Meyer sebastian

Meyer sebastian
Happy New Year! Chinese wind turbine market: Characteristics, experience, export potential Winterwind Ostersund, Sweden 12 February 2013 Live Presentation Sebastian Meyer Director of Research & Advisory Azure International Beijing Data and information in this presentation is proprietary to Azure International Do not distribute or copy without permission, seek permission to reprint excerpts or figures Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 1
Azure International - company summary profile  A clean energy technology research & advisory, commercialization & investment boutique founded in 2003  Based in Beijing and dedicated to leveraging the Chinese clean energy market and value chain into businesses with global potential  Team’s professional experience combines deep local and international cleantech business management; strong network of technical, financial and institutional partners  Unique, in-house research/knowledgebase combined with hands-on execution capabilities in sourcing, operations and marketing  Proven decade-long track record in commercializing clean energy technologies in China Engineering Market Research Consulting & advisory Investment Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 2
Presentation overview - outline (1) Introduction to Azure International (2) Capacity & potential in China (3) Operating history & track record (4) Export potential (5) Conclusions Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 3
Plans, pipelines, capital - China plans to add 1.2TW generating capacity Planned Power Generation Capacity (12th 5-year plan, GW) Total funding need: 2500 • RMB 2.6 Trn to 2015 • RMB 6.2 Trn to 2020 2000 Wind funding needed: 1500 Solar • RMB 180 Bn to 2015 • RMB 340 Bn to 2020 Wind 1000 Solar funding needed: Nuclear 500 Hydro • RMB 190 Bn to 2015 Coal • RMB 350 Bn to 2020 0 Now 2015 2020 Source: 12th 5-year Plan, SERC, Azure International estimates Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 4
Plans, pipelines, capital - China plans to add 1.2TW generating capacity PM2.5 emission sources Beijing vehicle exhaust: trucks vehicle 5% exhaust: pass other cars 7% 2% coal combustion 14% secondary sources road dust Adding 1.2TW 34% 7% generating capacity biomass burning (mostly coal) poses 8% an unprecedented cigarette smoke soil dust metal 12% environmental 1% industry processing 5% 5% challenge already Source: positive matrix factorization, various sources obviously problematic: Water, Air quality, Global Resource limitations mean wind power likely to warming... outpace plans Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 5
Plans, pipelines, capital - renewable energy targets & pipelines • China has seen an unprecedented scale-up and is now the operating the world’s largest wind fleet Installed capacity (GW, Cumulative) Installed capacity (GW, annual) 90 20 18 80 16 70 100% y-o-y growth ! 14 60 12 50 10 40 8 30 6 20 4 2 10 - - < 2005 2006 2007 2008 2009 2010 2011 2012 < 2005 2006 2007 2008 2009 2010 2011 2012 Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 6
Plans, pipelines, capital - renewable energy installed • Pipeline activity reflects economic transactions leading to capacity • Wind power Installed base already world’s largest Solar PV 5+GW Wind 70GW Source: Azure International data Source: Azure International, Google Earth Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 7
Plans, pipelines, capital - renewable energy under development • Ongoing early development activity across the country indicates considerable further potential Solar PV 85GW Wind 450GW Source: Azure International data Source: Azure International, Google Earth Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 8
Plans, pipelines, capital - renewable energy targets & pipelines • Central targets and bottom-up pipelines intersect reasonably well and confirm economic interest in out performing capacity targets in the long run if feasible Solar PV Mid Term Target (~2015) Long Term Target (~2020) Target 21GW 50GW 3GW Pipeline 18GW 85GW Source: Azure International for pipeline data, targets from NDRC and other Chinese government planning authorities Wind Mid Term Target (~2015) Long Term Target (~2020) Target 100GW (connected) 150GW 65GW Pipeline 105GW 450GW Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 9
