Below is an edited transcript of an interview with Vestas Chief Marketing Officer Morten Albaek, where he discusses:
(Commentary on the interview can be found here).
TE: Welcome to Climate Spectator, Morten Albaek.
MA: Australia is a priority, for sure a top ten market for Vestas. The assessment is that to hit the renewable energy target of 20 per cent in 2020 that around 1.2, 1.5 gigawatts will have to be installed every year the next coming eight years and just now we have a market share of 51 per cent. When Macarthur is installed, we are on the other side of 60 per cent. And we want to be Australia’s preferred partner in wind and we want to sustain our market share, so Australia is a very, very important market.
TE: I don’t know whether you’re familiar with the situation in Australia. We’ve had for a very long time, certainly on the east coast, very low gas prices of something like $3.50 a gigajoule and we’re moving to setting up liquefaction plants that will be able to export it to Asian markets where they pay in the realm of $10-$14 a gigajoule and there’s a widespread expectation that gas prices will ascend to reflect those sorts of prices.
Is that something that is playing into any of your thoughts around the prospects longer term of wind energy in this country?
MA: I would say that what makes Australia a very attractive market for Vestas is firstly that you have a lot of wind – and really, really good wind. It would be a little bit like not drilling for oil in the Middle East, not tapping into the wind resource that you have in Australia.
Secondly, that you have the renewable energy target of 20 per cent in 2020.
And then thirdly, Australia is one of the most CO2 emitting countries in the world and you have a price on carbon. These things together are what represent an attractive market for Vestas.
Then what we know whether we are talking about Australia or we are talking about a Latin American country or we are talking about East Asia or the States is that the price on fossil fuels is going to go up, and that also goes for gas and it also goes for shale gas. We also know is that the cost of wind energy is going to go down. So, to answer your question, of course increased gas prices make wind energy more competitive, but we have always factored in the fact that the fossil fuel price is going to go up and our cost of energy is going to go down.
That’s the reason why wind energy is going to hit grid parity in the not-too-distant future and even already is less expensive in a country like Brazil than fossil fuel is.
TE: Looking at Vestas’ financial performance recently, you’ve been going through some quite challenging times and when you look at say the US the price of gas there has absolutely plummeted, the environment politically perhaps has become more charged, we’ve got an issue over the continuation of the wind production tax credit. And also we’ve seen the entry of Chinese wind turbine supplies competing quite aggressively. It’s an incredibly competitive market. It is challenging financially. Can you see some light at the end of the tunnel?
MA: For sure. Firstly, and this is not something that we at Vestas invent, if you look at Bloomberg New Energy Finance analyses of how the shale gas prices are going to develop in the States and globally, they’re going to increase quite dramatically over the coming years as soon as shale gas starts being exported out of the States.
Secondly, we are optimistic about an extension of the production tax credit (PTC). But next year is going to be a very tough year for the business in the States.
TE: Are you confident about the tax credit extension?
MA: We are overall optimistic that it will be extended, but the question is whether it’s before Christmas or after Christmas. But no matter what, in 2013 we’ll probably see… even if the PTC is extended… we will see a significant smaller market than the one that we have seen in 2012. Depending on who you talk to, it can be a drop between 70 to 90 per cent. And here we are talking about the second largest market for wind in the world that suddenly decreases by 70, 90 per cent.
Since the US is such an important market for Vestas, then of course that is a significant challenge. But that’s also one of the reasons we have announced that in 2013 we are downscaling our business to five gigawatts.
TE: How does that compare to what it has been previously?
MA: When you talk about production capacity, it very easily becomes pretty complicated because it can be whether you have two shifts working seven days a week or whether you have one shift working five days a week. Then another thing is simply the number of factories that you have. So we have been capable of manufacturing much, much higher than five gigawatts if we had been fully utilising every hour in every day in all our factories 365 days a year. So I can’t give you precise numbers because there’s that complexity to it. But we have been capable of producing much more than five gigawatts.
TE: In Australia we’re a buyer rather than a seller of turbines, so this is actually good news for us at least in the short term. We’ve seen a substantial drop off in turbine prices here in Australia, so should we be trying to build as many projects as we can and putting our orders in now?
MA: Because you think that because of the downturn of the US market, so that you’ll get more attention and…
TE: Well, more attention, but maybe lower prices as well.
MA: Now, you can see that in our financial reports that our prices are pretty stable on a little bit more than one million euro per megawatt. We have been capable of sustaining our world leadership due to the quality of our products, so we don’t expect to see any price erosion or decreases due to the developments in the US. Furthermore, we have the policy that we say ‘no’ to non-profitable deals, which I think is the only sane and sensible thing to do for any company. That’s also the reason why we have said ‘no’ to certain deals in China, simply because it would be unprofitable for us to say yes to these deals.
TE: So, are there other suppliers out there that are prepared to do things that are… at unprofitable prices?
MA: At least what we can conclude is that these deals we say ‘no’ to are picked up by other suppliers.
TE: Okay. We’ve had anti-dumping cases against Chinese silicon PV manufacturers and tariffs have been imposed on them from the US and there’s a case being brought also in Europe. You don’t see that as an issue in the wind turbine industry globally?
