Navigant Research Blog

Gamesa Acquisition Spells Uncertainty for Adwen Joint Venture

— July 25, 2016

Der Rotor wird angesetztThe Siemens acquisition of wind turbine manufacturer Gamesa has been underway for over a month now. There are predictable synergies between the businesses already summarized by Navigant; less predictable is what will come of Adwen, the offshore wind turbine 50/50 joint venture (JV) between Spain-based Gamesa and French industrial conglomerate Areva.

Areva has until September to decide between selling its partial ownership position, buying out Gamesa’s partial ownership, or selling the entire entity to a third party. Gamesa has valued its 50% stake in the JV at $81 million, according to its 2015 annual report. However, the actual valuation in today’s market is likely to be significantly below that due to the challenging nature of the offshore wind market. Areva is unlikely to proceed in the offshore sector on its own since the company has suffered significant financial losses on its nuclear operations and is undergoing restructuring and seeking state aid from France.

Siemens Buying the Stake?

Siemens may end up buying out Areva’s stake, but this is not preferable since it could risk  regulators scuttling the deal due to anti-trust concerns. The German conglomerate already has an unquestionable lead in the offshore wind sector, enjoying roughly 62% global market share of installed capacity by the beginning of 2016, followed by MHI Vestas with 18%. Adwen represents a roughly 6% share according to data from Navigant’s Offshore Wind Market Update report.

Siemens also simply doesn’t need Adwen’s technology. Adwen has a well-proven 5 MW offshore wind turbine, with 630 MW of installed capacity, and an 8 MW turbine in very advanced stages of development (both are medium-speed geared drivetrains). However, Siemens has its own highly refined offshore wind turbine technology led by its flagship 7 MW turbine, and the company has an uprated 8 MW unit with a 180-meter rotor coming to market soon. Siemens’ expertise, R&D, and supply chain commitments are tailored specifically to its direct drive turbines (with no gearbox). Siemens is also committed to building its own blades while Adwen outsources to LM Wind Power.

In place of Siemens acquiring Areva’s stake, a more likely scenario is the sale of Adwen to another interested party in the offshore wind sector. U.S.-based GE and Germany-based Senvion are reportedly preparing bids. Adwen was selected for approximately 1,500 MW of offshore wind development in France over the next few years. Therefore, its pipeline of projects where it is the preferred turbine supplier is arguably just as much of an asset as its actual wind turbine technology.

Third-Party Players

Of the known suitors, GE has the strongest financial backing to purchase Adwen, and its earlier acquisition of France-based Alstom shows further synergies, as the acquisition provided GE with a supply chain that dovetails with some of the company’s existing supply chain in France.

The Alstom acquisition also provided GE with approximately 1,500 MW of offshore wind contracts in France. This highlights a GE acquisition’s potential downside to the marketplace, as it would allow the company to monopolize all approximately 3,000 MW of offshore projects in the near-term French pipeline.

A more market-friendly approach would be a Senvion acquisition, which would split the French offshore pipeline to two companies instead of one. Senvion could also leapfrog from its existing 6.2 MW high-speed geared turbine to Adwen’s 8 MW medium-speed turbine (medium-speed is arguably a preferred design for offshore), and would benefit from the 1,500 MW French project pipeline at a time when Senvion is seeking more business outside of its home German market. What is ultimately decided by September is an unknown, but it fits an overall pattern of consolidation among wind turbine OEMs both on and offshore.

 

Energy Efficiency Is Not Lost in the Supermarket

— July 18, 2016

ControlsLast month, national grocery store chain Trader Joe’s made headlines when it agreed to reduce greenhouse gas emissions from refrigeration equipment at 453 of its stores. The federal government alleged that Trader Joe’s had violated the Clean Air Act by failing to repair leaks of R-22, which is used as a coolant in refrigerators but which also depletes the ozone and has 1,800 times more global warming potential than CO2. In addition, the government alleged that the company failed to keep appropriate service records.

Under the proposed settlement with the U.S. Department of Justice and the U.S. Environmental Protection Agency, Trader Joe’s will spend an estimated $2 million over the next 3 years to reduce its leak rate to less than half the average in the grocery store sector, and to use non-ozone depleting refrigerants at all new stores. It also agreed to improve its leak monitoring and recordkeeping. This is the third settlement federal authorities have reached with a national supermarket chain over refrigeration practices. Previously, Safeway agreed to pay $600,000 in penalties and reduce its emissions in 2013. The following year, Costco also agreed to pay $335,000 in penalties and take similar emissions-reducing actions.

