Vestas (VWSYF)

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Avinash Gandhi

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Vestas Wind Systems is the largest manufacturer of wind turbines and systems in the world.^[1] Since 1979 the company has installed over 40,000 wind turbines in 65 countries with a total capacity of 38.3 GW.^[2][3] Wind systems get more cost-efficient as they grow in size and scale, making them ideal for large-scale installations; Vestas is one of the few manufacturers that makes turbines that produce as much as 3.0 MW.

With issues like energy independence, climate change, and high oil prices (WTI crude peaking at $124 in 2008) driving legislation that mandates and subsidizes the use of renewable energy sources, wind energy is cheaper than it has been in the past.^[4] Accounting for subsidies for wind farm construction, the installation cost of large wind farms rivals that of traditional gas and coal plants, giving the wind market an advantage over other renewables. Without subsidies, wind is still more expensive than cheap coal in low-regulation regions; for this reason, Vestas was forced to abandon its Australian operations.

Based in Denmark, Vestas has a strong arm in the European wind market, and is looking to the U.S., where legislation in favor of renewable energy sources has greatly expanded the market for wind, for its near term growth. With most of the long-term growth in energy demand expected to come from emerging markets in Asia, however, the company could be missing out on the opportunities in this region, though competitors like India's Suzlon might reduce the region's appeal. The strength of competitors GE in the U.S. and Gamesa in Spain have not stopped Vestas from claiming the two countries as its largest customers.

Business and Financials

Fiscal Year 2010 Summary

In 2010, Vestas generated revenue of €6.9 billion, up 36 percent from the previous year, with gross profits of €1.2 billion, up 41% from the previous year. These increases were due to an increase in deliveries, totaling 5,842 MW, a 23% increase from the previous year. At the end of 2010, the company had a backlog of orders of €7.7 billion, a 43% increase from 2009.^[5]

Trends and Forces

Vestas is Positioned to Benefit From Push for Offshore Wind Energy

In September 2009, the European Wind Energy Association (EWEA) held a conference in Stockholm with 4,750 attendees. The conference highlighted the large potential of offshore wind energy with the organization projecting that 50 gigawatts will be installed offshore by 2020. At the conference Vestas showed a new 3MW turbine model they had made for the offshore market, V112-3.0.^[6]

In May of 2009 DONG Energy finalized a $3 billion deal to build a 90 square mile wind farm 12 miles off the coast of the UK, deemed the London Array. It will be the largest offshore wind farm in the world with hefty support from the British government in offshore wind energy incentives. The wind farm is expected to provide 7% of the 15.4% of the country's target for energy from renewable sources by 2015.^[7]

In addition to the U.K., the United States has also demonstrated interest in offshore wind energy. At the end of June 2009 the Obama administration announced that it had issued five offshore exploration leases for wind energy production. The leases included areas 6-18 miles off of the coasts of New Jersey and Delaware. The leases were granted to: Bluewater Wind New Jersey Energy, Fishermen’s Energy of New Jersey, Deepwater Wind, and Bluewater Wind Delaware.^[8] There are other proposed leases off the coast of Northern California, Florida and Georgia.^[9]

Vestas has been installing offshore wind turbines since 1995 and in 2002 it produced the eighty turbines for the world's first major offshore wind power plant off the coast of Denmark, deemed "Horn's Reef." It is a 20 sq. km area that generates enough energy to run 150,000 homes.^[10]

The EWEA conference and interest from the U.S. and U.K. governments demonstrate high growth potential for offshore wind energy. Vestas already has a strong position in this emerging area of wind energy with an installed capacity of 900MW from 400 wind turbines. The combination of its experience with offshore turbines and the release of its new model (V112-3.0), is a positive signal that the company is ready to meet and profit from demand in this market.^[11]

Vestas Has Been Able to Grow, Despite The Global Economic Downturn

One might expect the falling price of oil to make Vestas's wind turbines less economically competitive. One might also expect shrinking government budgets to shrink the size of subsidies and tax credits for renewable energy companies. One would also expect tight credit conditions to limit the growth of all firms, including those with a pristine credit rating. All of those things are true, but only the third expectation will have an effect strong enough to slow down Vestas's growth. From the third quarter of 07 to the third quarter of 08, net income rose approximately 47%.^[12] An order backlog of €6.5B has kept revenue growth strong.^[13] The backlog has grown, albeit less than expected, because Vestas's turbines remain one the most competitive on the market. Only because lending has become more expensive will Vestas stop most of its new hiring.^[14] Credit remains tight because of the ongoing financial crisis being experienced throughout the world.

Though Many Emerging Markets are in Asia and Africa, Vestas is Focusing on the U.S.

Vestas plans to have 13,700 employees in Europe, 1,700 employees in North America, and 2,600 in Asia and the Pacific by the end of 2008^[15]. These represent 14%, 66%, and 15% increases, respectively, with real number increases of around 1700, 700, and 300 employees. It's clear that Vestas favors the Americas, especially the U.S., in its growth strategy. This makes sense, given the growing legislative support for renewable energy sources in the area. Furthermore, though only 6% of the U.S. has strong wind resources, these resources could supply 150% of the current U.S. energy consumption - but only if they were fully developed with turbines (IE 6% of US land mass would be covered with wind turbines)^[16].