Plans, pipelines, capital - China’s big 5 generators • Lots of assets (SOE groups total RMB 2.6Tr or US$ 400Bn) • Profits low (2010 net margins average 1.6%, Datang posts loss) • All net profit practically invested in capacity additions (2010 RMB 14bn or US$ 2.2Bn) • Overall balance sheets weak (2010 d/(d+e)=>80%) Big 5 net assets (RMB Bn) Big 5 profitability (RMB Bn) 800 Total liabilities Total assets Group profit 250 600 200 400 200 150 0 100 -200 50 -400 -600 0 Datang Huanneng Guodian Huadian CPI -800 -50 Datang Huanneng Guodian Huadian CPI Source: public declarations y SOE group level companies, not audited or confirmed Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 10
Plans, pipelines, capital - Hong Kong listed renewables subsidiaries • Better capitalized with funds raised in HK IPOs • Room for more leverage on balance sheets, but eventually capital is required for continued asset expansion • Given current capital market conditions, companies will be trying to conserve capital 1H 2012 Net Debt / D+E (%) Datang 1/2GW (1Yrs) 80% Huaneng 4GW (2Yrs) MAX Longyuan 6GW (3Yrs) 0% 10% 20% 30% 40% 50% 60% 70% 80% Source: Company financial statements Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 11
Plans, pipelines, capital - surcharge & redistribution fails to deliver cash • Interconnection delays likely caused by delayed cash reimbursement to deficit grids; ie lack of funding causes delays! Cumulative wind capacity installed & connected (GW) capacity installed & connected capacity installed not connected 70.00 60.00 50.00 40.00 30.00 20.00 10.00 0.00 1H06 1H07 1H08 1H09 1H10 1H11 1H12 2005 2006 2007 2008 2009 2010 2011 Source: Azure International Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 12
Plans, pipeline, capital - surcharge & redistribution fails to deliver cash • Curtailment is also Curtailment by province (2009-2011) correlated with degree of deficit under Surcharge & 黑龙江 Redistribution 吉林 mechanism 新疆辽宁 • Lack of funds also 甘肃内蒙古北京 means economic 宁夏河北 uncertainty once 青海山西山东 grid connection is 西藏陕西河南 completed 四川湖北安徽重庆浙江江西 Above 20% 湖南贵州福建 10-20% 云南广西广东 0-10% Source: CEC, Azure International Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13
Plans, pipelines, capital - receivables in the value chain Sinovel - receivables vs. payables (RMB Bn) Goldwind - receivables vs. payables (RMB Bn) Mingyang - receivables vs. payables (RMB Bn) Payables (+) Receivables (-) Payables (+) Receivables (-) Payables (+) Receivables (-) 20 15 10 15 10 5 10 5 - 5 - - (5) (5) (5) (10) (10) 10) (15) 15) (15) 20) (20) (20) YE09 1H10 YE10 1H11 YE11 1H12 YE09 1H10 YE10 1H11 YE11 1H12 YE09 1H10 YE10 1H11 YE11 1H12 Source: Company financial statements Source: Company financial statements Source: Company financial statements • Sinovel, Goldwind, Mingyang together represent 43% of all installed wind generation capacity as at end Oct 2012 • Knock-on effect clearly affecting working capital of equipment suppliers • Payables less receivables already at RMB 9bn (neg) for Sinovel, Goldwind and Mingyang • Market saw relatively stable installations in the timeframe • 1H 2011 working capital funding increase basically locked-up all capital raised in previous IPOs of the equipment manufacturers Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 14
Plans, pipeline, capital - borderline bankability caused by administration Average plant age close to 1.5 years operating only, with most operating projects actively repaying long-term loans 70GW+ installed, financing 80% debt (2-year repayment holiday) puts sector exposure on banks at some RMB 280bn •7-year repayment and 6.5% interest means wind sector must repay RMB 50bn in fixed principal and interest payments p.a. 2012 sector revenue at 2k effective hours by WA FIT is RMB 78bn, with: • RMB 46bn from the OGT, and • RMB 32bn from top-up to FIT, of which This leaves some RMB 50bn of timely received cash revenue for servicing debt payments Further capacity expansion can’t effectively be funded through retained earnings/cash; utilities must access (existing) equity Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 15
Operating history in China - overview • Over 5 years • Growing verifiable evidence of reasonably operating history robust turbine operations in China documented • Results reflect curtailment and seasonality • Azure International data shows turbines Operating track record: net capacity factor (%) are operating Average net performance from 01-Mar-06 to 01-Jul-12 (26 GW reference capacity) reasonably well 0.45 0.4 • 5 GW shown; data 0.35 set covers 20% 0.3 theoretically available generation 0.25 for market (’06-’11) 0.2 shows net 0.15 performance of 22% 0.1 0.05 Congestion likely explains declining average technical performance • Can be compared to net results for 0 Nov/06 Jan/07 Nov/07 Jan/08 Nov/08 Jan/09 Nov/09 Jan/10 Nov/10 Jan/11 Nov/11 Jan/12 May/06 Sep/06 May/07 Sep/07 May/08 Sep/08 May/09 Sep/09 May/10 Sep/10 May/11 Sep/11 May/12 Jul/06 Jul/07 Jul/08 Jul/09 Jul/10 Jul/11 Jul/12 Mar/06 Mar/07 Mar/08 Mar/09 Mar/10 Mar/11 Mar/12 Germany Source: Azure International data Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 17
