Fanning the winds of change
Quarterly results posted by Denmark’s Vestas held many positives for the worldwide move towards a low-carbon economy.
Download PDFFrom a standing start in 2005, China is now the largest wind farm operator in the world: One in five turbines in the world is now installed in that country. And this dominance is accelerating, with China installing some 16 Gigawatts (GW) of wind turbines in 2010 – almost half the total amount installed around the world in 2010.
From a climate change perspective, this is fantastic. But from a global, free-trade policy perspective, not quite so good.
China has been aggressively pursuing a ‘buy-domestic’ policy that has seen the collective Chinese market share of leading foreign wind firms like Vestas, GE, Suzlon, Enercon and REpower cut to a combined share of less than 10 per cent from over 33 per cent in 2007. This has underpinned the move of Sinovel, China Ming Yang and China Goldwind into the list of the top 10 wind turbine manufacturers globally.
This support to local firms has underpinned the rapid expansion of the domestic wind industry in China, with an equally successful growth evident in the Chinese solar industry. However, similar protectionist moves are be taken up in America, Canada and France as Western countries grapple with massive unemployment pressures. And India is implementing similar buy-domestic policies in solar and wind to foster domestic manufacturing and employment.
The quarterly results posted by Denmark’s Vestas last week have some very bullish points for the worldwide move towards a low-carbon economy. But the result also reflects the very negative consequences of the global financial crisis, specifically the constraints on the Western world’s ability to fund this crucial economic transformation.
Vestas’ revenues for the quarter to December 2010 doubled year-on-year (YOY) to €3.1 billion. It shipped 845 wind turbines with an aggregate capacity of 1,626 Megawatts (MW) in the quarter, but recorded volume declines of 33 per cent YOY. The numeric average wind turbine capacity that Vestas installed in 2010 was 1.92 MW, but more on more on this shortly.
Net income was a profit of €151 million, even after one-off costs of €158 million associated with the retrenchment of some 3,000 employees in Europe. But in spite of this gloomy news, this quarter’s profit represented a significant improvement on the very weak results seen over the prior four quarters.
Vestas said that its 2011 revenues for the full year should be in the order of €7 billion, which is broadly flat on 2010 levels. However, with the company’s significant cost reduction efforts expensed in 2010, and significantly improved shipments of turbines expected, net profits in 2011 should double. To put this in context, this is a significant improvement, but is still some 40 per cent below pre-GFC levels.
The most positive aspect of this result was that Vestas had a 2010 order intake of a standout 8,673 MW of turbines. This is almost triple the order intake of 2009 and is almost 50 per cent higher than Vestas’ previously highest order intake year (2008). Included in 2010’s intake was a single order for 1,500 MW from Energias de Portugal Renovaveis (EDPR) – the world’s largest onshore wind turbine order ever.
Climate sceptics can protest all they like; the world is changing towards a low carbon economy. The scale of renewable energy projects is doubling every one to two years, generating economies of scale and driving down the cost of renewable energy. And meanwhile, fossil fuel costs keep rising. The convergence of these two trends combined with the inevitable pricing of carbon pollution means grid parity is drawing ever closer.
Vestas has manufactured 40 GW of wind turbines globally over the last two decades, just over 20 per cent of the estimated 197 GW installed globally at the end of 2010. Vestas’ global market share in 2010 recovered to 16.3 per cent after hitting a decade low of 12.3 per cent in 2009. While Vestas has continued to lose share to the collective growth of the Chinese majors, it has gained share relative to GE, Nordex and Alstom.
As an aside, the other major non-Chinese wind turbine firm to have reported a significant recovery in market share towards the end of 2010 was Suzlon of India. This was a major surprise. Suzlon’s management have been under enormous financial pressure, juggling an excessive debt burden incurred prior to the GFC. Suzlon exited 2010 with a 5 GW order book worth $US7.4 billion (which combines Suzlon’s own wind division with their 93 per cent owned subsidiary, REpower of Germany).
During 2010 Suzlon signed a 1,000 MW agreement with Caparo Energy India, giving Suzlon a total orderbook in India of 1,624 MW at the start of 2011. Again, while Australia debates whether global warming is a myth, India is massively ramping up its wind and solar capacity exponentially.
Despite its financial woes in 2010, Vestas has continued to invest aggressively in new technology. Over 9 per cent of Vestas’ 23,000 employees are engaged in Research and Development (up from 4 per cent in 2006). Vestas exited 2010 with 227 patent applications globally (up from 165 in 2009 and 50 in 2006) and spend €150 million on R&D in 2010, well up from €92 million spent in 2009.
Vestas took a big hit in 2010, but has kept a focus on the long term and continued to invest in its core business. On 30 March 2011 Vestas will formally launch its 6 MW offshore wind turbine – almost the largest in the world (until AMSC’s 10 MW Sea Titan makes it’s debut, anyway!).
This follows rapidly on the heels of Vestas’ launch of the V112-3.0 MW onshore turbine. Followers of AGL will be familiar with the V112 – AGL and Meridian Energy announced last August 12 that they would spend some $A1 billion installing 140 Vestas turbines at the Macarthur Wind Farm near the Victorian town of Hawkesdale in 2011-2013. AGL was the first major order for the V112 in the world.
While the Western world grapples with how to fund the cost of shifting to a low-carbon economy, countries like India and China have firmly grasped that massive global energy security risks have to be quickly addressed before the ever-rising cost of energy and diminishing supply of fossil fuels fully hits home. Vestas is one company 100 per cent focused on leveraging the great business opportunity that this represents.
Tim Buckley is a managing director and portfolio manager at Arkx Investment Management
Disclaimer: Arkx Investment Management (Ark – x) focuses its investment approach on a small portfolio of high conviction stocks in the listed global cleantech universe. It looks for proven performers with world leading technologies backed by strong balance sheets and priced on sensible valuation metrics. While Arkx holds long positions in American Superconductor and Vestas, nothing in this article should in any way be considered as investment advice.