Wind power market entry strategies - build or buy?

Proliferation of climate policies are instigating long-term wind strategies split between domestically-focused wind generators and firms applying global strategies to tap major growth opportunities. In the current context of soaring turbine prices, supply bottlenecks and record wind farm valuations, carefully crafted entry strategies are key to growing profitable and competitive wind portfolios

Report Highlights
Today, wind is more competitive against fossil fuel than ever, despite higher turbine prices. The biggest price reduction of renewable technologies and learning curves are found in markets operating feed-in tariffs. This support system has delivered the most wind capacity, whereas quota and certificate mechanisms have largely underperformed Wind power projects are front-loaded and capital intensive, therefore hardware prices and financing standards and structures have a high degree of influence on the economics of wind farming. Wind power generation costs are also highly dependent on wind conditions, turbine load factor characteristics as well as operation and maintenance costs Onshore wind is profitable, provided that the four key parameters are optimized, with appropriate support mechanisms in place. Offshore wind, on the other hand, is a more high-risk high-reward business. Under the current market conditions, the most competitive portfolio is generally one that builds offshore but buys existing onshore wind capacity
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DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
SOURCES 1
ANALYSIS 2
The biggest price reduction of renewable technologies and learning curves are generated in markets operating feed-in tariffs 2
Wind is more competitive with fossil fuel than ever despite higher turbine prices pushing up the cost of wind generation 2
Feed-in tariffs have delivered the most wind capacity whereas• quota and certificate mechanisms have underperformed 3
The pioneering work of successful feed-in systems has shaped the recent record growth in European installed wind capacity 5
Wind power generation costs depend on key financial and technology-specific factors 6
Wind power economics depend largely on four key sets of parameters 6
Wind farm projects, both new build and M&A, are front-loaded and capital intensive 7
Wind power generation economics are highly dependent on wind conditions and turbine load factor characteristics 8
The cost of capital, reflected in the discount or interest rate, has a high degree of influence on wind turbine development costs 9
Project lifetimes coupled with discount rate have a significant influence over the annual costs of wind power generation 10
O&M costs vary widely and can be uncertain, yet they represent a significant part of a turbine's annual levelized generation cost 11
The most competitive portfolio is one that builds offshore but buys existing onshore wind capacity 12
In a market characterized by price increases and turbine scarcity, growing portfolios successfully calls for diligent entry strategies 12
Developing wind farms is gradually becoming a high risk high reward business 13
Onshore wind is profitable provided the four key parameters are optimized, with appropriate support mechanisms in place 14
On paper, offshore wind is high margin, however present concerns have injected high risk into offshore wind prospects 15
Acquiring onshore wind can deliver more value for money than new build development, but not at any cost 16
The high premium paid for the acquisition of offshore wind farms often makes the overall investment less attractive than new build 17
Despite recent escalating wind power generation prices, wind power has never been more competitive against thermal power 18
A case study of UK and German wind power markets reveals that the subsidy price alone is not sufficient to drive market entry strategies 19
The UK quota and certificate mechanism does not optimize wind investment structures, nor does planning permission limitations 19
Planning permission difficulties and a generous support scheme makes buying existing UK onshore wind more appealing than ever 20
UK offshore wind development costs have soared over the past few years, making the economics of such projects marginal at best 21
In Germany, proposed amendments to the Renewable Energy Sources Act (EEG) will drive further innovation and investment 22
APPENDIX 23
Definitions 23
Ask the analyst 24
Datamonitor consulting 24
Disclaimer 24
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Table 1: The three main entry strategies differ in many ways 13
Figure 1: Large scale wind is the most commercially mature renewable technology 2
Figure 2: Feed-in tariffs have delivered rapid growth in installed wind capacity in Germany and Spain 3
Figure 3: The vast majority of EU Member States operate feed-in mechanisms 4
Figure 4: Average realized wind power prices vary widely across the EU27 Member States 5
Figure 5: A recent study of 13 wind turbines shows that capital costs of wind energy projects are dominated by the cost of the actual wind turbines 7
Figure 6: Of the four main factors governing wind power economics, the most influential parameters are load factors and investment costs 8
Figure 7: A doubling of the discount factor from 5% to 10% increases the annual levelized capex costs (i.e. costs before O&M) by roughly 50% 9
Figure 8: The project lifetime that is most attractive varies with the underlying financing terms and the required annual rate of return 10
Figure 9: Typical offshore O&M costs represent 25%-40% of the total generation costs, whereas onshore typically accounts for 10%-30% 11
Figure 10: Utilities can access three main types of entry strategies to scale their wind portfolios globally 12
Figure 11: At $1m/MW, onshore wind power generation can be a high margin business 14
Figure 12: The additional cost of building offshore is rarely offset by the higher wind speeds and power generation potentials 15
Figure 13: Acquisition delivers more value than new build for prices paid up to $2.35m/MW compared to the most expensive development scenario 16
Figure 14: The hefty investment premiums paid for offshore wind typically fail to offset the time it would take offshore wind turbines to come online 17
Figure 15: As primary energy costs soar, the attraction of wind power as an generation technology with no fuel price risk has never been greater 18
Figure 16: Revenues from UK wind energy combine wholesale market price, ROC purchase price and tax incentives 19
Figure 17: At £1m/MW, buying existing onshore wind in the UK is very profitable and more appealing than new build development. 20
Figure 18: Offshore wind can however be profitable provided costs are kept low and difficulties in obtaining planning permission are overcome 21
Figure 19: The German government has proposed a reform of the EEG which provides for increased feed-in tariffs 22
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