Paper for China Wind Power Conference 2012

Transcription

1 Paper for China Wind Power Conference 2012 Track: A. Business and Policy Track 2. International Markets: emerging markets, market forecasts, opportunities for the Chinese industry in the international market Breaking Down the Manufacturer Monopoly on System Integration to Increase Competition Mailing Address: Wetzel Engineering Inc., 1310 Wakarusa Dr., Suite A, Lawrence, Kansas 66049, USA Kyle K. Wetzel, CEO/CTO, (785) ext. 103 Ken T. Lee, Blade Design Technical Lead, (785) ext. 105 Amool Raina, Aerodynamics Group Lead, (785) ext. 104 Abstract We propose to shift system integration from wind turbine manufacturers to wind power developers and constructors. Modularization of wind turbine components will increase competition and eliminate the need for global wind subsidies. This model opens a wide range of technology options for system integration available to developers/constructors, and allows the marketplace to see lower costs through increasing competition and innovation among well-established and value-added players of the global wind market. The path to increased profitability is to allow developers/constructors to become the primary integrators of the turbine system in order to reap the benefits of reduced COE through optimal wind farm design. The key lies in the standardization of non-key turbine interfaces such as the hub and the rotor shaft. These components eventually become low-cost and highly reliable commodity components, achieved through repeatability and manufacturing quality control. Highly capitalized and specialized manufacturers can shift their core expertise to innovate on select components such as the rotor blades, gearboxes, tower and generators. The developers/constructors are then left to innovate on the integration and assembly of the overall turbine system. A new framework will be required for component certification to ensure that designs are sufficiently robust to accommodate system integration with diverse components, or every project will require a specific site certification that reflects the particular integration. Results in cost savings are achieved by: (i) First, standardization of turbine interfaces allows for parts of the turbine manufacturing to be controlled by component specialists who would bring to market a higher level of technology and reliability than general turbine integrators. In the process, component manufacturers are more likely to invest in innovation of robust and adaptable turbine interfaces knowing that they would see higher profit margins in sales. (ii) Second, turbine manufacturers will be freed to focus on innovation in core components further increasing price competition. (iii) Third, wind developers/constructors will assume more responsibility as the primary integrators. The developer will become more knowledgeable in assessing the risk involved in the project development by focusing on the innovation of system integration to fully realize increased returns. This will also likely result in the importance of fostering increasing collaborative relationships between developers/constructors, certification bodies, and providers of knowledge intensive business services, such as those of technology consulting and design firms in the overall turbine systems integration, starting from the manufacturing down to the deployment chain of the wind industry in the coming years. Key Words: Developers, Manufacturer, Monopoly, Competition, Certification 1

2 1. Introduction Paper The main theme of this paper is centered on a proposal to shift the integration of wind turbine (WT) components from turbine original equipment manufacturers (OEMs) to independent wind power developers and constructors. This can only be realized through modularization of individual components of a wind turbine system (WTS). The proposal to shift system integration is motivated by the observation of a major shift of the global wind economy. Global restructuring, manufacturing overcapacity and consolidation will result in a transition period in the coming years going from production to innovation capabilities of the major players within the marketplace to increase price competitiveness of wind. For example, in the US market, uncertainty in the extension of the Production Tax Credit (PTC) and weakening demand will mean that the following year will be a matter of survival for many while the well-established will remain strong. In China, the government has moved towards the removal of subsidies and tightened regulations in an effort to curb blind expansion in the wind industry. At the end of 2011, 15GW of turbine installations were not grid-connected and the average prices of a Chinese turbine 1.5MW turbine has dropped 42 percent since Technology driven performance and profit gains may be overshadowed by removal of tax credits, subsidies and overcapacity in the wind industry. Thus, the race towards becoming a market differentiator and a globally diverse supplier of competitive, efficient and reliable technological solutions will take its course. An era of new innovation through a different market model may need to be explored for a path towards increased profitability. This could be achieved by allowing wind power developers to become the primary integrators of a wind turbine system and reduce vertical integration within the turbine manufacturers themselves. The latter point is particularly important as it stresses an interesting market approach taken by developers to assume more direct costs in the process but they eventually become more knowledgeable in assessing the risks in order to realize increased returns on their project development and deployment portfolios. This is central to the developers goal to assess risk and reward to achieve the return on investment (ROI) that is appropriate to their investment model. Therefore, a developer who acquires more advanced technology to achieve higher energy production will invest more in direct costs associated with the project development but reap a greater return. The sections that follow present this approach by: (i) First, exploring the basic wind industry supply and deployment chain, and the current challenges faced in the relationships between manufacturers and developers, (ii) Second, explaining our approach towards an insightful development of an improved model for system integration to increase component innovativeness and reliability, and profitability of wind power development, (iii) Third, opportunities for the proposed model given current trends in the European and Asian wind industry, and (iv) Lastly, providing the reader an insight towards future scenarios that are likely to change and occur within the value chain of the wind industry as a result of our central argument. 2. Wind Power Value Chain The wind power value chain is conceived in two parts, consisting mainly of the manufacturing chain producing the key components, and deployment services chain concerned with project deployment and utilization (See Figure 1). The key players in the chain are: Wind turbine equipment manufacturers Component suppliers Consultancy and design service providers Wind power developers and constructors Operation and maintenance providers Financial investors and utilities 2