Operating history in China - average vs. project level Utilization of wind plant in China Revenue of Per kW (full load Average revenue per kW (capacity Average revenue per kW hours) Individual project revenue per kW factor) (RMB/kW) Individual project revenue per kW 3,000 35% 2,000 1,800 30% 2,500 1,600 25% 1,400 2,000 20% 1,200 1,500 1,000 15% 800 1,000 10% 600 500 400 5% 200 - 0% - 55 projects 55 projects Source: Azure International,UNFCCC Source: Azure International,UNFCCC Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 18
Operating history in China - cold weather dominates Chinese fleet exposure • Most of the fleet in high wind speed areas in north China Cold weather rated Normal • In these regions, equipment is rated to operate regularly in temperatures to minus 35 degrees • Generally dry conditions in north China mean ice is generally not an overall issue • Abrasion through fine dust is a common problem Source: Azure International Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 19
Operating history in China - cold weather dominates 2012E Installed wind capacity in cold weather rated provinces (>500 MW) 25 Cold! 20 15 GW 10 5 0 IMAR Hebei Gansu Liaoning Heilongjiang Jilin Xinjiang Shanxi Ningxia Shaanxi Source: Azure International Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 20
Operating history in China - volume accelerates fleet operating experience Fleet operating experience (turbine years) Cold weather Normal Goldwind Sinovel Vestas Dongfang Guodian United Mingyang Shanghai Eelectric - 5,000 10,000 15,000 20,000 25,000 30,000 Source: Azure International Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 21
Operating history in China - direct drive leadership? Fleet operating experience direct drive (turbine years) Cold weather Normal Goldwind XEMC Energine DNEE - 2,000 4,000 6,000 8,000 10,000 12,000 Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 22
Export potential - value proposition & risk International expectation of value: “Deeply discounted capacity with manageable risk or reliability tradeoff” Azure: Because of differences in market maturity, capital markets, value chain integration, differing levels of quality control and sourcing relationships, international sourcing needs to be carefully managed to ensure highest valued is obtained (& Azure can support international buyers) Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 24
Export potential - available capacity & competitive pricing Supply side (Production plans vs installations) Wind turbine bid price in China (incl. VAT) - 1.5MW total actual installations tempered production plans (50%) (RMB/kW) 45 9,000 40 8,000 35 7,000 30 25 6,000 20 5,000 15 10 4,000 5 3,000 0 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Apr-12 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Sep-12 Jun-07 Jun-08 Jun-09 Jun-10 Jun-11 Jul-06 Jul-12 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Nov-12 May-06 May-12 2006 2007 2008 2009 2010 2011 2012 Source: Azure International Data Source: Azure International Data “Apparent” excess capacity strong price competition has halved capacity costs as industry reached scale Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 25
Export potential – exports already started Turbine exports form China (MW) 400 350 USA Pakistan 300 Ecuador Brazil USA Australia 250 Vietnam Chile Cyprus (MW) 200 150 USA USA 100 USA India Thailand Pakistan England 50 Cuba Thailand Chile - 2008 2009 2010 2011 2012 Source: Azure International Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 26
Export potential - expectation gaps and context • At present negotiations for Chinese turbine for developer participation in a growing number of projects around the world are frustrated by huge gaps and different expectations that exist because of differences in China and international markets • Context: 100% y-o-y growth, average turbine operating experience is just over 1.5 years • Shift from most turbines under warrantee in early 2013, to most turbines beyond 2-year warrantee period • Warrantee periods quietly extending…it’s a buyer’s market Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 27
