Analyses of wind energy market

By ZHAO Tian, LI Guang,ZHU ShengFudan University

Rubicon Team

Outline

External Environment 1 Market Analysis

&SWOT 2 Proposed Strategies3

Strategy Goal, Goal Decomposition and Strategy Directions

Roles Sites & Modes

Manufacturer? Investor?

S1: Positioning in Value Chain

Case Study 1: AES’s success

in a CDM Projects

Case Study2:How SK entered

Petro IndustryIn China

2nd Tier Region Off-grid Power

S2: Combination of Carbon-free Industry

and Off-grid Wind Power

SK Vision:Sharing Happiness When

Butterfly Meets Wind

Background

Policy Overview

Conclusion: Wind energy industry is very promising in China.

Profitability

Market Size

Industry Analysis

SWOT Analysis

Conclusion: SK Energy could join hands with players in industry to seize great opportunities in the vast and growing market.

1

Outline

Profitability

Market Size

Industry Analysis




SWOT Analysis

Roles Sites & Modes

Manufacturer Investor


Case Study 1: AES’s success in CDM Projects

Case Study2:How SK enter Petro Industry

In China

Tier-2 Region Off-grid Power

S2: Combination of Carbon-free Industryand Off-grid Power



Conclusion: SK Energy could join hands with players in value chain to seize great opportunities in the vast and growing market.

BackgroundChina is in need of renewable energies in future.

Wind energy development is booming around the world.

Wind energy is a promising industry in China.

Policy OverviewPolitical will fuels wind energy industry in China

2

Increasing Demand for Energy in China

Traditional Energy

With modern industrialization around the world, energy crisis is becoming more and more manifest. The scarcity of traditional energies and negative impacts on the environment are becoming a global concerns.

Negative impacts of traditional energy

CO2 Emission leading to global greenhouse effects.

COIncomplete burning of oil and coal, resulting in toxic gases emission.

SO2Resulting in acid rain, causing damage to the eco-system.

Dust Increasing risk of Respiratory Disease.

NOX

Severely poisonous, giving rise to risks of lung cancer and other diseases

China is in need of renewable energies!

3

Electricity’s Demand Growth, Supply Growth (Net CapacityIncrease) and Generation Hours under Optimistic Expectation

4860

5250

54605411

5221

50155069

5194

5359

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2002 2003 2004 2005 2006 2007 2008 2009E 2010E

4400

4600

4800

5000

5200

5400

5600

5800

Demand Grow th Supply Grow th Pow er Generation Hours

Source: China Galaxy Securities, 2008 Energy Insight

Growing industries along with economic development in China strongly carry the electricity market forward.

With improving life qualities in China, living electricity drives the demand going up.

Economic reconstructions push the application of renewable energies in China.

Key Factors Affecting Demand

Background

Proposed StrategyMarket Analysis and SWOTExternal Environment

Wind energy development is booming around the world.

Trend of Wind Energy Exploitation around the World

Country Share of New Installed Capacity 2008

All Source: World Wind Energy Report 2008, Global Wind Energy Council

0

20000

40000

60000

80000

100000

120000

140000

160000

180000

200000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E2010E

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

Total Installed Capacity MW Incremental Capacity MW Increment Growth MW

World Total Installed Capacity and Incremental Capacity MW

0 5 10 15 20 25 30

USA

Germany

Spain

China

India

Italy

France

UK

Denmark

Portugal

2007 2008

Installed Capacity: Top 10 Countries MW

Background

Summary


Worldwide capacity reaches 121,188 MW, out of which 27,261 MW were added in 2008.

Wind energy continued its growth in 2008 at an increased rate of 29 %.

China continues its role as the most dynamic wind market in the year 2008.

4

Energies Overview

2000

2020E

Source: China Galaxy Securities:

Energy Structure in China

Wind energy is playing a more important role in China

Background

Reliable, affordable and clean.

Immense storage, easy access, and low marginal cost. .

Wind projects under stable policy frameworks are less affected by the credit crunch than higher-risk investments.

Wind energy is the answer to both the environmental and financial crisis!