Reducing Operating Costs

An average-sized grocery store releases 1,900 tons of carbon emissions annually. By reducing the amount of ozone-depleting refrigerants and potent greenhouse gases, the Trader Joe’s settlement will help address major global environmental problems. An added benefit of repairing refrigerant leaks is improved energy efficiency of the system, which can save electricity. In fact, supermarkets are one of the most electricity-intense types of commercial buildings due to the large amount of power needed for food refrigeration. Refrigeration accounts for around 50% of electricity consumption in supermarkets. Every year, an average-sized grocery store spends more than $200,000 on energy costs. Consequently, energy efficiency technologies that help reduce energy consumption can significantly reduce operating costs and improve profit margins. According to ENERGY STAR, a 10% reduction in energy costs can boost net profit margins by as much as 16%.

Fortunately, there are ample energy efficiency and emissions-reducing investment opportunities for the retail sector. Some efficiency upgrades specifically target the supermarket segment and refrigeration practice. For example, Axiom Exergy’s Refrigeration Battery stores cooling, not electricity. The battery stores refrigeration when electricity costs are the lowest and deploys it when electricity costs are the highest, reducing on-peak demand by up to 40%. Thermal storage tanks and software optimizing the charge cycle can be easily added on to an existing system.

The Retrofit Market

The average supermarket size in the Unites States is 47,000 square feet, placing these stores in the small and midsize building class. Navigant Research defines small and medium commercial buildings (SMCBs) as those ranging from less than 10,000 square feet up to 100,000 square feet, and most supermarkets fall under this class. While approximately two-thirds of the global building floor space is occupied by SMCBs and more than 90% of commercial buildings are small or midsize, SMCBs have not yet seen the same penetration of energy efficiency technologies as larger facilities. However, with the largest commercial buildings already engaged in energy efficiency retrofits, the focus is expected to shift to SMCBs. According to Navigant Research’s Energy Efficiency Retrofits for Small and Medium Commercial Buildings report, the SMCB retrofit market is expected to grow from $24.1 billion in 2016 to $38.6 billion in 2025.

 

Brexit and the Future of Energy in the United Kingdom, Part 2

— July 14, 2016

Bangkok SkylineIn my previous post in this two-part series, I discussed different potential scenarios for the U.K. energy sector after Brexit; here I examine Brexit’s impact on energy investment and energy industry in the country.

Brexit has caused widespread economic uncertainty and market volatility. Though the FTSE100 index has recovered from its initial decline, the pound is still trading well below its pre-election levels. While it’s not an economic disaster, Brexit-related uncertainty will expose the United Kingdom to greater instability when economic shocks do occur. The days of the country being a safe economic haven are over.

The U.K. energy industry relies heavily on capital investment to build large-scale assets—in recent years, this investment has gone into both onshore and offshore wind, the conversion of coal generation to biomass, and grid reinforcement. The United Kingdom is a 16% shareholder of the European Investment Bank (EIB), which provides ultra-low-cost funding to European infrastructure projects. In the 5 years leading up to 2015, the U.K. energy industry received more EIB funds—28% —than any other industry. However, Brexit will make it harder to access EIB funds for new projects. The bank has no provision in its statute for countries leaving the EU; the bank recently told Newsnight that “some U.K. projects, which previously would have stood a good chance, are now less likely to be approved.”

Interconnector Uncertainty

There will also be significant uncertainty regarding the country’s interconnector projects with mainland Europe. The United Kingdom’s participation in the single market provided investors with enough certainty to create a business case for interconnection. Before progressing with these projects, investors will require assurances that the country will be able to access cheap power from its European neighbors when its power prices are high, and vice versa. Future EU-imposed tariffs on the sale of electricity between a post-Brexit United Kingdom and the rest of Europe will kill interconnection projects, as without significant price arbitrage, there is no business case.

A new nuclear power station at Hinkley Point is central to the country’s long-term energy security, given the country’s rapidly decreasing capacity margin as older coal-fired generation plants are decommissioned. However, the country’s credit rating has been cut, along with many of its banks. This will likely raise the cost of capital for these large-scale energy projects, and may sound the death knell for the Hinkley Point project. The French government-owned lead partner EDF was on the verge of pulling out of the project before the Brexit vote; early indications suggest EDF will pull the plug.

