Opportunities in Europe's Renewable Energy Markets
by Harald Thaler (4/6/05)
Renewable energy sources will play a much greater role in global energy supply during this century. Increasing support through incentives and the establishment of obligatory renewables quotas in many countries, combined with declining installation costs, will ensure that renewables are becoming an established part of power generation portfolios everywhere.
The best short and medium term opportunities in Europe can certainly be found in the wind power sector as this is the only real contributor towards meeting renewables targets and the only major profit source. Investments in solar photovoltaics (PV) and biomass will be on a much smaller scale although actual growth rates, in particular for solar, will still be impressive. The chart below shows the forecast installed wind capacity in key European markets for 2010.
While Germany will still have the largest installed capacity in 2010, it is other countries where most of the action will be over the next few years. Spain is poised to see rapid growth, and the country's leading utilities are the main actors in this race. Both Iberdrola and Endesa are benefiting from a very generous support system for wind power in the country and the presence of well-establish local wind turbine manufacturers, and we forecast that Spain will add about 9,000MW of wind capacity between 2004 and 2010. The Italian market is also set for major growth as the green certificates trading scheme prompts greater investments in renewables. We forecast Italy to add about 7,500MW through 2010 as new entrants, such as Spain's Endesa and Germany's RWE, compete with more established players in the market such as Enel GreenPower?. The UK wind market (measured in terms of annual installations) is expected to grow at an annual average rate of 37% between 2004 and 2010, driven by utilities aggressive investments in onshore and offshore wind as a result of the country's Renewables Obligation. Companies such as Scottish Power, Scottish & Southern, EON and RWE npower are expected to add nearly 6,000MW in wind installations through 2010.
Motivators
The main groups that invest in renewables are utilities, independent 'green' companies (including capital funds) and oil companies. Key motivators for utilities' involvement in renwewables are:
Comply with national targets as set by legislation, for utilities that have not yet reached a critical installed base in renewables
Grow a profitable business - for other utilities
For other companies, motivators are varied and include:
Exploit identified niche segment thanks to uniqueness of offering, original positioning and relatively low degree of competition; Diversify portfolio of activities in areas where core competencies matter;Benefit from green image (particularly oil companies)
Utilities to refocus
The most important future players in the renewables industry will be the utilities, whose core competency for utilities has always been the production and sale of energy based on their assets and large customer base. While they have so far been relatively reticent in their approach towards renewables, many of them are now aggressively expanding their presence and a number of them have become involved across different aspects of the renewable energy value chain, including equipment manufacturing, project development and trading of green certificates. Utilities have had to adapt and get involved in those activities that are currently more lucrative and not necessarily in line with their core skills (e.g. project development) and/or decided to get involved in activities that present synergies or can help reach strategic objectives (taking stakes in OEMs? in order to control lead times and/or bargaining power of suppliers).
So far, utilities have tended to operate across the value chain in order to spread risk and reduce the impact of uncertain and changing legislative framework. By 2010, however, we expect most utilities to have invested heavily in new assets in wind power either via organic growth or acquisition. Iberdrola. Endesa and Enel are good examples of acquisition-driven expansion. Although new sites will still be developed, the focus of utilities will have changed and, once they have achieved this critical mass in installed base, we expect them to refocus on their core capabilities of generation and sales.
Conclusion
The renewable energy market of Europe, in the particular the wind sector, is poised for rapid and sustainable future growth and offers excellent opportunities for companies of all types. For utilities it will become a core part of their business before the end of the decade while oil companies will increasingly be involved as project developers in line with the growing importance of offshore installations. Independent green companies will continue to operate in the market although in reduced numbers as the inevitable industry consolidation process gathers pace.
Frost and Sullivan are currently evaluating the market of various renewable technology markets in Europe as part of a study on the European renewable energy market. Research is also ongoing into opportunities in renewable energy plants services in Europe. If you would like further information on these research services, which will be published in the summer of 2005, please feel free to contact us at power@frost.com
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