KGB: Vestas Wind Systems' Ditlev Engel

Vestas chief executive Ditlev Engel tell Business Spectator's Alan Kohler, Robert Gottliebsen and Stephen Bartholomeusz:

Ditlev Engel: Thank you.

AK: So, wind power has been more difficult perhaps or has been difficult in the last few years. Has it been surprising to you how hard it has been? And have you had to change your view about where wind would end up as a proportion of electricity generation?

DE: So, if you go back and say well back in 2007, 2008 you had drivers where everything had to be green and we were looking for a big deal at the UN in Copenhagen at the COP15. You had the price of oil at $140 per barrel. You had like $10 per MTBU of gas. You had a carbon price in Europe of €30 per tonne.

And so, everything was indicating the cost of energy was just going to go through the roof and that obviously also meant that renewables were seen as being very much more attractive and mitigating costs. Then the financial crisis came. And if we just look at the year 2012, what are we left with?

In Europe the price on the ETS has gone from €30 to €4, the gas prices in the US have gone from $12 to $3. The economic growth has vanished. Southern Europe is under water. We have a constrained bank system and the talk about the climate change and the impact from renewables has basically vanished as well. So, in our industry we're wondering what are we missing for the perfect storm here? 

AK: It’s perfect.

DE: It’s perfect. So, I think the really interesting thing is when you add up everything that you in a risk scenario would say could go wrong, basically in the wind industry it has gone wrong, but despite that nobody has left the industry. And why is that?

AK: But you’re losing money though, aren’t you?

DE: We had a very difficult 2012, everybody did in the industry, but we are only in the wind sector, so we’re going to stay there. But a lot of our competitors have other legs to stand on. They’re not leaving the industry either. They are saying well if you look at the fundamentals on wind, they’re very, very strong.

So, even if it’s tough at the moment and is not as good as everybody thought it was going to be, then actually the installation of wind is coming to really keep on growing.  Andmif you just look in the US in 2012 now, and when I travel around the world everybody talks to me about shale gas, shale gas, shale gas, which of course is a new phenomenon and it’s part of the energy mix, however in 2012 I tell people that in the US they installed more wind than gas of new generation capacity in 2012.

Robert Gottliebsen: But they had a special subsidy, didn’t they?

DE: They still have. My point is that when you in the US have a price of gas around $6, then wind is competitive. Now, we are down to the $3 to $4 level at the moment and that’s why the production tax credit, as you were giving reference to, has been very important.

But if you look at the expectations to gas going forward, at this level I think most people are saying well it’s going to come up again and then wind is going to be a very important part of the mix.  And the interesting thing is when people look at this as if you are not going to go down this alley, what are the real options on the table? Are you going to install nuclear? I don’t think so. Are you going to install new coal? Very few countries are considering that option.

So, if you look at what are the real options if you want to replace existing generation capacity or if you want to add new capacity and here wind is actually standing out pretty strong in the cost of energy, despite all the, let’s say, perfect storm things that we have gone through in the last few years.

RG: Are you saying that in Australia as well as in the US you can install wind - without subsidy on the basis - of a $6 gas price?

DE: It depends from country to country, where you are and the total cost of capital.

RG: In Australia what would it be?

DE: Well, in Australia, I think it’s clear that you want to have an energy transformation. And there are two types of countries.  There are countries that are short of power, they have a fast growing economy and they need new generation capacity, and that is what we see in a lot of emerging markets; South America, South Africa, some Asian countries. It’s very clear that they are looking at having a clean choice when they have to install new capacity.

Then you have countries like Australia, you have the EU where there is enough generation capacity and people are saying why don’t we just stick to what we have? Why should we implement a new type of generation capacity?  But that is of course also needed to make that transformation as you have to implement new capacity when you have to make infrastructure investment.

So, the key question is if you have these incentives, you can faster move down to, let’s say, more wind or more solar in that area and then you have to remember that the energy business is not about the price at the pump tomorrow; it’s about your price expectations for the next 20 years. So, the really interesting thing is where do you think the prices of gas are going to go in Australia over the next 20 years?

And if you look at wind from a lot of utilities’ point of view, it’s a part of a hedging strategy. You know what your turbines’ costs are upfront. You can make a long-term service agreement. And then if you feel pretty comfortable on how the wind is going to blow, then you know for sure what that price of electricity is going to be. Whereas if you’re looking at the gas, I think people have been wrong footed a number of times when they thought it was going to go higher it went lower, when they thought it was going to go lower then it went higher. And they are some of the things that you can mitigate through wind. 

