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I spent much of last week at Wind Energy Hamburg meeting executives in companies right across the wind value chain. There was a buoyant mood at the show with nearly all companies across the value chain earning good money and the good news is that wind is firmly embedded as part of the global power mix. However, the global wind industry is entering a new slower growth phase driven by a slowing down in the core markets of Europe and China. The result is that manufacturers are looking to make acquisitions to access new markets. At the same time, we are seeing increasing consolidation among wind developers and owners which creates a very competitive situation which can only be good for the costs of onshore and offshore wind as well as the end consumer and the environment. But I am little bit sentimental because I don’t believe the founding fathers of wind would be happy with what they are seeing.
It should not be a surprise that the European manufacturers are leading the consolidation charge in wind. Annual installations for onshore wind peaked in Europe in 2012 at 11.7GW and have been in decline since. Unsurprisingly, companies like Vestas are acquiring wind service companies to broaden their revenue and earnings bases. We have also seen extensive consolidation among the manufacturers with Siemens acquiring Gamesa, GE acquiring Alstom and Nordex and Acciona joining forces. To date, we have seen very little M&A activity from the Chinese. This is however likely to change as the Chinese wind market is likely to have peaked last year at 28.7GW. With excess production capacity in that market the Chinese manufacturers are likely to begin looking abroad to sell their turbines.
We are also seeing consolidation on the wind developer and owner side. On the onshore wind side we already have large global wind players such as Enel, EDP and Iberdrola but generally that market is very fragmented with thousands of wind turbine owners across the world. This is not the case in offshore wind which is dominated by a handful of players such as Dong Energy, Vattenfall and Statoil. This has happened because of the need to pre-finance high development costs around projects which are usually €100m or greater in size. Offshore wind requires large balance sheets but onshore is also going down the same road, thanks to a move away from feed in tariffs towards large national auctions (Germany, Spain, Brazil, etc) which gives an advantage to bigger players who have access to low costs of capital.
One of the results of the increasing consolidation is increased competition and lower costs which can already be seen in the lowest ever prices for power purchase agreements for onshore and offshore wind, both of which took place earlier this year. The successful bidders for an 850 megawatts national tender in Morocco were willing to accept power prices of circa €25 per MWh for wind generated. Then we saw Sweden’s Vattenfall recently announce a record breaking bid of €60 per MWh for two wind farms in Denmark totalling 350 megawatts.
Going forward this consolidation trend is only likely to gather pace. Chinese manufacturers will enter aggressively European and North American markets by financing their own projects and teaming up and acquiring wind developers. They will do to show the rest of the world that their turbines are as good as anything that comes out of Europe or the US. They will also look to get into the highly lucrative offshore wind market. We will also see more downstream moves by Western turbine manufacturers which will sometimes put them in competition with their customers. We are already seeing this in the O&M area where turbine manufacturers are oftentimes servicing competitor turbines!
Finally, the offshore wind market may give us a view of what is to come. This market is already highly consolidated with three major manufacturers in MHI Vestas (Mitsubishi Vestas JV), Siemens and GE Alstom plus a handful of developers such as Vattenfall, Dong Energy and Statoil. And there are clear barriers to entry in this market given the experiences gathered around the project management of offshore wind that has been gained by these players in recent years. In addition, big balance sheets are needed both on the manufacturing and development sides. If this is the way wind is going then the leading suppliers of coal and gas generators across the world today will not only be the leading wind suppliers but also they will have the same clients in utilities and oil and gas companies. If so, it is a long way from the dreams and visions of the wind pioneers 30 years ago but that said it is likely to be good for end consumer as well as the environment.