Wind Turbine Outlook
A panel of wind turbine manufacturers talked at the Global Windpower 2014 convention in Las Vegas in May about what changes are likely in wind turbines in the next five years, their order backlogs, whether the industry is headed for a shake out, how the manufacturers view the US, Canada, Latin America and other markets, how uncertainty about construction-start issues in the US is affecting turbine manufacturers, what they would do differently next time if Congress extends the deadline to start construction of new projects to qualify for tax credits, what customers are asking in meetings, and the manufacturers’ forecasts for the levelized cost of energy from wind.
The panelists are Scott Baron, global product line director for Acciona Windpower, Gonzalo Onzain, vice president of sales and marketing for Gamesa Technology Corporation, Keith Longtin, general manager of the wind product line for GE Power & Water, Renewable Energy, Daniel McDevitt, president and CEO of Nordex USA, Peder Nickelsen, head of product integrity for Siemens Energy, Duncan Koerbel, CEO of the Suzlon US subsidiary, Suzlon Wind Energy Corporation, and chief technology officer of the global parent company, and David Hardy, vice president of sales for Vestas. The moderator is Keith Martin with Chadbourne in Washington.
MR. MARTIN: Keith Longtin, will there be significant turbine technology advances in the next five years or are we in a refinement stage where we are just tinkering with what we already have?
MR. LONGTIN: GE has invested more than $2 billion in wind turbine technology in the last 12 years. The levelized cost of energy from wind farms has fallen more than 60% over that period. Looking forward, we will continue to invest. Investing in technology to create differentiated products is both our heritage and our future. The trend is toward bigger rotors and bigger generators.
MR. MARTIN: David Hardy, will turbines continue to improve at the same pace as in recent years and, if so, where do you expect the improvements?
MR. HARDY: You will see wind projects being built in North America with much lower electricity prices than ever before. Vestas strives to be a market leader. The industry needs us to continue to drive LCOE down, but it will be challenging to do so at the same pace as over the last decade.
MR. LONGTIN: Over the last few years, rotors have moved to diameters of 130 to 140 meters and towers are pushing into the 120-meter range. I would not call those refinements. A lot of great work has been done in order to allow that to happen throughout the supply chain. The laws of physics still apply and, at some point, the machines will become too big and heavy to be cost effective to move. What will be the next breakthrough? I think it will be in blades and towers.
MR. BARON: One interesting feature of the US market is that you cannot innovate too much because the tax equity investors and banks who finance the projects do not want to take risks on unproven technologies. As a manufacturer, we are better off making incremental improvements rather than wholesale changes. We also try to set up sustainable supply chains. You cannot come out with a new turbine model that is dramatically different every few years without having to rebuild the supply chain.
MR. MARTIN: Peder Nickelsen, where do you see improvements in next five years?
MR. NICKELSEN: Improvements will occur in a number of directions. Our technology pool for bringing down the levelized cost of energy is far from tapped out. I expect improvements in the intelligence part in terms of software. We can get a lot more out of our hardware with better software. I see both bigger hardware and more intelligent turbines.
MR. KOERBEL: The stability of the market is probably the most important thing to everybody in this room. It is not a stable market when we go from 13,000 megawatts of new wind installations one year to 1,000 megawatts the next year. It is very challenging to maintain an industrial base in that kind of market. At the end of the day, if we can get stability, we already build machines that have 160-meter diameter rotors offshore. There is no limit in sight to what we can do onshore. We will have to come up with two-piece blades to solve some logistical problems.
MR. HARDY: Two things affect the levelized cost of energy. They are technology and cost. We are confident of further advances on the technology side. We are also all working on the cost side, but the cost side is challenging in such a cyclical market.
MR. MARTIN: That is a good bridge to the next question. Any predictions about turbine costs?
MR. KOERBEL: They will keep falling.
MR. LONGTIN: They have been falling over the last four years. I think the question is whether they will continue to fall over the next two to four years. Look at power prices from four years ago to today; there has been a 50% reduction. Power prices are not going to zero. The issue is how much money there is in the system to pay developers, banks, turbine manufacturers, construction contractors and others with a role in each project.