3 Figure 1. Wind industry value chain 1. Figure 2. Approximate contribution of each core component to the final cost of a wind turbine 2,3. The ongoing model in the process of wind power development is the relationship between the wind turbine generator (WTG) manufacturers/assemblers and the project developers responsible for deployment and utilization of energy generation. In addition, it is common to find that WTG assemblers will stick to their own preferred suppliers, limiting themselves to selected components which may not be the most cost-effective reliable solution to vertical integration. According to Figure 2, key components (in terms of percent of overall total cost) are blades, towers, gearboxes while the entire turbine consists of nearly 8000 components. The total cost of a turbine accounts for almost 70% of the total wind farm development and construction cost. Therefore, it is paramount that developers/investors demand component reliability and cost effective solutions to ensure overall viability of the project. We argue that wind farm developers/constructors should attain the flexibility to choose the most cost competitive and technologically optimal solution of integrating various components of a wind turbine from various sources within the manufacturing chain to reduce the overall cost of wind energy. The current model described above leaves the developers dependent on WTG manufacturers with regard to assessing the risk and reliability issues associated to the turbine. However, the approach we present allows integrated wind power developers to exploit maximum control and increased returns as they become more involved in the process of system integration and are able to fully assess the risk involved. 3

4 As a result, the goal is to reduce the manufacturer monopoly on all components of a wind turbine and we support our model by emphasizing that technological innovation on key components will require significant efforts in R&D within the wind industry in order to increase global competition on wind turbine pricing among the major players in the marketplace and project development cost structures. The following section presents a focus to the general idea and approach by examining similar models in various industries, insights to the current practices within value chains of the global marketplace, and the potential benefits of the suggested shift in the approach to the current model. 3. Focus of Approach The original idea is focused on lowering overall turbine component costs, and improving quality and reliability of components through the standardization and modularization of wind turbine hardware. This will eliminate the need for and dependence on global wind subsidies, and reducing the manufacturer monopoly on system integration to increase competition. There are many studies showing how standardization of hardware in various industries leads to commoditization of certain pieces of the machine that are not particularly amenable to innovation. The argument is supported by presenting an approach emanating from the computing or automotive industry. Commoditization is common in these industries and generally leads to eliminating fat from manufacturing and hence driving the cost as low as possible. For example, in the computer hardware industry, the innovation is in the CPUs and video cards, which remain relatively expensive for high-end machines. Most of the rest of what is inside the box is standard hardware that has become a commodity, for example, the cables, power supplies, DVD drives, even hard drives and motherboards. This is why computers are price competitive. In contrast, if you still had to purchase everything from one manufacturer and they insisted on manufacturing all of it in custom ways, computers would be very expensive. Another interesting model that we can examine relates to the conventional fossil-fuel power generation industry. We draw attention to the role where the utility company or independent power provider (IPP) acts as the integrator of standard hardware. The overall power plant is custom, but the generators and almost all other hardware other than the civil engineering of the plant itself is pretty standardized. Various companies would compete to supply the major components that go into the successful construction of a power plant. Particularly, the innovation is in generator designs from companies that can specialize such as General Electric (GE), ABB, Siemens, etc. To correlate this approach to the wind industry, turbine manufacturers can remain focused on what distinguishes their turbine, i.e. whatever piece of the overall turbine that remains customized (for example generator, converter, rotor blades), with standard interfaces at the hub, tower top, power electronics. The rest becomes the realm either of specialization of controllers and power electronics, or standard commodities such as the hub, cabling, etc. This results in cost savings in three ways: First, by standardizing many of the interfaces, you allow pieces of the turbine to be taken over by specialists who should bring to the market a higher level of technology and reliability than the general turbine integrators. Second, for components that are less amenable to innovation, this specialization leads to commoditization, which leads to lower costs. Third, you allow the turbine manufacturers to focus on their core product. Over time, the core turbine interfaces will become narrower in scope. Initially, it would probably be the core hardware that makes up the electro-mechanical drive consisting of the bedplate, gearbox, shaft, bearings, generator, and yaw deck. It may not be difficult to consider that the yaw deck could be removed over time and becoming a 4

