Mergers and acquisitions among turbine manufacturers have increased competition and driven down costs. Alliances have created larger offshore wind businesses able to invest in developing new, higher-capacity turbines. This competition and increased scale have led manufacturers to innovate, reducing the levelized cost of energy by an estimated 11.5 euros per megawatt-hour through two main effects. Larger turbines have lowered costs by around 10 euros per megawatt-hour, while longer service contracts with performance guarantees have decreased financing costs by around 1.5 euros per megawatt-hour by reducing risk for investors. Overall, these reductions have strengthened the offshore wind industry by making it less dependent on subsidies.

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Turbine Manufacturer M&A is driving
down the cost of energy
Introduction
Mergers and acquisitions (M&A) among turbine manufacturers has increased competition
and is driving down the cost of turbines and financing costs. The offshore turbine alliances
of Mitsubishi Vestas (MHI Vestas); the Areva and Gamesa joint venture Adwen; and GE -
Alstom have created offshore wind businesses with the scale to bear the costs of developing
new, high tech turbines and providing a strong and long after sales service package. These
alliances will innovate to reduce the Levelised Cost of Energy (LCOE) and provide stronger
performance guarantees as part of their service contracts which reduce risk and so cut
financing costs by an estimated 0.1% - 0.2%. Together technical improvements and
reduced financing costs will shave some €11.5/MWh from the LCOE. Importantly, this will
reduce the dependence of offshore wind farms on subsidies.
Analysis
Siemens’ financial strength and ability to invest to support turbine sales has provided a
competitive advantage in the offshore wind market. In 2014, the bulk of the offshore
turbines installed in Europe were supplied by Siemens 86% (see Figure 1). In onshore wind
where scale and financial strength are less important, the league table shows Vestas as
leader with Siemens second. Till now GE has focussed on the North American market which
does not yet have an operational offshore project and as a consequence GE are the number
three manufacturer globally in 2014 but did not install any offshore turbines in that year.
Figure 1: Wind Turbine Manufacturer market share 2014
Installations (MW) European Offshore1
Global2
Siemens 1,278 4,990
MHI Vestas 141 6,053
Areva 45 NA
GE 4,589
Note: the global data is for both on and off shore turbines
The comparative financial weakness and lack of scale of Siemens’ main but smaller
competitors (Vestas, Gamesa, Areva and Alstom) is evident from a comparison using the
three key financial metrics of revenue, profit and enterprise value (the market value of the
company) in Figures 2 and 3.
1
European Wind Energy Association, The European offshore wind industry – key trends and statistics
2014, January 2015
2
GlobalData, Top 10 wind turbine manufacturer rankings for 2014, March 2015

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Figure 2: Key financial metrics for Turbine Manufacturers
The huge gulf in financial size and strength between what I have labelled the “Giants” (GE
and Siemens) and the “Minnows” (Mitsubishis, Alstom, Vestas, Gamesa and Areva) is clear
from Figure 2. This matters in the offshore wind market as project developers value turbine
manufacturers who the developers are confident will be around in the long-term to maintain
their equipment.
Figure 3: Key financial metric for turbine manufacturers
€m Revenue Profit Enterprise value
General Electric 105,960 9,473 436,596
Siemens AG 82,290 5,690 103,960
Mitsubishi Heavy Industries Ltd 22,760 929 18,117
Alstom SA 20,620 480 13,170
Areva SA 8,620 -617 8,210
Vestas wind systems 6,084 -82 6,528
Gamesa S.A. 2,620 80 3,080
Notes: Latest available data for each company as a whole
The competitive weakness of the Minnows and their small share in the rapidly growing
market for offshore wind turbines (the top end of the wind turbine product range) was
reflected in their share price, for example Vestas’ share price fell 93% from April 2010 to
November 2012 (see Figure 5). The estimated compound annual growth rate from 2010 to

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2020 of installed offshore wind capacity is over 20% pa in Europe and 45% pa in the Rest of
the World (see Figure 4).3
Figure 4: Rapidly growing offshore wind capacity
In 2011, 2012 and the first part of 2013, the share price of all of the Minnows fell while the
share price of the Giants changed little (see Figure 5). However, in the middle of 2013
investors recognised that the Minnows were using alliances to boost their competitive
position and profitability. As a result the share price of the Minnows started to rise,
although they did not catch up with the Giants.
3
Based upon analysis of forecasts produced by Renewables UK, the European Wind Energy
Association and the International Energy Association