The International Energy Agency has estimated that world energy demand will increase by 50% in the next 22 years. 74% of this increase is expected to come from developing countries - out of which China and India will make up 45%. Vesta's approach is appealing to social investors, as the company's motto, "People before megawatts", would seem to preclude it from taking advantage of low-cost workers; however, by expanding operations disproportionately in the U.S., where labor is more expensive and demand growth is less rapid, Vestas is missing out on opportunities in the Asian marketplace. Also, without expanding in Asia, the company will have difficulty achieving its goal of increasing wind power's contribution to the world's electricity generation to 10% by 2020.

At the end of 2010, Vestas received an order for 58 turbines with total capacity of 49.3 megawatts from Chongli Construction Investment Huashi Wind Power Company Ltd., to be installed at Jiaochekou wind farm in Chongli County, Hebei province, China. This puts the total order amount for the year from China at almost 1,000 MW, a record high for Vestas. Despite Vesta's focus on the United States, it is able to maintain its presence in other countries and stay resilient. Barclays forecasts global wind capacity to increase by 35.3 gigawatts in 2011, and expects Asia, China specifically, to be a major driver for this growth. The Global Wind Energy Council states China added 37 gigawatts of renewable energy power capacity during 2009, more than any other country in the world.^[17] Maintaining a presence in Asia is a priority for Vestas.^[18]

Wind Energy is the Most Economically Competitive Form of Renewable Energy

Vestas, as the largest wind turbine and system manufacturer in the world, is in position to take advantage of wind's competitive economics. Wind turbines have the lowest installation costs of any of the renewables, especially with large wind installations, which take advantage of economies of scale to reach lows of $800 per kilowatt installed^[19]. Small wind farms and individual turbines can cost up to $3,500 per KW installed^[20], which is a bit higher than the average geothermal plant, at $2500 per kilowatt installed^[21], but still less expensive than the $8,000 per kilowatt installed^[22] associated with photovoltaics. Wind farms also have the capacity to generate much more electricity than geothermal or solar installations. Wind rivals natural gas ($1200 - $1600 per kilowatt installed^[23]) and is much less expensive than a coal plant that has all the emissions retrofittings ($2,200 - $3,700 per kilowatt installed^[24]), though gas and coal plants generally take up much less land than wind farms with equivalent capacities.

Renewable Energy Legislation Gives Wind Companies like Vestas a Strong Cost Advantage

The U.S. has relied heavily on tax subsidies and direct government support to move the wind energy forward. Historically, wind energy has benefited from an investment tax credit, especially in California which saw a host of installations of wind turbines in the 1980's. Unfortunately, these turbines never needed to actually generate power in order to receive the credit. The second round of tax subsidies for wind focused on the Production Tax Credit (PTC), currently at 1.9 cents per kwh produced. The American Recovery and Reinvestment Act of 2009 included a 30% tax credit on new purchases of small wind energy systems across the United States with capacity of up to 100kW.^[25] Tax credits have been very beneficial for wind production, encouraging new investment and fulfillment of power production expectations.

Aside from a production tax credit on renewable energy sources (including wind), and the Renewable Portfolio Standards that have been adopted by 26 states, the U.S. government is coming out in vocal and financial support of wind energy. On May 23rd, 2008, the U.S. Department of Energy released a report titled "20% Wind Energy by 2030" stating that, even with contemporary wind technology, it will be possible for the U.S. to generate 20% of its electricity through wind farms by the year 2030, a move which would reduce natural gas consumption by 11% and coal consumption by 18%. China is planning on having 100 GW of wind energy installed by 2020.^[26] Even oil maverick T. Boon Pickens is getting into wind, investing over $2 billion in a Texas wind farm in May, 2008.^[27]

Since the passing of the American Recovery and Reinvestment Act, by May of 2009 $118 million has been announced to support the wind industry. Notably, in April of 2009, through the Department of Energy (DOE), $93 million was allocated to support further development of wind energy in the U.S. This strong support will move the industry forward through expanding domestic capabilities. It will allow for advancements such as the ability to test blades longer than 50 meters, which currently can only be done in Europe. It will also increase the cost competitiveness of wind energy, speed the next generation of turbines and the creation of large-scale offshore facilities.^[28]

At the end of June 2009 the Obama administration announced that it had issued five offshore exploration leases for wind energy production. The leases included areas 6-18 miles off of the coasts of New Jersey and Delaware. The leases were granted to: Bluewater Wind New Jersey Energy, Fishermen’s Energy of New Jersey, Deepwater Wind, and Bluewater Wind Delaware.^[8] There are other proposed leases off the coast of Northern California, Florida and Georgia.^[29]

The exploratory leases will allow for the creation of meteorological towers to collect data on wind speed, intensity and direction. The leases will cost about $17,000 per year and the data collected from them will be used to support future renewable energy projects and to assist coastal states in meeting renewable energy requirements. It has been proposed that offshore wind energy could account for nearly one-fifth of the U.S. wind capacity by 2030.^[8]