Export potential – context & risk interpretation (capex and opex) China ROW Capex Lower cost Higher cost Opex 2 year warranty period 5 year warranty period is common, but cost of services is charged to client Warranty periods currently being expanded Enercon: warranty period > 12 years Entire Chinese fleet now operational Public data on turbine models which for an average period of under 2-years have been operating for more than 10 years No public data on failure rates Project financial model includes Assumes fixed yearly O&M cost with no failure rates major failures e.g changing 15% of gearboxes every 5 year period Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 28
Export potential – annual energy production interpretation China ROW Considers losses but not uncertainty Considers losses & uncertainty Example: – GROSS equivalent full load hours: 3500h – Estimated energy losses: 20% – Net energy production: 2800 full load hours This is the value given in a typical local FSR, it is a P50, there are as many chances that this result is exceeded than chances that it is not reached. – Estimated Uncertainty: 15% – P75: 2517 full load hours  75% chance of being exceeded – P90: 2262 full load hours  90% chance of being exceeded This is is the value used by western developers for project assessment Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 29
Export potential - other commercial DD & finance related issues • Country risk, currency risk, policy risk, political risk • International banks & insurance difficulty in getting comfortable with risks although international listings have helped add some balance sheet visibility for some leading companies • Most Chinese banks are unable to lend in foreign currency, long-term parent company guarantee treatment remains unresolved particularly with regards to potential future asset ownership transfers, PPA uncertainty and unfamiliarity with non-PPA market based subsidies • Service and maintenance treatment/coverage Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 30
Conclusion - Closing remarks • China is already a world leader in wind markets • The position and its leading companies as an important global industry leader will be optimized if the industry can demonstrate long-term success in its home market • International markets and approaches particularly around policy and finance differ considerably from the China experience • Execution of growing Chinese brand turbine deals depends on refining approaches to international markets and Chinese overseas direct investment, but experience is growing... Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 32
Azure International – Syndicated Research - Other available studies Other reports available: A) Wind Development Bottom-Up (updated monthly, predictive) B) Wind Turbine Manufacture Bottom-Up (updated monthly, predictive) C) Wind Gearboxes Bottom-Up (updated annually) D) Large Castings Bottom-Up (updated annually) E) Blades Bottom-Up (updated annually) F) China Offshore Industry: Sponsored by WWF Norway, and available at: http://assets.wwf.no/downloads/china_norway_offshore_wind_final_wwf_march_2010.pdf Bespoke assignments (suggestions/examples): - Market segments, new products, competitor analysis, policy & market analysis - Customer, partner, strategic buyer identification - Project pipeline identification/acquisition (China, Australia, USA, Europe) - Turbine and component quality due diligences, procurement support - Investment related commercial and technical due diligences - Wind measurement, project design, micro-siting, turbine selection - Permitting & approvals, company structuring & setup -Energy strategy: carbon foot-printing and emissions optimization & offset Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 33
Conclusion - final remarks – 2012 3Q China Wind Market 2012 China Grid Scale Energy Quarterly: Storage:  Reports available through Azure International’s partner Greentech Media (GTM) at www.greentechmedia.com Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 34
Sebastian Meyer Director of Research & Advisory sebastian.meyer@azure-international.com Tel: +86 10 8447 7053 Fax: +86 10 8447 7058 Oriental Kenzo Suite H, Office Tower, 6th Floor 48, Dongzhimen Wai Street 100027 Dong Cheng District, Beijing PR China www.azure-international.com Happy New Year! Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 35

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