allocate International Management and Executive Search Consultants Stormy Weathers in the European Wind Power sector how to keep the pace? Dr. Jörg Fabri allocate International, Managing Partner Presentation at EcoSummit Düsseldorf, 15. November 2012 1
Investment hot spot : more than $ 200 billion investment annually in Renewable Energy New investments in Renewable Energy New investments in Renewable Energy by sector Q1 2004 to Q2 2012 in bn. $ Comments Global new investments in renewable energies is app. $ 200 billion annually Since peak in 2011 decreasing volumes Share of wind investments is 33% VC/PE share stable at low level $ 8 bn. New class of investors entering renewables markets: low interest levels for low risk assets directs attention to renewables with infrastructure characteristics Initial growth to a large extend driven by subsidization and legal framework Is the Renewables sector prepared for further growth if subsidization is decreasing? Source: allocate, Bloomberg 2
Success story: wind power is becoming a significant pillar in the European power production Capacity figures wind Europe in MW Annual on and offshore wind installations in MW, Europe, 2001 to 2011 Breakdown European generation capacity mix (in %,2000 vs. 2011) Absolute MW 2 10 other PV Wind Large hydro Fuel oil Cumulative 94 GW Gas Nuclear Coal 2000 2011 Significant pillar in Europe - Germany alone plans to add 25-40 GW until 2030 However, recently significant challenges occurred to proceed with the projected pace in developing the wind power sector Source: EWEA, allocate 3
Huge growth ambitions: Germany has planned to install 25 GW until 2030 offshore Wind parks German North Sea (German economic zone only, AWZ) Wind parks and grid connections Status 4/2012 Investment needs Installation of 25 GW until 2030 planned More than 120 billion total investment (based on 4,5 mn. /MW) Planned/ approved offshore volume 50GW Central pillar of German power generation: 25 GW produce 17% of today s electricity demand (50 GW accounts for 33%) Key challenge: integration with the grid and transport to main consuming areas Very ambitious plans but problems increase with the implementation. 1 17.09.12 Studie "Daten zur Umwelt 2012 2 Source: CO2 Newsletter, Umweltbundesamt, allocate 4
Investors perspective: not all wind is the same onshore and offshore wind investments with different risk-reward profiles Bandwidths in wind investments KPI onshore offshore EPC Cost 000/MW ~1400 ~3000 1 Capacity Utilization 20-35% 30-45% Investment Cost /kwh ~80 46 c ~114 76 c Operating Cost 1.5 1.8 c/kwh 2.2 2.8 c/kwh Debt Service Cover Ratio @ P90 1.25 1.3 1.5 Proj. Financial Leverage 70 75 % 55 65 % Equity IRR @ P50 9 12 % 14 18% Attraction of different investors: infrastructure funds focusing on the low risk profile of Onshore Wind PE investors on high IRR of Offshore Wind (if the risk can be managed) 1 Site dependent 5
Investors are becoming increasingly reluctant towards wind power investments Investment uncertainties Risks Technical Subsidies Grid connection Operational Description Near shore/ 40+km offshore experiences uncovers a magnitude of unexpected problems (foundations, ship & employee bottlenecks, ) Deep water pioneer project BARD with big financial problems Feed in tariffs guaranteed for 10 year, planning cycles are 25 years Decreasing willingness to grant new subsidies, trend to reductions & caps Government tries to avoid another solar bubble due to over subsidization Sales risks, TenneT with problems to connect the wind parks to the grid Planned state guarantees still have to pass the parliament New annual grid plan will coordinate grid and generation build up Limited experience in true operational costs esp. maintenance. (manufactures often guarantee for 20 years only) Source: allocate Obvious high first mover risks in deep water offshore wind, grid uncertainties and reduced subsidization currently reduce investors appetite 6
Capital Markets view: Clean Energy Stock index has come back to the level of 2003 Performance of renewable stocks NEX Clean Energy Index, 2003 to 2012 How can Renewable Energy companies regain the confidence and backing from the Capital Markets? Source: Bloomberg 2012, allocate 7
Costs of offshore wind parks increase significantly with distance to coast & water depth but do the profits as well? Overview of investment per MW over exposure 1) Cost per MW installed [EUR m] 6 EUR 250m for 60 MW 5 4 3 2 Lillgrund Egmond am Zee Nysted 1,8 1,9 1,5 Thanet 3,3 London Array 3,5 Horns Rev2 2,2 Thornton Banks Ph. 2+3 2,7 Belwind Borkum West II 3,7 3,6 Alpha Ventus 4,2 Official figures Will this be sufficient? BARD Global Offshore 1 Tech 1 3,5 3,5 1 0 10 20 30 40 50 60 70 80 90 100 110 120 130 Exposure 1) With more distance to coast the operational (wind) hours increase thus the higher investment might pay back by higher energy output per installed MW (but risks increase) Remark: other parameters such as turbine capacity not considered in this analysis Source: Company web pages; allocate research 1) Exposure = distance to coast [km] + water depth [m] 8