MR. BARON: There is a certain amount of economic rent in the system. Sometimes a larger share of it has gone to the manufacturers: for example, when we have a turbine-constrained market. Sometimes it goes more to the developers. Sometimes it goes more to the financiers. Sometimes it goes more to the utilities. We are in a market now where energy demand is not growing. It is a PPA-driven market. More of the economic rent goes to the utilities in such a market. That is what is driving the LCOE to such a low level.
MR. MARTIN: It sounds like a recipe for turbine manufacturers to get squeezed.
MR. BARON: Everybody gets squeezed.
MR. MARTIN: There may be developers in this audience who are preparing to bid on power contracts. Assume they don’t have to start delivering electricity for three years. What assumption should such a developer make about where turbine prices will be three years from now?
MR. HARDY: It is hard to give a number because there are too many variables that are outside the manufacturers’ control. Technology is a main driver in the LCOE, but there are lots of components in a wind turbine — a lot of steel, a lot of composite. Overall energy prices affect the price of steel, the cost to transport everything and so on.
MR. NICKELSEN: When demand spikes after a trough, it is difficult to source parts like towers, and they become more expensive. The relatively high volatility in the market is not necessarily supporting reduction of LCOE.
MR. MARTIN: Are there any other suggestions for developers who are trying to decide what to assume in a bid model three years from now about the cost to deliver power?
MR. KOERBEL: I expect a shake out in the next year and a half because a large number of projects got under construction right at the deadline at the end of last year to qualify for tax credits, but a lot of these deals are pretty thin. Some are based on power purchase agreements with very aggressive pricing. The turbine manufacturers will say we can help so much, but we cannot go that far.
MR. MARTIN: A shake out among developers, among projects, among turbine manufacturers?
MR. KOERBEL: Projects. The developers are an entrepreneurial bunch. With the tax credit deadline looming, people took a lot of risk. I think you will see things come to a defining moment where the turbine guys will say we can only do so much. Everyone will get squeezed, but the deal will not happen. There will be some fallout from that.
MR. MARTIN: There is a sense in the market that the pace of innovation has slowed. Let me give you some figures from the latest statistics book that the American Wind Energy Association released this spring. The levelized cost of energy for wind fell steadily to 2005 then it increased slightly after 2005 before falling again starting in 2008 but at a slower rate than before. The LCOE has been largely static the last two years. Some have suggested this is because people are pursuing projects in low wind areas, but that does not account for the rush into the Midwest. To what do you attribute the static nature of the LCOE the last two years, and what would it take to have another large breakthrough, Keith Longtin?
MR. LONGTIN: We disagree. The LCOE has definitely come down at a steady pace over the last couple years.
MR. KOERBEL: These are large machines, and the development cycle takes a while, so I would not take a year-over-year set of data points. You need to draw a trend line. The costs have been falling and will continue to do so.
MR. MCDEVITT: The LCOE may have leveled off because we are starting to move into low-wind sites that could not be developed earlier, but now can be with the improved turbines. You are seeing higher towers and bigger rotors and that affects the cost as well.
MR. MARTIN: Fair enough. Gonzalo Onzain from Gamesa, how would you characterize the current market for turbines? Start with the US, then Canada and then Latin America.
MR. ONZAIN: Crazy? The US is in a race to complete projects within the next 18 months. That has a lot of implications. There was a race to start construction last year. There was an evident way to qualify and a not-so-evident way to qualify, and those who chose the not-so-evident way to qualify are in a grey situation now. We all have customers who are telling us they would love to move forward, but I am not sure if their projects will move forward.
The consequences are that if we do not know soon, a lot of projects will not be able to be completed by December 2015, and no one will issue a notice to proceed for a turbine order with the expectation that the construction-start deadline for tax credits will be extended. The market is not in a bad position right now, but if we wait three more months and the construction-start rules have not been clarified, then it will turn into a bad situation.
MR. MARTIN: The American Wind Energy Association said roughly 11,000 megawatts of projects were under construction in time to qualify for tax credits. Scott Baron from Acciona, do you see the US market the same way?
MR. BARON: One of the things I have taken away from this convention, echoing Gonzalo Onzain’s point, is that there was a lot of optimism about the methods for starting construction, but whether projects were under construction in time has come under more intense scrutiny than when the numbers were submitted for that database. A number of these projects may not come to fruition because of that scrutiny.
MR. MARTIN: Keith Longtin from GE, Gamesa and Acciona describe the US market as a little skittish. What about Canada? What about Latin America?