Capacity Shortfalls

If Hinkley Point isn’t built, how will the United Kingdom address its falling capacity margin? One way will be to continue with its renewables program. However, the public is as hostile to onshore turbines as it is to European bureaucrats. To date, the United Kingdom has been a guiding light in offshore wind; however, these projects are more expensive per kilowatt of capacity than onshore projects. And with a higher cost of capital and an uncertain commitment to renewables, the country may find it difficult to find investment partners willing to commit to future offshore developments.

The capacity shortfall could be made up with domestic solar, but the ruling Conservative Party has already demonstrated its antipathy to subsidies by slashing the feed-in tariffs for domestic solar. With the threat of a post-Brexit recession, the government is more likely to remove incentives than introduce more generous ones.

What is more likely is a retrenchment from the country’s previous renewables obligations and a refocus on fossil fuel-powered generation—including the extension of the life of coal-fired generation—at least in the short- to medium-term. With historically low gas prices, we could see a resurgence in gas-fired generation. Fracking could also be back on the United Kingdom’s agenda: post-Brexit, the country will be free from the generally anti-fracking European body politic.

Siemens has gone on record about its uncertainty regarding future investment in the U.K. economy; this position is entirely expected. Most companies currently considering investment in the United Kingdom’s energy industry are expected to follow Siemens’ lead and wait until new prime minister Theresa May takes office and provides more clarity on what Brexit means for the country’s energy industry. While we just don’t know the extent of the fallout from Brexit on the U.K. energy sector, we do know that there will be an impact, and that it will most likely be negative—there are few positives to draw from the British public’s decision.

Potential Opportunity

So far, so gloomy. But is there a silver lining to what many see as a very gray cloud? While there is much to be pessimistic about, there are some potential positives to take from Brexit. Amber Rudd, the U.K. Energy Secretary, recently stood by the country’s commitment to address climate change, and suggested the United Kingdom could adopt more ambitious targets for CO2 reduction: 57% reduction from 1992 levels by 2032.

It can’t be disputed that Brexit has increased the risk of losing EDF as a partner for the Hinkley Point nuclear plant. However, this does not mean the project has to end. Brexit could unshackle the United Kingdom from EU regulations on nuclear power and, more importantly, wider procurement rules. The lower-valued pound will make it harder for U.K. companies to pay for goods and services beyond its own borders, but makes it cheaper for foreign companies—for instance, those in the United States or Japan—to make investments. Some may view Brexit uncertainty as an opportunity to enter the U.K. market at a lower cost.

 

Brexit and the Future of Energy in the United Kingdom, Part 1

— July 12, 2016

Energy CloudThe world is still reeling after the United Kingdom’s shock vote to leave the European Union (EU). So what does this mean for the country’s energy policy? And what does this mean for companies seeking to do business in energy in the United Kingdom?

The short answer to the first question is nobody knows, but it will either stay the same or get worse. Only a few short weeks after the world woke up to the reality of Brexit, there is far too much uncertainty to form a considered opinion about the extent to which the United Kingdom’s energy sector will be affected by the vote. However, it is worth taking a step back to assess the different scenarios that may evolve during the Brexit negotiations.

Period of Uncertainty

Until the U.K. government invokes Article 50 and formally notifies the EU about its intent to leave, the United Kingdom remains a full member. Article 50 will not be invoked until the new Prime Minister Theresa May enters Downing Street; however, there may be legal hurdles and a vote by Parliament before Article 50 can be invoked. There may even be a snap general election, further extending the period of uncertainty.

Brexit will either look very similar to the current state of affairs (although the United Kingdom will no longer participate in the European Parliament, it will still enact its laws), or the United Kingdom will cut itself off completely and face many years of trade renegotiations. So what can we expect the impact of Brexit to be on the U.K. energy market?

A Potential New Direction

The United Kingdom’s energy policy has been closely tied to wider EU policy for the last couple of decades. EU policy is heavily influenced by a low-carbon future and a pan-European energy market. The United Kingdom’s renewables, smart meter, and air quality targets were all set by Europe; a full departure from the EU via Brexit would mean the United Kingdom could tear up its commitments and choose its own direction.

Given the impending start of the United Kingdom’s smart meter rollout, this is probably an unstoppable train that has already left the station. However, if Brexit leads to a recession and higher fuel bills, there will likely be pressure on government to delay the smart meter deployment or rescind the legal obligation that forces suppliers to deploy meters. The United Kingdom has lagged behind many European countries in its commitments to improve air quality; a full Brexit from the EU will likely see the country delay further, given a likely shift back to fossil fuel-powered generation.

The short answer to the second question of what Brexit means for companies doing business in energy is “wait and see.” Look for more on this topic in the next post in this two-part series.

 

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