2010E


0

20

40

60

80

100

120

140

2005 2006 2007 1H 2008

Wind Others Small Hydro Large Hydro Nuclear Coal

1.18%1.80%

2.08%

0.74%

China Annual Capacity Add Additions and Wind Energy Growth GW,%

Source: China Galaxy Securities, 2008 Energy Insight

China’s electricity demand growth (9% to 10% annually) has created a capacity gap.

Wind is evolving as one of China’s top four technology options for new capacity.

With coal-fired electricity prices rising, wind is becoming more cost-competitive.

Growing Wind Energy

Advantages of Wind Energy

5

2006.1

2006.10

2007.8

2008.1

2008.4

Political will in China is striving for propelling wind-power market

Political Will Fuels Wind Energy Industry in China


Renewable Energy Law

Established the framework of the national exploitation of clean energies. 3 principles on wind were proposed:

Implement fixed pricing to wind electricity power.

State Grid unconditionally purchases the wind electricity. Price gap would be shared among the grid.

The state establishes fund to support wind power development financially.

Market Open Policy

Long-term planning for the development of renewable energy

Make the wind power market more competitive and open.

Take advantage of coastal areas and inland wind resource.

Targeting at a capacity of 5 MkW and 30 MkW in the year 2010 and 2020 respectively.

To form the wind-power center in several provinces such as Inner Mongolia, Jiangsu, Shandong and Liaoning.

Tax and Tariff ReductionThe Ministry of Finance further reduce the tax imposed on the wind-energy companies.

National Customs cut down tariff on importing advanced wind power technologies and equipments.

Financial Support

National Development and Reform Committee improve the standard of subsidies and lower the qualifications of the companies to acquire loans from the bank and funds.

Price Reform

NDRC set the bottom line for the auction price of biding for the permission to exploit wind energy to avoid malign competition and attract more foreign investments.

6

Policy

Policy

State Stimuli for Wind Energy Just Revealed


China’s new energy promotion plan, focusing on wind power

7

2009.5

•China also promised to propel the R&D of the key turbine components; allocate more funds to aid the promotion of wind power technology.

•Financial crisis provides a great opportunity to adjust the energy structure in China, aiming at reducing the emission and improving energy utilization.

•News reported that from 2009, government will bolster more wind electricity bases at the ten million kilowatt levels vigorously in 10 more years in provinces such as Gansu, Inner Mongolia, Hebei and Jiangsu.

News Source: Xinhua

•According to the plan, the state will invest about 3,000 billion on the development of renewable energy, in which wind power will benefit most. The wind electricity price and the bidding policies are also will be discussed to improve the overall profit and open the market.

China is ready to develop wind energy!

Outline

Background Strategy Goal, Goal Decomposition and Strategy Directions



Policy Overview

Roles Sites & Modes

Manufacturer Investor




In China





Conclusion: Wind energy industry is very promising in China in future.

The wind energy market in China is vast, exploitation remains unbalanced

Return of wind energy will become more Profitable in near future.

Overview of different players in the Industry.

Profitability

Market Size

Industry Analysis

SWOT Analysis

8

Chief Distributions of Wind Energy in China 107W

Year 2007-08 Installed Capacity Increments 106W

Source: China Investment Annual 2005

Inner MongoliaXinjiang

HeilongjiangGansu

JilinHebei

Shandong

JiangxiJiangsu

GuangdongZhejiang

FujianHainan

0 2 4 6

Inner Mongolia

Liaoning

Hebei

Jilin

Heilongjiang

Jiangsu

Gansu

Xinjiang

Shandong

GuangdongFujian

ZhejiangHainan

3.9

2007

2008 Increments

Source: China Wind Energy Association 20092.61.30

Fastest Growing %

Hainan 568.97Zhejiang 311.04Liaoning 142.52

Inner Mongolia 138.93Hebei 126.00

Tier 1Tier 2

Chief Distribution and Exploitation of Wind Energy in China

Source: China Wind Energy Association, Century Securities

Energy DistributionChina’s wind power resources mainly distribute in the eastern coastal areas and “Three-North Region” - Northeast, North China and Northwest.