MR. LONGTIN: We announced 3,900 megawatts of orders for the US market, and I think we are comfortable all of those turbines will be delivered. That said, they are right that some US projects will not get built. We see room for growth in Latin America, particularly Brazil. The world as a whole is a 55,000-megawatt market per year.
MR. KOERBEL: South America will continue to grow. There are 133 million people in Brazil. Australia, which has been a decent market, has only 23 million people. Sao Paulo has 30 million people in one city.
MR. LONGTIN: The thing that is interesting about that market is that wind is competing without subsidies.
MR. KOERBEL: I think there will be sustained growth in South America because the installed base is proportionally much smaller than in the US and Canada. Coming back to the US, I think the 11,000-megawatt number exceeds what will actually be built. A lot of these projects will not pass muster when they reach the stage of trying to secure financing.
MR. MARTIN: What do you think is the more realistic number?
MR. KOERBEL: We had a discussion at dinner last night about best case, worst case and most likely worst case. People said 50% of them will make it. I bet we will see at least 30% fallout.
MR. HARDY: I have a slightly contrarian view. Some of the larger wind developers started construction of projects by taking delivery of wind turbine components. I think the tax equity market has pretty much backed that. The developers who are having trouble are the ones who merely did a little physical work on site in 2013. They are trying to secure financing and, unfortunately, time is the enemy because waiting three months for the Treasury to give more guidance is eating up time that is really precious, as these projects have to be completed by December 2015.
MR. MARTIN: How is the wait for more guidance from the Treasury affecting you as manufacturers? Is there any effect? You still have the orders.
MR. HARDY: There is a big difference between having an order and receiving something called a notice to proceed.
MR. MCDEVITT: The tension and time pressure are starting to build.
MR. NICKELSEN: The tension travels all the way down the supply chain. Everyone is ready to start, but you do not really know whether you have a firm order.
MR. MARTIN: So what happens, Peder Nickelsen of Siemens, if you have an order, but you have not yet received the notice to proceed? Do you have to hold space for a 2015 delivery to someone? When do you release the turbine slot?
MR. NICKELSEN: In principle, we never give up. You need a large and agile organization to have the flexibility, stay in very close contact with your customer and then have weekly or even daily planning with your supply chain to remain ready to move on the order. It is not easy. It is also not the most cost-effective way of doing things, but this is the way we are working for the time being.
MR. MARTIN: There was a big rush in 2013 by developers to purchase turbines or turbine components for delivery within
3 1/2 months of year end. Congress may extend the deadline to start construction to qualify for tax credits by another two years through 2015. If that happens, what advice do you have for developers about what to do next time based on what you saw happen in 2013?
MR. HARDY: The challenge is that many developers are not well capitalized. If a project is a mature project, then the developer may be able to get the equity investors lined up, get access to capital, and incur at least 5% of the project cost by year end 2015. That is the safest way to qualify for tax credits.
MR. MARTIN: What did you as manufacturers learn from the rush in 2013? What would you do differently in 2015?
MR. HARDY: At Vestas, we worked closely with a lot of our customers. We tried to be creative, and I think we are in a decent position now. We would follow the same path. We learned some lessons about the need to focus on your partners and how real their projects are. It used to be that one could treat a project as real if it had a power purchase agreement. It is no longer enough to be told the project is a contracted project.
MR. KOERBEL: There is plenty of money for good projects. There really is. You have to make sure you have good projects. People will not take a lot of risk if there is any doubt whether the project was under construction in 2013.
MR. MARTIN: So the best advice is to start working now on power contracts in case the construction-start deadline is extended, and plan to incur at least 5% of the project cost by the deadline.
I gather your order books are full for 2014 deliveries. What about 2015? What about 2016?
MR. ONZAIN: How many of those orders fall through? As you said, 2014 is fairly full. It is too late to order for 2014 delivery. Most of 2015 is also fairly well booked, but there are still opportunities for late 2015. The situation may change if some of the existing orders shake out.
MR. BARON: There are really only a couple months left to place orders to get turbines in time to complete projects by the end of 2015.
MR. MARTIN: Is there some strain now? Many of you took orders in 2013 for deliveries by the end of 2015. If the deliveries slip into 2016, there will be questions about whether the project qualifies for tax credits. Is there some strain beating the 2015 deadlines if you are still waiting for notices to proceed this far into 2014?
