Danish dominance

Thursday, 24 September, 2015 - 11:00
Denmark is not only a strong sales market but has with Siemens Wind Power and Vestas two powerful turbine supliers. (Photo: dpa)
Denmark is not only a strong sales market but has with Siemens Wind Power and Vestas two powerful turbine supliers. (Photo: dpa)

The special conditions of the offshore business favour the ­established market leaders much more so than in other ­sectors. And without a new round of significant growth, the air will become increasingly thinner for the smaller players.

There can be no doubt that this year will be a record year for offshore wind energy in Europe. At the same time, however, it is equally certain to remain an exception, because the majority of activities have served merely to clear the accumulated investment backlog, above all in Germany. By the end of the year, Germany will have installed a capacity of around 3,300 MW and is thus already half-way to its first-stage objective of 6,500 MW by 2020. The situation in other countries is similar.

Accordingly, the manufacturers of wind turbines must prepare themselves for a market volume of the order of 1,500 to 2,000 MW in the coming years. There is little scope for sales of more than around 400 wind turbines per year, and even that figure will probably prove optimistic, as average wind turbine outputs ­continue to increase.

 

Luis Alvarez: “There is no example of a market where a monopolistic situation would have led to cost decreases.” (Photo: Adwen)

 

The result will be an ever fiercer competitive ­situation, because the offshore branch tends to favour its market leaders. The typical investor seeks to keep operating risks to a minimum, and thus generally chooses the supplier with the most turbines already installed in the field.

Figures for the period 2009 to 2014 (see diagram) show the great lead which Siemens was able to achieve in this way. Thanks to the significantly greater ­numbers of turbines, the market leader can usually also reduce manufacturing expense, whereas the competition is caught in the vicious circle of smaller numbers and higher unit costs. It can be asked whether this must not automatically lead to a monopoly situation. Or at least – factoring in the recent successes of MHI Vestas – a “Danish duopoly”.

The “Big Three” pulling together

Not only the Danish offshore wind farms, but also most British and German projects have been supplied by ­Siemens and Vestas to date. At the end of 2014, ­Siemens had reached a share of 65 % of the overall installed capacity in Europe, followed by Vestas with 21 %. Dong Energy is the largest operator of offshore wind farms with a market share of 24 %.

This Danish dominance could even become stronger still in the future. The “United Industry” declaration issued by the “Big Three” (Dong Energy, MHI Vestas and Siemens) in March 2015 made it clear that they want to use their large business volumes to negotiate ­better purchasing terms. “We have a cluster in Denmark whose market power is acquiring its own strong momentum,” says Andreas Reuter, Managing Director of Fraunhofer IWES Nordwest, “and that is an alarm signal for the ­other players.” They must reckon with the emergence of an effectively ­invincible “industry champion” in ­Denmark.

 

Andreas Reuter: “Their large business volume enables Siemens, Vestas and Dong to negotiate better purchasing terms.” (Photo: Fraunhofer IWES)

 

The long-time CTO of Siemens Wind Power, Henrik Stiesdal, who has been enjoying retirement since the end of 2014, rejects the frequently expressed accusation that Denmark closes off its market: “In Denmark, the competition is open, and Dong and others have made no secret of the fact that they have also seriously considered non-Danish competition.” For the smaller developers entering the near-shore market, “the only thing that matters is the economy; they have no pre-defined preference for the two Danish suppliers.”

Planning certainty must be strengthened

When viewed more closely, the question of possible market foreclosure is actually secondary, because the Danish offshore market is significantly smaller than that in Germany or the UK. The greater concern for the offshore industry is planning certainty. There is nothing which the offshore industry craves more urgently than continuity. Wild up and downs in incoming orders produce unnecessary costs. Over time, it becomes wearing for a manufacturer to supply three wind farms one year, but then not sell a single turbine the next. Only very strong and established companies are able to endure such pressure in the long run. “To foster the development of alternative players, a predictable and steady market perspective is crucial,” says Luis Alvarez, General Manager of Adwen.