Inland wind resource is larger than that of coastal areas. The risk of onshore investments are lower than those of offshore projects

Wind energy market in China is vast, exploitation remains unbalanced.

0

5000000

10000000

15000000

2000 2001 2002 2003 2004 2005 2006 2007 20080.0%20.0%40.0%60.0%80.0%100.0%120.0%

Total Capacity MW Total Grow th

Current Exploitation

China’s Total Installed Capacity and Total Growth

Investment on Wind Energy has been increasing exponentially in China at nationwide scale.

The wind resources of eastern coastal areas remain unexploited compared to the “Three-North Region”.

The markets of Tier-2 districts, with more potential to develop, grow much faster than that of Tier-1 districts.


9

Market Size

Estimated costs of Wind and Coal Energy

0.5

0.4

0.7

0.6

0.3

0.2

0.1

02000 2005 2010E 2015E 2020E

Wind Energy Coal

Source: Wind Energy 12 in China, China Galaxy Securities

No. Name of wind plantsHighest

PriceYuan

1 Inner Mongolia ZhuRihe Wind Farm 0.609

2 Inner Mongolia Shangdu Wind Farm 0.609

3 Hebei Zhangbei Wind Farm 0.984

4 Xinjiang Danban City No.1 Wind Farm 0.533

5 Liaoning Donggang Wind Farm 0.915

6 Zhejiang Cangnan Wind Farm 1.200

7 Hainan Dongfang Wind Farm 0.560

8 Guangdong Nanao Wind Farm 0.740

9 Shanghai Chongming Nanhui Wind Farm 0.773

Average Price 0.769

2nd Tire

1st Tire

The price of grid-connected wind electricity is greatly affected by the government’s policies.

Price Differentiation and Cost Trends

The price of grid-connected wind electricity by province (Highest)

Current Pricing and Cost

In the current market the average price of electricity generated by wind farm is still higher than that of coal. The price disadvantage is the main barrier constraining further development of wind energy market.

Future Prospect

In 2020, the estimated cost of wind electricity the cost of coal electricity, which will stimulate the widespread application of wind power.

The application of CDM in joint venture projects could make wind electricity more competitive by generating extra revenue from CERs. Return of wind energy

will become more Profitable in near future.


10

Profitability

Turbine Manufacturers

Brand Manufacturer

Capacity (kW)

% of domestic and joint venture

capacity

% of increased

total capacity

Sinovel 华锐 1402500 29.71% 22.45%

Goldwind金风 1131750 23.98% 18.12%

DEC东汽 1053000 22.31% 16.86%

Market share of Domestic and Chinese-foreign joint venture turbine manufacturers in 2008

Brand Manufacturer

Capacity (kW)

% of foreign owned

capacity

% of increased

total capacity

Vestas 599700 39.30% 9.60%

Gamesa 508300 33.31% 8.14%

GE 145500 9.53% 2.33%

Market share of foreign owned turbine manufacturers in 2008

Brand Market status Main focus

Guodian (Longyuan)

A specialized wind powerdevelopment company owning the largest shares of installed wind power capacity in China.

Three North Region, Southeastern China. Case study: Jiangsu Rudong Wind Power Concession Project

Datang

Rank No.2 in China wind market ownership. With great impact in the Northern China electricity market.

Northern China. Shanghai. Case Study: Shanghai Donghai Bridge Offshore wind farm.

Huaneng

The largest independent electricity generator in Asia. With solid government background.

Inner Mongolia, Shandong, Sichuan, Guangdong, Case Study: Huaneng Zhaobei Wind Farm

State Generators Top 3 State generators in wind market

Summary of turbine manufacturers in China

Sinovel, Goldwind and DEC capturing more than 57% of the market. Vestas, Gamesa and GE dominating among foreign manufacturers.

With ambitious wind targets, state generators are harnessing strong capacity and political will to carry the market forward.

All Source: China Wind Energy Association

While turbine assembly manufacturing booming, key components witnessing shortage.Chinese OEMs to dominate supply market in the long term.