MR. HARDY: There could be. It is easy to sell a turbine. The hard part is manufacturing and delivering that turbine. It does not work to have one or more dead months of manufacturing. There are a lot of people sitting idle all the way down the supply chain. The more uncertainty there is, the more difficult the supply chain is to manage.
MR. KOERBEL: And there are the balance-of-plant construction contractor, construction cranes and everything else, so it is a big dance.
MR. MARTIN: You are all in the business of providing something to developers that they want. What trends do you sense among the development community when it comes to turbines?
MR. BARON: One trend is an interest in higher performance testing. The industry wants a higher degree of confidence as we put out bigger turbines that we can stand behind the power curves.
Another trend is an interest in bigger rotors as developers move to sites with lower wind speeds.
MR. HARDY: We are putting a stronger focus into service after the turbines have been delivered in an effort to drive down operations and maintenance expenses, as these are another factor in the levelized cost of energy. The focus is on more reliable turbines, a better after-market supply chain, best-in-class labor strategies and remote monitoring. Trying to squeeze cost reductions out of the service side of the business is important.
MR. KOERBEL: We ran a blade extension program for turbines that are in areas with lower wind speeds than they were designed to handle. You section the blade and put an insert in so that you are basically growing the rotor. This leads to a 20% increase in electricity output.
MR. MARTIN: What is a standard warranty at this point for a turbine.
MR. MCDEVITT: We get a lot of requests for 10 years. Ten years is what we would call a premium service contract. Many developers want bumper-to-bumper protection, while others prefer to minimize up-front costs and take their chances.
MR. ONZAIN: I think it depends on the type of customer. Customers that are more utility or independent generator type tend to be more short-term focused. People who are more financially driven have a longer-term view. Ten years is the usual tenor of tax equity.
MR. MARTIN: Peder Nickelsen, at past AWEA conventions, the turbine manufacturers had rooms and developers shuttled in and out to negotiate orders and play the group of you off one another. How has this convention been for such meetings?
MR. NICKELSEN: I think it has been fine. [Laughter.] We have been having a lot of confidential dialogue with customers.
MR. MARTIN: Let me press you on that because you don’t have room in your order book for 2014 or 2015 orders. Are people talking to you about 2016? There may not be much demand for turbines in the US at that point depending on what Congress does with subsidies. What are people asking you about? Are they ordering turbines for 2016 delivery?
MR. NICKELSEN: Many customers are interested in what will be the next advances in technology. We are discussing what kind of boundaries there are in logistics, noise restrictions and height restrictions. These are important points of reference to report back to the engineers as we try to optimize turbines as much as possible and still have a generic fit for the market.
MR. MARTIN: Keith Longtin, how has this convention compared to past conventions for turbine orders.
MR. LONGTIN: We have our customers here, and we meet with them continuously.
MR. KOERBEL: There is a positive and upbeat tone this year. Many developers think Congress will extend the construction-start deadline so that there will be more opportunity in the future. Developers are talking not only about current projects, but also potential future projects.
MR. MARTIN: What are the main questions people are asking in meetings?
MR. KOREBEL: Everyone wants to know what is going on with the Suzlon and Senvian merger. We have given our customers the inside scoop.
MR. MARTIN: David Hardy, what questions are people asking in meetings with Vestas?
MR. HARDY: This is a convenient way to meet a lot of people. My calendar shows back-to-back meetings for three days straight. It has been a marathon.
MR. MARTIN: What questions come up most frequently in those meetings?
MR. HARDY: Most of the discussions have been about short-term things. We are talking getting 2015 projects across the finish line. That is the front of the line for us. We are also talking about longer-term opportunities.
MR. MARTIN: If someone is planning ahead at this point, what is he planning to do with you? Is he planning to order more PTC components by the end of 2015?
MR. HARDY: There is some talk about how to extend into 2016 under the current regime. That has become a little difficult because we are having challenges getting some of the 2015 equipment qualified. We are also talking about what happens if Congress extends the deadline. How do you secure your price and slot in exchange for starting to work on that stuff now.
MR. MARTIN: Scott Baron, what do you end up discussing in meetings?
MR. BARON: There is a lot of focus on locking things down for 2015 and meeting that deadline. We also have an interest in finding ways to work on later-stage projects to make them successful.