5 stand-alone module. There will also be an opportunity for independent companies to create innovative subassemblies that the developers could use to assemble the best turbine components together into a fully integrated system. The latter point suggests that we don t end up with a wind turbine anymore but an integration of selective components that make up the most cost effective and highly innovative solution. This approach does not entirely suggest a business model in which the OEM is now not the sole designer and integrator, and that the developer becomes the detail designer. The developer should be an integrator at the system level. If a developer becomes the designer of all turbine components, it is worse than buying a complete system from one OEM. Although there is nothing wrong with that, this turns the developer into a designer and assembler, and we have observed that this model, i.e. the old Zond model, was flawed. The problem with the Zond model was that the company was responsible for everything, from being the designer of turbine core components to wind farm development. There is a balanced approach to be maintained in which WT modules are designed and manufactured by specialists while the WT modules are assembled by the wind farm developer and constructor into the finished product. To go to either one extreme or the other is not always the best approach. In the following section, we present an interesting observation in the global wind climate by comparing and contrasting supply chain architectures and networks to provide the reader an insight into the type of environment in which the main proposal of our approach would be most suitable. 4. Global Wind Climate This section of the paper is concerned with the contrasting nature in which the Western and Asian marketplace operates and describes the prospects of the current proposal to fulfill the promise of cost-effective wind energy. The dynamic relationships within supplier networks and turbine manufacturers/assemblers can be seen in Figures 3 and 4, for Europe or USA and China, respectively. One may observe that the leading firms in Europe and North America have a high degree of vertical integration, in some cases, about 70% of the WT components such as the towers and rotor blades are designed and produced in-house 1. Some WTG OEMs have taken ownership in tower and rotor blade manufacturing factories while others have established technology alliances and long term agreements with suppliers to secure their strategic position in addressing uncertainty of supply at a time when there was significant growth in the wind market. These relationships between supplier and manufacturer also suggest that there is a relatively small group of highly competent key suppliers and a low degree of price competition among the suppliers as many components are customized for each individual WT manufacturer/assembler. Key components such as gearboxes, generators, and power electronics are designed and manufactured to the specifications provided by manufacturers. As a result, little attention is paid to strategic supply chain management to lower costs 1. Modularization of turbine components is challenging in this business model as European/US firms provide more emphasis towards continuously tweaking solutions for increased reliability, in the process, developing more dissimilar and more expensive components but higher quality designs 1. Drawing from the relationships between supply base and manufacturer networks in Figure 4, we can also make general observations about the value chain in China. Compared to their Western counterparts, the leading WT manufacturers in China are not vertically integrated and relatively few components are manufactured inhouse 1. There is a high degree of supply base sharing between domestic turbine manufacturers and numerous suppliers of each component. Depending on turbine type and size, 70 to 90 per cent of the total components in a domestic turbine can be supplied by domestic suppliers, while other key components are provided by global suppliers in China and abroad 1. There is some similarity among Chinese turbine designs arising mainly from design licensing which in turn makes supply-base sharing easier and increases the economies of scale. As a result, one can infer that the Chinese wind turbine industry is already highly modularized 1. 5

6 The model of industrial organization in the wind industry adopted by the Chinese can lead to innovation and competition, or it can also lead to a stifling lack of innovation if a majority of the turbine components becomes a commodity, including rotor blades, gearboxes, tower, etc. However, we have observed that Chinese enterprises may already be on the path towards addressing the latter issue raised. We found that the Chinese are achieving this in interesting ways such as using international innovation networks and building on the emphasis of R&D on component design. One such example is, Envision Energy, who with the establishment of a global innovation center in Denmark s wind power cluster have hired some of the most talented engineers to jointly develop a dual-blade wind turbine which promises high efficiency and lower complexity, requiring less components and priced cheaper than competitors. Many critics may argue that Chinese companies will face challenges to compete with Western firms with regards to quality, adaptability and reliability. In contrast, Western firms may find it challenging to compete on price which will be a key element in new growth markets outside of established wind power nations such as South America, South East Asia, Australia and Africa 1. There is also widespread consensus that as the industry matures; the focus in China is now shifting from quantity to quality, and emphasis on R&D and innovation on the advancement of technological capabilities. The bulk of innovation in the wind sector will depend on R&D efforts which typically address increase in turbine or rotor size, cost reduction and integrated wind systems that are tailored to specific wind sites. The Chinese model may possess competitive advantages when it comes to external economies of scale to keep driving down the cost of wind. We believe that there is much to be learnt drawing from the observations in the business models employed across the West and Far East. The market environment in China is conducive to the central approach that is proposed in this paper while the Western firms bring to market years of lifelong research and development that will help to further push technological innovations fostering a future global wind climate where collaboration and co-operative competition will co-exist to reduce the cost of wind power deployment 1. It will be interesting to observe how this scenario may develop and benefit the global wind market. One hypothesis is that by growing the global wind market, China may be able to help wind power look more affordable and credible 1. This can eventually help create new markets for rapidly growing economies in Brazil, South Africa, India and Indonesia Future Scenarios for Growth One of the most important issues in the effort of advancing and making wind more credible is the perception of risk by developers and investors alike. One may question how cost advantages can be realized with the proposed model; the answer herein lies in whittling risk by whittling components. The more components the WT manufacturer is responsible for designing, manufacturing, and integrating, the more risk is associated with the entire WT system if the market does not hold confidence in the manufacturer. Significant portions of the WT system should be standardized and become dominated by specialized manufacturers in the manufacturing chain, which should also reduce risk associated with those components that make up the overall WT system. The innovation in the deployment value chain is in the specialized integration of optimal solutions for specific wind sites. This opens up a range of opportunities to the developer to customize the design of the overall turbine system for different sites. The innovation in the manufacturing chain will stimulate technological advances of key components such as rotor blades, controls, power converters. Prowess in technological know-how and emphasis on R&D will be evident in the coming years as companies strive towards cost-competitive wind energy. The wind farm developer and financier assume less risk in the deployment and become the primary integrators of the turbine system in order to reap the benefits of reduced COE through optimal wind farm design. We recognize that when you place the developer in the position of assuming more responsibility, they will hold more power to manage their risk. The benefit should be increased return by reducing risk in the 6