Decreasing subsidies and entering new life cycle phases change success factors in the wind industry significantly... Changing rules of the game Life cycle wind industry by segment illustrative - Euro Sales Offshore Life cycle phase Introduction Growth Maturity Saturation Critical success factors Innovation Onshore Profit Production Operational Excellence Time Sales Comments Readiness and willingness of governments to subsidize renewables decreases (esp. in Germany) New success factor need to be mastered due to the progress in life cycle Onshore entering maturity phase Offshore leaving pioneer phase Financial crisis has dramatically increased the equity required in the industry New strategies and operational concepts required to stay competitive Operational Excellence - Go to Market Strategy - Cash optimization are becoming key to stay in the game and to proceed with the growth 9
with significant implications for the industry Implications for manufacturers suppliers and operating/service companies Industry Concentration/ Consolidation i.e. reduction of the number of competitors Main implications Adaptation of Business Systems required Operational Excellence becomes key to sustainable profitability The wind power industry has to adopt consequently to the new conditions to maintain the attractiveness for required investments 10
Industry structure: Herfindahl index indicates that significant industry consolidation might be required to secure profitability Market concentration by selected industries Herfindahl index, 2011 Wind Turbine Airlines 358 737 1600 Scenario assumption: Top 3 players double their market shares Solar Modules 266 Degree of industry concentration not concentrated moderate high Scenarios indicate that top 3 wind players have to double its market shares to reach moderate industry concentration / competitive rivalry Remark: maximum Herfindahl-Index is 10.000 11
Business systems: industry players need to redefine their role in the wind power value chain Example: Owner-/ Operator stage of value chain Hardware e.g. turbines Owner- & Operatorship Services Other e.g. finance Lever Existing strategy type very high very high high moderate Identification & Feasibility Study Development and Planning Developer e.g. PNE Building Integrator e.g. RWE Owner- & Operatorship Extended Operator e.g. DONG Operator e.g. EnBW Pure owner e.g. Insurances Service businesses Different business models are applicable which require a match with their specific key success factors 12
Operational Excellence: future key to sustainable profitability in wind power Example with selected offshore KPIs mi n Projects Offshore Average max Target Project 3,6 CAPEX 1 Mio / MW 3,3 3,8 3,5 Limited bandwidth 25,5 OPEX / MWh 20,1 36,7 35,0 Manageable Wind yield in % 41 52 49% Huge deviation of manageable OPEX Operational Excellence with huge impact on profitability 1 includes contingencies Source: KPMG, allocate international 44 Site dependent 13
Operational Excellence: Minimizing total operating cost in wind power operations by a tailored maintenance strategy Example: Maintenance strategy wind parks Downtime by reason / components Optional maintenance strategies State based strategy Time/periodic based strategy Event/crash based strategy Mix Cost of repairs Total operating and maintenance cost Strategy 1 Strategy 2 Source: IWES, DEWI, allocate 14
allocate International supports clean energy companies across the whole set of their key challenges Activities Financing Portfolio development Total value equity Structures and processses 08 09 10 11 12 13 Success in Clean Energy businesses Investment planning CF 1 CF 2 CF NPV = + + + n 1+r 1+r 2 1+r n Business planning Operational Excellence PHEK PCB ECU plant Fixed costs PHEK fix PCB ECU Real value added Real value added ratio / - Total waste + Variable waste + Cost of rework Cost of shipping errors Cost per direct employee per hr x Time for reworking PCB ECU Average cost per shipping error x # of shipping errors Turnover PHEK PCB ECU plant Cost per inspection employee Cost of inspections x # of inspections Combining and implementing different key success factors in Wind Power 15
Thank you for your attention we would be pleased to discuss with you! Contact details for further discussions Dr. Jörg Fabri Managing Partner Management Consulting allocate International GmbH Plange Mühle 3 (Medienhafen) D-40221 Düsseldorf Tel.: + 49 211 137 233 21 Fax.: +49 211 137 220 87 Mobil: +49 177 340 5095 E-Mail: jfabri@allocate.de www.allocate.de Arnd Fabri Managing Partner Executive Search allocate International GmbH Plange Mühle 3 (Medienhafen) D-40221 Düsseldorf Tel.: + 49 211 137 220 88 Fax.: +49 211 137 220 87 Mobil: +49 179 204 3328 E-Mail: afabri@allocate.de www.allocate.de Anton J. Setter Partner Management Consulting allocate International GmbH Plange Mühle 3 (Medienhafen) D-40221 Düsseldorf Tel.: + 49 211 137 233 21 Fax.: +49 211 137 220 87 Mobil: +49 177 8387611 E-Mail: asetter@allocate.de www.allocate.de 16