More Growth Markets
MR. MARTIN: Let me go back to particular markets. Within Latin America, which are the hottest countries? Keith Longtin, you mentioned Brazil. There is a local content requirement. Where else?
MR. ONZAIN: I think Mexico is the market.
MR. BARON: Mexico and Brazil are the two biggest ones, at least for us.
MR. MCDEVITT: Chile is pretty interesting as well.
MR. NICKELSEN: If you want to avoid local content requirements, then the best countries are Chile, Uruguay, which is a short-term market, and Peru. There are other markets in South America that are starting to develop. The questions are how much, how long, and what are the barriers to get in and make them work?
MR. BARON: It is not as easy as simply turning to another market when the US is having a slump. Brazil is a local content market. Quebec is a local content market. The manufacturers had to make the right investments and be in those markets ahead of time. It takes forward planning.
MR. MARTIN: Keith Longtin, GE is in Brazil. What is it manufacturing in country to meet the local content requirement?
MR. LONGTIN: Hubs, machine heads and blades.
MR. MARTIN: Does anyone else have a strategy for Brazil? Is it a big enough market to justify setting up a factory?
MR. BARON: Acciona has 650 megawatts of orders in Brazil. There is a progressive local content requirement. We have a hub facility. We have a partnership with a local blade manufacturer. We have our own tower factory.
MR. KOERBEL: Brazil is a big enough market to justify the investment. It has a 60% local content requirement. You are not going to put a blade factory in Uruguay when that market is only maybe 200 megawatts annually. We have the same issue with Quebec. You have to pick your places. Consistency in government policy is very important.
MR. HARDY: Vestas is a global wind manufacturer. We operate in 73 countries. There are growing markets around the globe. The US market can be big or small from one year to the next, but Brazil, China and India will all be growth markets and they are highly competitive markets as well. What it takes to be successful in the US is a low cost of energy. It takes the same thing in Brazil, China and India. Policy helps and local content can be a challenge, but it is technology and low cost of energy that will win in the end.
MR. MARTIN: Are there other special issues in any western hemisphere countries? We mentioned production tax credits in the US and local content in Brazil and Quebec.
MR. BARON: Another issue we see in the US is tip height restrictions. There is a 500-foot limit for clearance from the Federal Aviation Administration. You can get a permit for a taller tower, but it is more complicated, time consuming and risky. Meanwhile, Europe is moving to taller towers.
MR. LONGTIN: They are permitting 140-meter tower height today in Europe, and there are requests to go to 150 to 160 meters.
MR. MARTIN: What is the key to going taller, and how much does it reduce the cost of energy?
MR. LONGTIN: The tower diameter cannot be more than four to 4 1/2 meters for logistical reasons. If you can open that up, then you can use less material in the tower, so we came up with an innovative design that permits shipping a 100-meter tower in 11 40-foot shipping containers.
MR. KOERBEL: We have about 6,000 lattice towers in India. The local wage rate is $5 a day. The cost of labor in India is so competitive that we have been building lattice towers for 20 years. The same tower is not competitive in the US because of the higher cost of labor. We are going have to stick to the 4.3-meter stuff with a tubular shape so that it can pass under highway bridges.
MR. ONZAIN: Another challenge is grid codes. The way we interact with the entire electrical system can be a constraint. Quebec is a nightmare.
MR. MCDEVITT: Various smaller countries in South America want in on local content requirements. You have to look at groups of countries in order to make a market. That is how a lot of us are looking at the smaller countries. Local content requirements in smaller countries are a challenge, but we are willing to try working with them if the opportunity makes sense.
MR. BARON: Mexico favors an EPC approach where the manufacturer is required to do the entire project. That’s different from the US where we only supply the turbines.
MR. NICKELSEN: Logistical constraints are another issue. We are trying to develop our hardware so we can fit on the different roads and rail beds. For example, we can do split blades, but a split blade is more costly than a non-split blade. Longer blades are normally pre-bent in order to keep the tower at a safe distance. They come in a banana shape, which is also creating challenges in terms of logistics and transportation.
MR. MARTIN: David Hardy, you said Brazil, China and India will all be growth markets, and I guess the US if it allows more time to start construction will be as well. Do those sound like the top markets to the rest of you?