MA: No. I would say when it comes to the Chinese manufacturers, firstly you can see on their earnings figures that they are also struggling as well as the rest of the industry in earning money, and that also means that that it’s tough to earn money in China because that is where they get the vast majority of their orders.
This brings me to the second point, namely that of course we take the Chinese colleagues and competitors deeply serious, as any other competitor, but they have so far not been capable of gaining significant market shares outside China and it is because it is a different market. And the clients in Australia or in Europe or in the US value quality, business case certainty very high and are not solely and only focused on price, but rather the total value of the project over a 20-year period. That’s where the western manufacturers, with Vestas at the forefront, have a competitive advantage.
TE: All the other turbine manufacturers are having trouble financially. Does that mean that prices for turbines have to rise for us to have a sustainable market place?
MA: Now, as I said, our prices have been pretty stable. There are minor fluctuations from quarter to quarter, but if you compare, you could say prices in Q3 2012 versus 2011, then it’s pretty flat. And, as I said, we don’t expect any significant developments up or down in the prices. So, now it’s all about reducing costs in your organisation and in your products and we are working determinedly and persistently on ensuring exactly that. We have communicated that we will reduce our fixed capacity costs by €400 million by the end of 2013 compared with 2011. We have announced that we have so far costed €30 million euro of EBIT out of our product platforms and that is kicking in by Q4 this year and then you can do the math of that and continue through four quarters.
So, that is where the competitiveness is going to come from. But that can’t come at the expense of quality.
We have reduced in 2012 at least €250 million in our capacity costs, while the lost production factor on our turbines continues to be historically low and the best in the industry for a full fleet. So, that shows that we can actually do both things, bring costs down and continue to have high product performance.
TE: We’re having a debate here in Australia about the level of our renewable energy target and there are some people suggesting that this is not sustainable, that we couldn’t achieve this target. Either we don’t have sufficient transmission capacity in sites where there is good wind, or if we don’t build new transmission capacity, then we have to go to places where the wind is poor and we’ll see a substantial deterioration in the economics of the projects.
Vestas is obviously talking to a lot of developers. Is that something that you can see that there’s an inevitable, substantial deterioration in the cost of energy because we are just not going to be able to make this target without moving to some poor wind speed sites?
Of course transmission system investments are needed for any large-scale energy technology and that goes for Australia as well as it goes for any other country on the planet.
However it’s important to recognize that the dominant part of the technology development inside wind energy is actually now happening in the lower wind classes. And that means that the technology now is becoming so sophisticated that it can actually capture very, very low wind speeds and generate significant energy production. So going to low wind sites is not an issue. But of course if there are no transmission systems, then there is an issue, but I don’t know the political agendas and decisions well enough to be an expert on that.
TE: Well, to give you some context the view tends to be that we’ve got a lot of sites… a lot of land area with seven metres a second that’s not too badly situated in relation to a transmission line, but…
MA: May I just say one thing here?
MA: These people tend to forget and just to make the technology evolution visible for people. If you’re a grown up human being and you put your hands around half a metre away from your mouth and you breathe out as strongly as you can, full power, the blade of a wind turbine will start moving. That’s how sophisticated it has become.
Furthermore, the reason why the technology evolution has been so extreme on the low wind sites is exactly as you started drilling oil where the oil was just one metre underneath the floor but now explore in more remote areas. So, if you look into whether it’s Vestas or it’s our competitors, the technology evolution is now happening in low wind speed turbines as well as offshore wind.
TE: So in Australia say around 2005 developers wouldn’t consider anything much less than eight metres a second. With these improvements could seven metres a second now deliver something equivalent in cost of energy? You were saying that the price of the turbines has been relatively steady sitting at around €1 million euros.
MA: The little more than €1 million euro per megawatt as a price average for a Vestas megawatt covers both old and new technologies, and new technologies are more expensive than old technologies. So, if you take Vestas two megawatts, then that is cheaper than the three megawatts, which are the ones installed the Macarthur project. So, old and new technologies do not cost the same, but we are talking about an average here, so it’s just to say of course you can get turbines that do not cost a million plus per megawatt. It’ll just be on an older platform.
TE: So, I suppose the thing is that while maybe price is not necessarily going down, yield is going up.
MA: Yes, exactly. That comes back to the fact the cost of energy from wind has gone down more than 90 per cent since 1981 and that continues to go down. It’s not just a function of turbine price, it’s also the output and the output is increasing year in and year out.
And then there is also the continuous upgrades of an already installed turbine that continues over 20 years … It’s a bit like if you have your Microsoft product that you got continuous upgrades. It may be that it says Microsoft 2001, but you’ve gotten so many upgrades on the way that it now runs much, much, much, much faster. It’s exactly the same with wind turbines.
TE: Yes. So, this idea that we might be running out of wind in Australia…
MA: But that’s absurd.
It’s not only absurd; it’s also pretty humorous because you have some of the absolutely best wind regimes in the world. You actually do have high wind regimes and medium wind regimes that are not even harvested yet, and furthermore your low wind regimes can also be harvested easily with the technology that we have now.
So, Australia is truly one of the most obvious places to get full benefit of wind energy. It would be as silly to state that you are running out of wind as it would to say that we are going to run out of sun in Australia.