So, nobody’s going to have 100  per cent wind unfortunately, but I think you see a lot of utilities saying well it’s a good idea to have 20 per cent, 30 per cent of our portfolio in wind. And I have to say a lot of the CFOs in the energy companies like us because they can easily go to the board and say the cost of wind is this and I guarantee you it’s going to be like that for many years to come.

Stephen Bartholomeusz: Ditlev, to get back to something Bob asked a moment ago, the cost of wind versus solar PV versus gas, can you run through the basics of that?

DE:  Not to be awkward, but these questions are much more complicated. I wish I could just say it’s (clicks fingers) just like that. First example, on an annualised basis, the fossil fuel industry in the world gets subsidies in excess of $500 billion dollars. So, to answer your question is it wind without the $500 billion dollars that the fossil fuel industry gets. That I think is important.

RG: What do you mean by subsidies?

AK: What sorts of subsidies are we talking about?

DE: Well, you talk about the number of governments that are paying your producers. Since 1923 in the US it has been imbedded in the Tax Code that monies are going from the US taxpayer to support the oil and gas industry. It’s a fact.

SB: Well, to make it simple just...

DE: So, these are the kinds of support schemes. So, everybody keeps saying  is renewables on par with fossil fuel? My only point is to say we always talk about subsidies on renewables. Well, we never talk about the $500 billion dollars a year that the fossil fuel industry is getting and that’s a fact from the IEA – International Energy Agency – and so on.

So, coming back to your question, there was a study out – since we’re in Australia today let’s focus on that. There was a study out by Bloomberg, New Energy Finance, here in the early part of the year where they went out and said well if you look at the cost of energy for Australia, then wind will be cheaper than you installed gas or coal fired power plants. Of course if you have a depreciated coal fired power plant, that’s a different story, but if you want to install a new generation capacity, then wind is a good choice.

And you have to remember one thing that in Australia you are blessed with – I have to say as a wind guy you are blessed with phenomenal wind resources. I think everybody in Australia knows that you have fantastic coal opportunities, I think everybody knows that, but not that many people in Australia actually know that if they looked at the wind map, as we tend to do in our industry, we look at Australia and we go ‘wow this is a fantastic wind opportunity’.

SB: The issue that everyone always raises in relation to wind and solar for that matter is what happens when the wind doesn’t blow.

DE: I can guarantee that they’re not going to turn around.

SB: Is there anything under development which would allow storage of the generated power?

DE: Absolutely. You have in Australia a few percentages of your total energy mix being supported by wind, and in Denmark where I come from it’s 28 per cent. The Danish government has decided by 2020 we’re going to go to 50 per cent. That’s just seven years away. And by 2050 the Danish government has also decided that we’re going to run 100 per cent of renewables which is going to be a combination of wind and biomass and...

RG: Not hydro?

DE: No, no. Denmark is flat like a pancake, so it’s not an option for us. The point here is that wind is a base load for that month and obviously we also have days where the wind doesn’t blow and we need back-up for that.

Gas is there, a good back-up fuel. But again, when we look at something as exciting as energy, we cannot just say the technology development is here today and it’s going to be like this for the next 20 years. If we look at the mobile phone 20 years back and look at where it is today, look at what has happened, the same happens in our sector.

And a lot of work is being done at the moment in terms of storage and finding batteries, finding new ways of how you can store the power, and if that happened in the wind sector it would be like the iPad of the PC industry because that would change the whole thing. So, the most risky thing you can do I think in any business is to say we are here today, disregard technology development and say that we’re going to be here in 10 years from now. The only thing we know is that that is not going to happen.

AK: But you can’t predict what is going to happen, can you?

DE: You can at least come with some bets and if I look at the amount of investment that is going into finding new solutions in this area, because for a lot of countries that would be a game changer. It will also mean that you will reduce your dependency on other countries. It will mean that you could break the very important price barrier for renewables.

So a lot of work is going into that. If you just look at the amount of work that is going into electrical cars and battery facilities, they have caused a lot of spin-off work in the R&D area that we are engaged in. And I cannot tell you when somebody has cracked the code of storage, but it’s just clear when you look at how many people are pushing down there, I’m sure sooner or later somebody is going to find the solution to this.

So my point is, the costs we have today are with the disadvantages of wind not being able to store it. But if you then just dream – as Walt Disney said it – you can dream, you can do it. So, if you can try to think about it, imagine if you could do that, what would that mean?

RG: Is China trying to wipe you and GE off the map?

DE: No.

RG: By slashing the cost of the wind installations?

DE: No.

RG: They’ve certainly cut the price.

DE: Yes, but first and foremost, Vestas has six factories in China. We have a 100 per cent Chinese footprint. So if what you’re saying should be correct, we can produce everything in China at Chinese cost.