MR. NICKELSEN: I disagree about China.
MR. MARTIN: Why?
MR. NICKELSEN: Because it is difficult for any non-Chinese manufacturer to sell there; not to manufacture. We all have facilities there, but selling in China is . . .
MR. KOERBEL: I agree with them both. China is a big market, but as a non-Chinese manufacturer, we have been there, done that, and it did not go well. The Chinese market is huge, but we will probably invest in other places because China is difficult. India is obviously huge. We think South Africa has a lot of potential over the next 20 years.
US Local Content
MR. MARTIN: Speaking of domestic content, in the US, the domestic content of wind turbines increased from 25% to 72% from 2005 through 2012. Any sense in which direction it is headed?
MR. MCDEVITT: I wonder about that 72% number. Manufacturers that are building turbines here are still importing an awful lot of components. We do not have a purely domestic supply chain that supports generators, gear boxes, converters, castings, forgings, all the big, heavy, highly costly stuff that makes up probably 80% of the turbine. We still import a lot of towers. We saw the tower market decrease so if we did get to 72%, we are no longer there today.
MR. MARTIN: So local content in the US is declining. There were 12 utility-scale blade facilities, 14 tower facilities and nine turbine and nacelle facilities in 19 states in 2013. Are some of these factories closing? Who among the different types of manufacturers do you think is getting squeezed the most? Nacelles? Towers? Blades?
MR. MCDEVITT: We have seen towers take the biggest hit. They are more of a commoditized item that can be outsourced overseas. The blade manufacturers have bounced back with the surge in orders last year.
MR. MARTIN: Are nacelle factories closing in the US due to the uncertainty?
MR. HARDY: Vestas has four plants in Colorado: two blade facilities, a nacelle facility and a tower facility. We are hiring now. We have a domestic supply chain. We are committed to the US market, but it is challenging for us to keep that commitment given the cyclical nature of the market.
MR. MARTIN: If Congress provides more time to start construction, would there be an increase in the number of factories or the situation would simply stabilize?
MR. KOERBEL: I think you stabilize.
MR. HARDY: It is tough to continue to make big capital investments in this uncertain a market.
MR. MARTIN: Gonzalo Onzain, if the US is a somewhat unstable market as you characterized it at the start, where in the world are things more stable?
MR. ONZAIN: Probably nowhere, but two less unstable markets are India and Mexico.
MR. NICKELSEN: Some of our markets in Europe are relatively stable. The market for offshore wind turbines has been a good market for us, and it is one with longer time horizons.
MR. MARTIN: You made the comment in the prep session before the panel started that Europe is actually coming back as a good market which seems surprising when one reads stories about rollbacks in feed-in tariffs and other subsidies. What accounts for the growth?
MR. NICKELSEN: We have had quite a lot of new market development in Scandinavia as a function of the move to very tall towers. We have a steel tower at 120 to 140 meters that comes with de-icing and other features and is well suited for forestry terrain. This has opened a new market that is relatively stable for the time being. Individual countries within Europe are still volatile, but the fact that programs vary from one country to the next tends to level out compared to the US, which is a single market with a single policy.
MR. MARTIN: A question from the audience.
MR. PATTERSON: My name is Jim Patterson, and I am with the Federal Aviation Administration. We are busy revising our advisory circular trying to account for the next generation of turbines. We have heard that Europe is moving not only to larger turbines, but also to lattice-type towers versus the solid tube. Do you foresee lattice construction coming to the United States?
MR. KOERBEL: It is all about the best way to get the best solution in labor, material and logistics. I think you will see tower heights grow from 80 to 90 to 120 meters with bigger rotors. We will come to you more often for permission to put a rotor tip above 500 feet. Just be prepared to help our developers because the higher towers take better advantage of wind and land. It would be great if we could get a dialogue going on this soon. Thank you for coming. We are glad you are here.
MR. MARTIN: Last question. Tom Kiernan, the AWEA head, said that the levelized cost of energy is currently between $30 and $60 a megawatt hour in the United States. I would like each of you to make a prediction. Where do you think it will be in the US five years from now?
MR. HARDY: The US is a big market with lots of different wind regimes. Vestas has publicly committed to a strategy of bringing down the LCOE faster than the market average, and we are confident we can do that. In a very high wind regime with very efficient turbines, the LCOE could