Foreign entrants are seeking a foothold through near-term partnerships, with exploration targeting long-term pipeline activaties.


Summary of state generators in China

11

Industry Analysis

•Success in KoreaBellwether in the wind industry of Jeju Island, South Korea. Achievement in various energy fields around the world.

•Green Ocean Strategy.Bring happiness to people by implementing SRI in green energy field.

•Robust Financial AbilityFortune 500 Company and high reputation in China.

•ExpertiseSeveral wind blade patents, abundant knowledge of China’s energy market

•LocalizationLocalization of the business in China to be improved,developing coordination with the domestic companies and local government.

•PolicyThe regulation of foreign capital to enter the energy industry

•Market ShareInsufficient infrastructure and facilities in China compared with the professional wind power companies, such as GE, Vestas, etc..

Strength Weakness

Opportunity•DemandAn answer to the world energy crisis and China’s rapid development

•CompetitorThe low quality of domestic wind-energy investment companies.

•Nationwide SupportAttention of government on the clear energy and favorable policies towards .

Threat

•Financial CrisisFinancial Crisis world widely impairs the process of huge investment for lack of the liquidity.

•Entrance CostHigh cost of the wind power and subordinated negotiation power when coordinated with State Grid.

•Technological UncertaintiesSome pending technological problems such stabilization of the grid due to the high levity of wind power.


12

SWOT Table

Outline

Background

Profitability

Market Size

Industry Analysis




Policy Overview

SWOT AnalysisRoles

Manufacturer? Investor?




In China

SK Energy could expand his roles in the value chain and create additional value.



13

GoalTo enter China’s wind power market and implement “Green Ocean” strategy by investing in wind energy market of China.

To cut down the cost and gain a higher profit

To choose a niche market to enter and boost its share

(Social Responsibility Investment) To secure its position as a top global “Low Carbon, Green Growth” company, to create and share happiness with Chinese people.

Market

Profitability

SRI

To be a pure turbine manufacturer or a Wind Farm Investor?

To find a new wind-farm new potential areas and model

Criteria Evaluation

The difficulty to enter the market

Current market share

The technology advantage

The number of core technology patent of main turbine manufactures

The trend of the market development

The share of different types of the turbine company in different years

•The exploitation of wind-resources is unbalanced.

•The current prevailing grid-connected model has faced with a lot of problems such as high cost, difficulties to sustain the stabilization of the grid and so on.

1.Goal Setting 2. Decompositionof the Goal 3. Strategy Directions


14


A turbine manufacturer or a wind-farm investor?

0%

20%

40%

60%

80%

2004 2005 2006 2007 2008

Domestic(Joint Venture) Foreign Investors

Wind Equipments Market Share in China (Domestic and Foreign Investors)

The market share change for foreign manufactures is declining in recent years and domestic companies have lead the turbine manufacturing industry.

Rank Institute NamePatent

NumbersOriginal Country

Business Realm

1 GE 211 U.S.Electrical

Manufacturing

2 Mitsubishi 211 JapanElectrical

Manufacturing

3 (Person) Wobben Aloys 141 GermanyWind Power Generation Equipments

4 Vestas 93 DenmarkWind Power Generation Equipments

5 REpower System 63 Germany Wind Turbine

6 LM Glasfiber 56 Denmark Turbine Blade

7 Siemens 48 GermanyElectrical

Manufacturing

8 Ebara 47 JapanFluid Conveying

Equipment

9 Fuji Heavy 47 JapanElectrical

Manufacturing

10 Gamesa 52 Spain Wind Turbine

Top 10 Institutes (People) with Most Patents in Wind Energy Technology in DII Database

SK doesn’t have a technology advantage when competing with these industry leaders.

It is not the proper time for SK to become a turbine manufacturer in China. SK could use its great capital power to invest in the construction of wind farms.


Source: DII Database

15

Proposed Strategy 1: Positioning in the Value Chain

Va

lue

Ch

ain

Po

sit

ion

ing State

Generators

Chinese Developers

Foreign Entrants

State Generators

Chinese Developers

Chinese Developers

Foreign Entrants

Local players seeking technical expertise

The Clean Development Mechanism (CDM) is an arrangement under the Kyoto Protocol allowing companies from industrialized countries to invest in projects that reduce emissions.