4. Turbine Manufacturer M&A is driving down the cost of energy
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Figure 5: Share prices of the wind turbine manufacturers
Forming strategic alliances
The Minnows led by Vestas have successfully formed alliances as a strategy to improve their
competitiveness. Other important components of this strategy include innovating and
driving down the cost of energy. The principal innovations were selling larger, more cost
effective turbines; and offering long-term operations and maintenance (O&M) with
performance guarantees which created a new profitable business stream and took risk from
wind farm investors.
The turbine manufacturers are driving down the LCOE with longer blades which increase
energy capture, while reducing operational and maintenance costs by enabling customers to
run fewer turbines, with fewer service visits. The largest operational turbines are Siemens’
SWT-7.0 154 and the MHI Vestas V164-8.0 MW, one of which is capable of supplying
electricity for 7,500 European households. The SWT-7.0 154 is Siemen’s response to Vesta’s
8MW turbine and a number of manufacturers are working on 10MW turbines which will
further drive down the LCOE.
Another important step forward for the industry and turbine manufacturers is to provide
stronger performance guarantees similar to those available with types of generation.
Siemens, GE and Alstom provide long and credible performance guarantees for their gas
turbines which drive sales. For example, in 2013 GE signed a service agreement as part of a
deal to provide more than 300MW of gas turbines. This 13-year agreement includes power
output efficiency, reliability and performance guarantees. The availability of long, strong
performance guarantees is a sign of the maturity of the gas turbine market and the wind
turbine market is heading in this direction.
Industry consolidation allows manufacturers to offer stronger performance guarantees and
so reduce risk for investors. This strengthens the industry as manufacturers have the
knowledge and the reputational incentive to maintain their products, and for financially
strong manufacturers, their long-term guarantees are credit worthy. The €2bn of debt for
the Project Gemini offshore wind farm was catalysed by a contract structure which included
Siemens signing a 15-year project service and maintenance agreement. This managed risk
efficiently with the minimum of interfaces and Siemens’ equity in the project aligned the
interests of all parties. This structure is a template for other offshore projects and for long-
term turbine support.

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Impact on the LCOE
The analysis of the impact of the turbine manufacturer M&A on the LCOE is based upon the
effect on the size of turbines; the strength and length of turbine service contracts available
and finally the impact of both factors on the LCOE.
The steps in the analysis are set out below.
1. Larger turbines with longer blades deliver economies of scale in construction,
installation and O&M. Longer blades increase the Average Energy Production for a
turbine by sweeping a larger area. These factors combine and result in a lower
LCOE. DTU Orbit estimate that the LCOE for a 5MW offshore turbine is €107/MWh
and for an innovative 10 MW turbine it is €85/MWh.4
This is equivalent to a
€4.5/MWh LCOE reduction for each increase of 1MW in turbine size. When MHI
Vestas introduced the V164-8.0 MW it was 2MW bigger than its largest competitor
and had blades 10 metres longer, which I estimate reduced the LCOE by around
€10/MWh
2. Competition has also driven longer and stronger service contracts which reduce
investor risk and hence the cost of capital required by investors. In the language of
the credit rating agencies this is estimated to reduce investor risk by one notch (e.g.
increasing the credit rating of a bond from BBB to BBB+). Such a reduction in risk,
increase in credit rating, would reduce the interest rate on a 10 year infrastructure
bond by some 0.1% to 0.2%.
3. The Crown Estate has estimated that a drop of one percent in the Weighted Average
Cost of Capital (WACC) is equivalent to a reduction in LCOE of around 6%.5
Thus a
reduction in the WACC of 0.1% to 0.2% would cut the LCOE by 0.6% to 1.2% which
is equivalent to some €1.5/MWh
4. Adding together both these saving in give a total reduction in the LCOE of
€11.5/MWh
Conclusions
The conclusions based on this analysis are:
• Alliances have resulted in a more competitive market with four or more strong
groups able to invest, innovate and provide long-term product support
• Innovation and particularly developing large turbines has driven down the LCOE by
an estimated €10/MWh
• Turbine manufacturers are providing more O&M with performance guarantees as an
important sales tool as well as a growing source of income and profits
• Credible, long-term performance guarantees gives financial investors comfort, reduce
the cost of capital and so cut the LCOE by an estimated €1.5/MWh
• Together these reductions in LCOE are an estimated saving of €11.5/MWh or 8%
• These changes strengthen the whole industry and are an important contribution
towards driving down the LCOE and making offshore wind more competitive with
other types of electricity generation
4
DTU Orbit, Key Performance Indicators and Target Values for Multi Megawatt Offshore Turbines,
May 2014
5
The Crown Estate, Offshore wind cost reduction pathway studies, May2012

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• Cutting the LCOE also makes the industry more secure as it is less dependent upon
high levels of subsidy which are at the mercy of political whims
Charles Yates, March 2015