RG: How much lower is that than other places?

DE: Now what we do weighs 250 tonnes apiece, so this is not like T-shirts and sneakers where you can just mass produce stuff in a container and ship it around the world. If you look at the total cost of what we’re doing, then actually we produce in southern Europe, we produce in the US, we produce in China, and today you cannot move a wind turbine from China to Europe cheaper than you can produce it in southern Europe. You cannot move it from China to the US cheaper than you can produce it in the US. So, if our Chinese competitors want to take on Vestas, they also have to build up a manufacturing footprint in Europe or in the United States.

RG: Or incur a loss.

DE: Yes. So my point here just is that there is this notion that because we for the last 20 years have seen that you mass produce something in Asia and ship it around the world, we have to remember that the distance economics are changing. The cost of production in China has gone up. The cost of labour is going up. The cost in Europe is going down. The cost in the US has gone dramatically down. And therefore the copy/paste-like produce in Asia, ship around the world, is not the same for all industries and is definitely not the same for our industry.

RG: So, I’m being outdated. Say three or four years ago, that was really on where they were cutting the price.

DE: To be fair, we were not certain when we globalised our footprint whether or not it was going to go like that, but when we look at the cost today, then we can for sure produce very competitively in China and use it in Asia, but you can’t just like you do in other industries issue it around and about the globe.

SB: Ditlev, I’m sure you’re acutely aware that there’s been a debate going on in Australia about the 20 per cent by 2020 renewable energy target.

DE: Right. I know it.

SB: Which is expressed as a percentage, however the renewable commitment I think is 41 gigawatt hours and that looks like being 26 or 27 per cent rather than 20 per cent by 2015. I’m sure you’ve got a view about whether the target should be adjusted, so that it is a genuine 20 per cent.

DE: The first thing I will say is I cannot recall any country that has lowered their ambitions, even in the middle of the financial crisis, of what percentage of their energy should come from renewables. So, my first thing is to say in our sector, and if people watching this program will forget everything else I’ve said, I will at least say one thing I do I hope they’ll remember is that for this industry it’s all about regulatory strategy.

For the Australian market to have a bipartisan agreement on where you want to go in energy policies is what is going to release the investment to grow this business. And as far as I have heard, and I’m not the expert on everything here, but there seems to be a fairly good bipartisan support on the 2020 targets and obviously there can always be discussions about how would that play out in terms of the energy mix and so forth and so on, and let’s see how that goes.

But the key issue really is to make sure that the energy policy in Australia is something that on a bipartisan level gives long-term business certainty for the investors because as I hear it, it’s not due to a lack of capital. There’s a lot of capital that is ready to invest in big infrastructure projects in Australia. What seems to be holding certain things back are some planning issues... getting things approved or maybe having certainty about how to do the investments.

SB: The Coalition have said that they’re going to have a review of the RET in 2014. The gas producers not surprisingly are saying that allowing the overshoot that’s occurring to continue means higher costs for consumers.  Again, I imagine you’ve got a response for that too.

DE: Yeah. But I would say if you look at it... remember today wind is about 3 per cent. I think that what is most important for any government including an Australian government is to make sure that the industry has predictable energy prices going forward and there’s no way better to hedge an energy price than on wind because once you know what the installation cost is and you’ll then know for sure what the running cost is going to be the next 20 years. 

My view would be if you go to 20 per cent, you will still have a fairly good portfolio spread. You would have 20 per cent of renewables where the prices are given and you will still actually have a bet on 80 per cent which is actively, could be subject to fluctuations.  So, these two could guarantee to the Australian people to go to 20 per cent we have now hedged 20 per cent of our energy costs and we don’t need to be concerned. Because if you look at some of the costs going forward, as far as I understand, there are huge discussions in Australia: will the gas prices go this much higher and then this much higher?  And then my answer is well if you do the 20 per cent, you’ve already made a pretty good bet.

AK: That’s interesting because the discussion about renewable energy targets has always been in the context of an emissions reduction, not in the context of pricing hedges.

DE: Yes.

AK: So, are you trying to change the conversation away from emissions reduction towards pricing because, you know, the emissions reduction debate is really kind of over? Is that what you’re doing?

DE: You know, since this is on tape, I will -- you can go back five, 10 years from now and look at whether what I said was right or wrong -- but let me come with a prediction and then we can discuss in five years from now whether I was right or wrong. 

I think it’s very clear that the world is going to run out of everything and that means that the pressure on commodities is going to be very, very high. And we’re going to be another two billion people on the planet over the next 20, 25 years. And those things are very important to remember and not just in terms of what we are discussing in today’s world, but mainly in terms of exactly what’s happening tomorrow.  We keep forgetting about talking about the day after tomorrow. 