Coal Stands in the Way of Vestas' Expansion

In August of 2007, Vestas announced the closure of its Australian branch. Australia, the largest coal exporter in the world, looks to the "other black gold" for 85% of its domestic energy production^[30]. Because coal is easily accessible from any of Australia's populated regions and is one of the country's main exports, legislators are loathe to support the development of another source of energy, especially one financed abroad. Vestas could face similar troubles in the U.S., where oil companies are firmly entrenched in the nation's economic and political spheres. Furthermore, the U.S. is in the top three coal exporters AND coal consumers in the world (now vying for position two with China)^[31]. With such strong vested interests in coal, the U.S. government will debate whether or not to switch to wind energy and other renewables, despite the looming threat of climate change and the environmental degradation coal has caused in the past.

Competition

Vestas estimated that its worldwide market share fell from 28% to 23% in 2007, primarily because of the entry of Chinese competitors into the wind market, and that it had a 17% share of the US wind market in 2008.^[32]

• Gamesa - Gamesa's turbines make up over half of Spain's installed wind capacity, and the company itself held 11% of the world wind market in 2008.^[33]
• Suzlon Energy Limited - By acquiring REpower and taking advantage of global wind opportunities, India's strongest wind entrant has captured a global market share of 7% in 2008.^[34][33]
• General Electric Company (GE) - GE held 18% of the global market in 2008 and has installed over 10,000 wind turbines with a worldwide capacity of 15,000 MW.^[35][33]
• Siemens - Siemens Wind owned 7% of the international wind market in 2008, though the electronics company wants to expand its annual production to 4,500 MW (enough to give it 15%).^[36][33]
• Enercon - Enercon in 2008 held 9% of the world market share through installation of over 13,000 turbines in more than 30 countries.^[37][33]

Notes

1. ↑ Reuters Factbox: Facts and figures about Vestas, REC, EDF En nouvelles Feb 10, 2010
2. ↑ Vestas Brief History
3. ↑ Vestas Press Release April 26, 2010
4. ↑ Global Crude Oil and Liquid Fuels Energy Information Administration, Short-Term Energy and Summer Fuels Outlook, April 14, 2009
5. ↑ VWSYF 2010 Annual Report Pg. 9
6. ↑ Stuebi, Richard,"Offshore Wind: Europe Now, U.S. When?," SeekingAlpha.com, September 21, 2009
7. ↑ London Array Website, accessed on September 23, 2009
8. ↑ ^{8.0 8.1 8.2} Mouawad, Jad First Offshore Wind Leases Issued Green Inc. June 3, 2009
9. ↑ U.S. Department of the Interior- Offshore Energy Minerals & Management, accessed on July 6, 2009
10. ↑ "Wind Power In Stormy Waters," Danish Trade Council Website, accessed on September 28, 2009
11. ↑ Vestas Offshore Wind Brochure, accessed September 28, 2009
12. ↑ Vestas Wind Systems 2008 Q3 Interim Report, Consolidated Financial Highlights, Page 4
13. ↑ Vestas Wind Systems 2008 Q3 Interim Report, Summary, Page 1
14. ↑ Vestas Wind Systems 2008 Q3 Interim Report, Outlook for 2009, Page 2
15. ↑ [Vestas Wind Systems 2007 Annual Report, Page 16
16. ↑ U.S. Department of Energy: Wind Energy Resource Potential
17. ↑ [1]
18. ↑ [2]
19. ↑ http://www.telosnet.com/wind/future.html
20. ↑ California Energy Commission: Economics of Owning and Operating DER Technologies"
21. ↑ U.S. Department of Energy, Energy Efficiency and Renewable Energy: Geothermal FAQ
22. ↑ http://www.wind-works.org/Solar/SolarPVCurrentInstalledPricesperkWinCaliforniaElsewhere.html
23. ↑ http://www.memagazine.org/mepower03/bbuster/bbuster.html
24. ↑ Gristmill Post by GreyFlcn, July 19th 2007
25. ↑ Database of State Incentives for Renewables and Efficiency
26. ↑ SeekingAlpha: "Wind Power, Big and Small"
27. ↑ MarketWatch: "Department of Energy Says 20% Wind Power Achievable"
28. ↑ U.S. Department of Energy Energy Efficiency and Renewable Energy News, Recovery Act Announcement: Secretary Chu Announces $93 Million from Recovery Act to Support Wind Energy Projects, April 29, 2009
29. ↑ U.S. Department of the Interior- Offshore Energy Minerals & Management, accessed on July 6, 2009
30. ↑ "Vestas Wind Systems Blows Strong"
31. ↑ http://www.eia.doe.gov/emeu/pgem/ch6.html
32. ↑ International Business Times - GE led wind energy industry with top 2008 turbine sales
33. ↑ ^{33.0 33.1 33.2 33.3 33.4} Environmental Leader: Wind Turbine Market Share Revealed
34. ↑ "FT: Suzlon Sizzling"
35. ↑ GE Energy
36. ↑ "Siemens AG's Siemens Wind Power to Set Up Wind Turbine Plant in China-DJ"
37. ↑ Google Finance: Enercon