By applying CDM joint venture projects on clean energies become possible in China.

The Permitting Negotiations are usually local, complex and highly project-specific.

Foreign entrants seeking cooperation with the state generators under momentum policies.

State Generators and Chinese Developers lack of expertise and advanced technology.

Consultancy through value chain is in need on issues like site acquisition, components manufacturing, CDM applying.

Foreign players seeking vertical integration(ownership limited to 49% for CDM qualification)

SK Energy could expand his roles in the value chain and create additional value.


SiteAcquisition

TechnicalDevelopment

PermittingNegotiation

Financing EPC Operation


State Generators


16

Case Study 1: AES’s role in a CDM Project


Project Title: Guohua Hebei Huanghua 49.5 MW Wind Farm Project (Phase I)

Completion Date: 24th December 2008

What SK may do

ProjectProcess

Outcome

About: AES operates 132 power generation facilities worldwide.

Investor

Equity share: 49%

Guohua AES (Huanghua)Wind Power

Co. Ltd.

Consulting

Merrill Lynch Commodities

(Europe) Ltd.

Project Guohua 49.5 WM Wind Farm Project

(Phase I)GE, Vestas, Sinovel

Completion date: 12-24-2008

Invest via CDM Turbine SupplierFunding

Wind Energy Sells to

Yearly Capacity: 99,160WMhNorth ChinaPower Grid

•33 wind turbines with the unit capacity of 1500kW and total capacity of 49.5MW.

•Generating greenhouse gas (GHG) emission reductions by avoiding CO2 emissions from traditional energy, and will contribute to sustainable development of the local community and the host country by reducing green house gas (GHG) emissions of 106,647 t CO2 per year.

Financial Indicator for the Proposed Project

IRR (Total Investment) Benchmark Rate = 8%

Without CDM Revenue 6.24%

With CDM Revenue 9.58%

All Source: United Nations Framework Convention on Climate Change

CDM is a good way for foreign entrants to invest in the wind energy market in China which would greatly reduce the cost.

AESCompany


17

Case Study 2: SK successfully Knocked the Door of China’s Petrochemical industry

Background:

•Petrochemical industry is the core and strategic industry that Chinese government always wants to keep strong control of it, which impeding the foreign energy companies’ entrance.

•SK tried hard to enter China’s Petrochemical industry, finally succeeded via Sino-South Korea relations.

SK’s Trial

SK’s Good Relationship with Governments

Studied the planned Petrochemical programs in China, Seeking more commercial opportunities.

2006.4

Negotiated with Hubei Province Government on the 0.8 million tons Ethylene projects.

2008.5

No break-throughs were made

1990

Firstly settled its business in china

1992

Establishment of diplomatic relations. SK as a bridge.

2008

The director of SK accomplished the South Korea president’s official visit to China several times.

What Can We Learn?

well preparation and careful planning

good relationship and coordination

+ = Win-win solution for wind energy in China!

Good relationship and coordination play an important role in the trial of SK to knocks the door of China wind energy!

Connecting two countries

Other competitors competed for the projects

0.8 million tons Ethylene projects

in Wuhan


SK Energy, SinopecJoint Venture35% Equity

Before 2006


South Korean President’s official visit to China; SK got approval of the project.

2008.5.27

18

Outline

Background

Profitability

Market Size

Industry Analysis




Policy Overview

SWOT AnalysisSites & Modes



U-Eco Cities in Northernand Southern China



19

Site Acquisition: Tier-1 Vs. Tier-2

Tier-2 areas are more promising than Tier-1 areas.

Mode: Grid-Connected Vs. Off-Grid

Grid-Connected Mode

More prevailing, applied in most of current projects.

Wind electricity should consolidated to the State Grid.

Difficulty to maintain the stabilization of the grid High cost (0.5-0.6 yuan/kWh)

Off-grid mode is more promising than grid-connected mode.