And I think for anybody, when you talk about the challenges that you were referring to on the climate and the emissions, it’s a given that we are under significant pressure. It just seems that we cannot at this moment comprehend all these issues because we are so embedded with banking and other stuff going on. But I’m sure that in five years from now – and this is my bet – that we’re going to have discussions like we have in the banking industry, how come that we didn’t act on the information we had on the table? How come that we just, well we were so busy and so forth and so on? 

When you have a job like I do, then you have the luxury of getting a lot of information from the UN, from the International Energy Agency, from the World Bank and so forth and so on, and I think it’s very, very clear that we are going to see a lot of challenges on the emissions schemes and the emissions challenges.

But even so, if we just then forget that for a moment and just look at what is it that we are actually doing on the other sector. We are actually creating some very interesting new opportunities on the energy side that we need and when people are saying ‘well if we don’t do wind, what should we do instead?  Should we go and build nuclear?  Should we go and build coal?’ So, what are the real options on the table for doing this going forward?  And here I think that wind has this fantastic opportunity that on one hand it keeps on reducing the cost of energy -- and has done so over the last 20, 25 years. And the only thing I will guarantee is that we will keep on reducing the cost of energy from wind going forward.

AK: But it’s all about gas, isn’t it?

DE: Pardon?

AK: It’s all about gas.

DE: Well, I am not saying that the...

AK: There’s so much gas in the world.

DE: Yeah, there is, but we have to remember that wind is only 3 per cent. And wind prices are going to come up again because they are, because we are all going to draw on the same resources. 

We have to make a transformation on how we consume both through efficiency gains, but also through the sources we explore. And to be very frank, I think it’s very interesting that even though the wind sector has been very, very challenged at the moment, nobody has left the sector. Everybody is staying in there. That of course for us is a little challenge at the moment because it would be nice if somebody left, however it also reassures us that even some of the largest industrial companies in the world are saying this is a good place to be because it’s going to be very interesting in the next years to come. 

And Australia has -- and this is actually what you should not forgot -- you have fantastic wind resources. And that is not bad when you’re going to see gas prices being much higher in a few years from now.

RG: But let me challenge that and give you a different scenario.

DE: Sure. Yes.

RG: That in the US, the shale gas revolution will be so huge that the gas price won’t rise above $4 dollars (and make it a dollar). The enormity of gas that has been discovered in Russia is that Europe is going to be flooded with gas. China is now looking as though it might discover large amounts of gas. And I question it running out.

The Middle East has got enormous reserves of gas. We’re not going to run out of gas for 100, maybe 200 years and so you’re going to have to compete with low cost gas for the next 100  And it’s not a question of running out in five years or six years or 10 years; it’s a 100 years. 

DE: Yes. Let me just say two things though. First, if you talk about gas, gas has the, let’s say this very positive characteristic that it is emitting a lot less CO2 than coal. But it is still emitting CO2. That’s one challenge. 

Secondly, I think that gas and the dependency on gas is something that any government would think twice about -- that you are dependent on one fuel only. I think most would like to make sure that you have a variety to bank on. And I’m not saying it’s going to be wind and everything else is going to be gone. I’m saying we’re going to need to make sure that this energy transformation takes place, is done on various tracks.

And we have to remember that in some places you’ve got gas, you’ve got some places where you’ve got fantastic wind. And what I’m saying is that in Australia you’ve got fantastic wind resources. And if everybody is going to draw on the gas, you also have to remember that you have to transport and gas doesn’t transport that easily in terms of the losses that you actually have. 

So, when you look at it today, if you take the shale gas in the US, it costs about $3 to $4 dollars in the US and the landed cost in Asia is about $12, $13. I can tell you $12, $13, wind is by far more competitive. So, we just have to remember that a lot of infrastructure investment has to go in there in order to exploit the gas as well.

RG: So, you’re saying that you can’t, or it’s much more difficult to compete with gas in an area, but if you have to make it into LNG and transport it, then you’re in the game. That’s one of our big industries.

DE: It’s funny. If I look at the world today, I see a world where you pay this much for gas in the US, you pay for this in Europe and you pay for this in Asia. And not so long ago, gas was sort of, you know, more on an equalised level. Now, it’s very much fragmented in terms of what the gas prices are. 

The only thing is what’s going to happen then in between is the gas prices have seemed to be fluctuating a lot. Now, what I’m just saying is from a government’s point of view they’d have to make sure that energy security is in place. It would probably be a good idea not to put all the money on one horse.

AK: We’ll have to leave it there. Thanks very much, Ditlev.

DE: You’re welcome.