone is not sufficient to drive market entry strategies
    • The UK quota and certificate mechanism does not optimize wind investment structures, nor does planning permission limitations
    • Planning permission difficulties and a generous support scheme makes buying existing UK onshore wind more appealing than ever
    • UK offshore wind development costs have soared over the past few years, making the economics of such projects marginal at best
    • In Germany, proposed amendments to the Renewable Energy Sources Act (EEG) will drive further innovation and investment
• APPENDIX
  • Definitions
  • Ask the analyst
  • Datamonitor consulting
  • Disclaimer
• List of Tables
  • Table 1: The three main entry strategies differ in many ways
• List of Figures
  • Figure 1: Large scale wind is the most commercially mature renewable technology
  • Figure 2: Feed-in tariffs have delivered rapid growth in installed wind capacity in Germany and Spain
  • Figure 3: The vast majority of EU Member States operate feed-in mechanisms
  • Figure 4: Average realized wind power prices vary widely across the EU27 Member States
  • Figure 5: A recent study of 13 wind turbines shows that capital costs of wind energy projects are dominated by the cost of the actual wind turbines
  • Figure 6: Of the four main factors governing wind power economics, the most influential parameters are load factors and investment costs
  • Figure 7: A doubling of the discount factor from 5% to 10% increases the annual levelized capex costs (i.e. costs before O&M)by roughly 50%
  • Figure 8: The project lifetime that is most attractive varies with the underlying financing terms and the required annual rate of return
  • Figure 9: Typical offshore O&M costs represent 25%-40% of the total generation costs, whereas onshore typically accounts for 10%-30%
  • Figure 10: Utilities can access three main types of entry strategies to scale their wind portfolios globally
  • Figure 11: At $1m/MW, onshore wind power generation can be a high margin business
  • Figure 12: The additional cost of building offshore is rarely offset by the higher wind speeds and power generation potentials
  • Figure 13: Acquisition delivers more value than new build for prices paid up to $2.35m/MW compared to the most expensive development scenario
  • Figure 14: The hefty investment premiums paid for offshore wind typically fail to offset the time it would take offshore wind turbines to come online
  • Figure 15: As primary energy costs soar, the attraction of wind power as an generation technology with no fuel price risk has never been greater
  • Figure 16: Revenues from UK wind energy combine wholesale market price, ROC purchase price and tax incentives
  • Figure 17: At £1m/MW, buying existing onshore wind in the UK is very profitable and more appealing than new build development.
  • Figure 18: Offshore wind can however be profitable provided costs are kept low and difficulties in obtaining planning permission are overcome
  • Figure 19: The German government has proposed a reform of the EEG which provides for increased feed-in tariffs