7 process of reducing vertical integration within the turbine manufacturers themselves. Such a scenario would make the wind farm developer and constructor responsible for the integration of the WT system, and overall wind farm project development. Another possible scenario occurring is that the developer and constructor will form co-operative relationships with experienced design consulting firms and certification agencies to perform all the certification analysis which turbine manufacturers are performing now, such as design and loads evaluation. The developer does incur more direct costs but they will become more knowledgeable about the risks and be able to assess them better. These are important advantages for developers in order to realize increased economies of scale through supplier specialization and component standardization, resulting in cost reductions in key technologies and the overall cost of project development. As we observe major changes in the current global wind market, the changing conditions in the business and political environment prompted us to examine the implications and prospects of new collaborative business models in which the developer and turbine manufacturer should shift their focus to occupy different positions in the value chain. A range of complementary strengths and capabilities among the major players in the chain can be identified as a basis to form new types of partnerships and both the European or US, and Chinese markets could serve as test-beds. An improved model for wind power development has been presented to help drive and set international benchmarks in the global drive towards reduction in costs of wind energy to levels that are competitive with traditional energy sources. 6. References 1. Lema R., Berger A., Schmitz H., et Song H., Competition and Cooperation between Europe and China in the Wind Power Sector, IDS Working Paper, Vol No. 377, October Anon., Supply Chain: The race to meet demand, January/February Morand C., Rarer Rare Earths Are Not Going to Sink the Wind Power Sector, August , 4. Totaro P., Expecting Consolidation in the Wind Industry Not So Fast, Anon., Wind Energy-The Facts, A Guide to the technology, Economics and Future of Wind Power, EWEA, Anon., Renewable Energy Country Attractiveness Indices, Ernst & Young Publication, Issue 29, May Anon., Technology Roadmap: China Wind Energy Development Roadmap 2050, International Energy Agency, Energy Research Institute, October Roadmap to Bankability: A Discussion with Matt Cheney on Getting New Technology Financed & Deployed, AltaTerra Research Network Seminar, February Aldeman M., Opportunities for Illinois Manufacturers of Wind Turbine Components, Building the Wind Turbine Supply Chain: The Next Steps Workshop, July Rogowsky R. et. Laney-Cummings K., Wind Turbines: Industry & Trade Summary, United States International Trade Commission, Office of industries, Publication ITS-02, June Anon., Wind Turbine Component Supply Chain Strategies: , New Market Study-IHS Emerging Energy Research, June Anon., ACCIONA Windpower: Experience and Innovation at the Service of the Wind Power Operator, Anon., BARD Group: Integrated Turn-Key Supplier to the Offshore Wind Industry, German Equity Forum 2010, Frankfurt, November Gardiner, G., Windpower 2012 Report: Continued Technology-Driven Performance Gains are Overshadowed by PTC Gloom and Predicted Asian Overcapacity, Composites Technology, Vol. 18, No 4, August

8 Figure 3. Supply chain relationships between Top 5 European turbine manufacturers and key component suppliers 1. (Source: EWEA (2007) using data from BTM; note that many of the firms listed as single suppliers also supply to other turbine firms outside the top 5. Note that these are key suppliers. There may be other suppliers to these top five firms in different markets.) 8

9 Figure 4. Supply chain relationships between Top 5 Chinese turbine manufacturers in 2007 and key component suppliers 1. (Source: Data from BTM (2008)) 9