Proposed Strategy 2: Site and Mode Selecting

Off-Grid Mode

More and more mature

Serves directly for the large scale industry base

Increasing Government Attention

Low cost(0.05-0.06 Yuan/kWh)

Tier-1: “Three North” Areas

Market is relatively saturated.

Increasing rate reaching bottleneck

Disadvantageous Price

Lack of Industrial Integration

Tier-2: Costal Areas

Remain Relatively Unexploited

Faster Growth

Higher Electricity Price

Denser Industrial Bases

Advantages


1

2

20

Proposed Strategy 2: Site Acquisition and Mode

Shandong

Northwestern Hebei Base

Middle-southern Liaoning PeninsulaBase

Combine the off-grid wind-power industry with the development of Tianjin Binhai New District and the strategy of Revitalizing the Old Industrial Base in Northeast China. Reduce the CO2 and other toxic material emission.

Built Farms

FarmsUnder-Construction

The market is incompletely exploited; SK has an opportunity to seize!

Hebei

Liaoning

Tianjin

Why Bohai-Rim District?1Integration of Off-Grid Wind Power with

Revitalizing the Old Industrial Base

U-Eco City in Northern China

Long history of industries development, mainly energy-hungry heavy industriesFirm support from the local government Sound foundation of wind-power development

0

10

20

30

40

50

60

70

80

2000 2001 2002 2003 2004 2005 2006

Hebei Liaoning Shandong

’97-’06 Bohai-Rim District Wind Energy Installed Capacity 104W

Booming Capacity2

3

Steel, Raw material, Petroleum Fine Chemical, electrolytic aluminum, Chlor-alkali, seawater hydrogen manufacturing industries. Important ports as Qingdao and Dalian.

Eastern Shandong Peninsula Base

Proposed Strategy 2:

Proposed Strategy 2: Off-Grid Wind Power in Bohai-Rim Industrial Bases


Applicable Industries

21

The Combination of Off-Grid Wind Power with Two Industrial Bases

Zhejiang

Jiangsu

Combination of Off-Grid Wind Powerwith Yangtze Delta Carbon-free Industrial Base

Shanghai-Southern Jiangsu Base

Northern Zhejiang Costal Base

NorthernJiangsu Base

Combining off-grid electricity with carbon-free energy-hungry industries in Yangtze Delta, develop the eco-tourism.

Anhui

Jiangxi

U-Eco City inSouthern China

The increasing demand for energy Rich wind resources and off-coastal land that

remain unexploited. Good Policy Environment The Yangtze River Delta boasts the advantage

to solve the technology and capital problems

Why Yangtze River Delta?Built and Under-Construction Wind Farms in Yangtze Delta ’07

Current Status of Exploitation

Farm NumbersTurbine

NumbersCapacity %Nation

Shanghai 3 38 27.24 2.63Jiangsu 3 244 85.80 8.30

Zhejiang 2 264 23.33 2.26

Total 8 546 136.37 13.19

Built Farms

Farms Under-Construction

21

3The market is incompletely exploited; SK has an opportunity to seize!

Proposed Strategy 2: The Combination of Off-Grid Wind Power with Two Industrial Bases

Proposed Strategy 2: Off-Grid Wind Power in Yangtze Delta Industrial Bases


Newly chemical industries such as Chlor-alkali Industry, seawater hydrogen manufacturing, electrolytic aluminum and steel, Power Machinery industries. Integrating the shipbuilding, steel, machinery industries

Applicable Industries

22

Experiment U-Eco city with combined application of wind energy and SK’s other businesses

Realize SRI by enhancing China renewable energy development. CDM is the main method.

SRI

Active part in Green Ocean Strategy supporting energy solution for in remote areas.

Lower the carbon-dioxide release and achieve green growth in electricity generating.

Use off-grid wind electricity supporting energy-hungry industrial bases in China.

Vision

23

U-Eco City

Low Carbon

Off-GridIntegration

Green OceanStrategy

Thank You!

LI Guang, [email protected]

ZHAO Tian, [email protected] ZHU Sheng, [email protected]

Fudan University

Rubicon Team

Documents

Analyses of wind energy market