Commentary: Newcomers need
air to breathe

The European offshore market is stable, but it is no longer growing – at least not to the extent that it could support five turbine manufacturers in the long term. The pioneers are able to throw their experience into the ring and can point to a large number of references which are already functioning without problems. Newcomers face a difficult time from the very beginning and are also unable to score significantly with innovative concepts, because investors tend to shy the higher risks of new technologies. They are more interested in the track record of a proven turbine type than the possibly higher yield of a newly developed system. And they are meticulous about cost reduction. Consequently, the manufacturer with the most installations to date also has the greatest chance of being chosen by investors.

Siemens has drawn considerable benefit from this special constellation in recent years. As a company manufacturing in Denmark, furthermore, Siemens enjoys the full backing of a state which supports wind energy within the framework of a long-term energy and industrial policy plan. The reward for this perseverance becomes more and more evident from year to year.

If Siemens also decides to act in concert with MHI Vestas in the future, it must be asked whether the remaining manufacturers will be left enough air to breathe. A monopoly, however, would not be in the interest of investors. The smaller manufacturers can thus expect to receive orders for turbines here and there. But if that is barely enough on which to survive, they will be unable to invest and will still fade from the market sooner or later. And concentration would take another step forward.

Detlef Koenemann

The European Wind Energy Association (EWEA) would also like to see opportunities for as many manufacturers as possible, and has been lobbying the EU Commission almost continuously to have the 2020 renewables target followed up with another ambitious expansion plan for the period to 2030. To the disappointment of the EWEA, the EU has so far failed to react. For the time being, therefore, no help can be expected from above.

But perhaps that is not actually necessary. Stiesdal believes that it is more important for “the key countries to set their own targets and not rely on the EU doing that for them.” He prefers to trust in the power of cost reduction, because “as costs come down, it will become increasingly irrelevant what the targets are. Once ­market levels are reached, the market will decide.”

Experience plays a decisive role

The dominance of the Danish manufacturers is founded above all on the enormous experience of Siemens and MHI Vestas. Siemens already erected the world’s first wind farm back in 1991, and Vestas the second in 1995. During the first decade of offshore wind energy, ­Vestas was the most successful manufacturer and was still market leader when it decided to realign operations in 2010. After this self-imposed two-year “pause for reflection” and with the recently formed joint venture MHI Vestas (with Mitsubishi), the company now seems to be making ground once more. Will Siemens and MHI Vestas eventually rule the market? “The advantage in experience and trustworthiness of these two companies is simply hard to match, even for industrial players of similar financial strength,” Stiesdal sums up.

At present, there are three further companies who are vying with Siemens and MHI Vestas for market shares: Adwen, Alstom and Senvion. They are each striving to equip at least one offshore wind farm each year, so as to utilise their production capacities to a reasonable extent. But with the numbers of turbines which the market can absorb being limited, the competition is set to become tougher than ever.

How many will survive?

The question of a possible monopoly can also be ­addressed from the opposite perspective: how many wind turbine manufacturers can the market support? If they are to hold their current positions, the three smaller manufacturers are urgently dependent on market growth. For ­Alvarez, the situation is characterised by ­“limited market ­capacity, reduced opportunities for cost ­reduction, and favoured long-established Danish players compared to relatively young German companies” and he goes on to point out that increased subsidies would also make no real difference: “A subsidised market is not sustainable in the long term.” Long-term sustainability can only be achieved through cost reduction, as this would enable the industry “to maintain and develop the jobs created locally and to produce energy at an ­acceptable price.”

 

Henrik Stiesdal: “The largest markets are not in Denmark or France, but in the UK, Germany and China.” (Photo: Siemens)

 

The market could be rather tight for five ­manufacturers in the longer term. “There is enough ­potential for three or four manufacturers, but not more,” Reuter predicts. He considers a maximum of 500 ­turbines a year to be realistic under favourable ­conditions. But that is the purely European ­perspective, quips Tim Camp. As Head of Turbine Engineering at DNV GL, he has his eyes on global developments: “It’s important to consider possible new entrants from other regions. China, for example, has ambitious plans to develop offshore wind projects.” That could well be a source of new opportunities: ­“European OEMs would be foolish to rest on their laurels, as we expect exports to grow with the growth in Asian OEM experience and turbine reliability.”

Detlef Koenemann

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