2011-12-12-korea offshore wind master plan_is leapfrogging possible

8/12/2019 2011-12-12-Korea Offshore Wind Master Plan_is Leapfrogging Possible

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Bloomberg

NEW

ENERGY FINANCE

12

December 2011 WIND

ANALYST

REACTION

Contents

Koreas offs ore md master p a

is

~ 2 Ieapf ogging possible?

KOREAN WIND

MARKET

3

Qn 11 November 2011, South Koreas Ministry of Knowledge Economy (MKE)

3.

LEAPFROGGING

announced that it wil l nvest KRW 10 .2tn ( 9bn ) to

develop

2.5GW worth of

STRATEGIES:

BUILD . .

YOUROWNORBUY

offshore wind capacity

by

2019 in conjunction with 15 domestic companies, ~

THEM

OUT?

~ including seven power producers

and

e ight turbine manufacturers. This

long ~

awaited

plan

is designed

to kick

start

Koreas

offshore

wind industry, creating a

domestic market

to

help

companies

gain

experience

and

achieve

scale

in

wind.

~

But as a latecomer

to

the industry and with the wind supply chain facing severe

competition

and margin

pressure

in

other parts of the wor ld , how

well

wiIl ~

Korean wind companies far e? B loombe rg New Ene rgy F inance examines the

~

details

of the plan and the

prospects

for Korean wind companies.

o

The plan

wi ll be executed in three

phases,

with

the

f lrst phase

running

to 2014

to install

~

100MW mostly as a demonstration, the second phase between 2014-16

to

install 400MW

and

~

with a

final phase until 2019 to

deploy

the remaining 2GW.

In

the

flrst phase, each of

the eight

domestic turbine manufactures will

be

allowed to i ns ta ll two or

three 3-7MW

turbines. The ~

second phase wi ll be open to

turbine

manufacturers which have

successfully

installed and ~

tested turbines

in

the first phase. The last phase

will be

open to public tenders.

The

plan

will approximately double Koreas current wind project pipeline from 2014-16

and

add even more

signiflcant

capacity from 2017-19, but this will sti ll not create enough annual

demand to sustain the eight local

suppliers and

their component

providers

without an

export

~

market. Exports will

also

have

to

take place before the

plan

is fully implemented in order

to

be

a

part

of

the major upcoming European offshore wind tenders in the next few

years.

The entire

2.5GW project

is estimated

to

cost 9bn

and

there is little indication

on

how this will

be f inanced, part icularly for the later phases

of

the project. European investment banks were

involved in

many Korean

onshore projects

before,

but

it is

unlikely they wil l be involved

in

this

2

offshore plan A combination

of

domestic banks

and

balance sheet flnancing is likely be used ~

instead.

Offshore

wind is

probably

the best

entry poi nt fo r

the emerging Korean

wind

turbine

manufacturers given their existing experience in marine engineering, shipbuilding and power

equipment.

However,

as latecomers

and without a domestic market

to scale, Korean turbine

manufacturers wilI face a

cost

disadvantage against Chinese

firms and

an

experience

deflcit

versus European companies.

Korean industrials are

well-capitalised

and have mult ip le bus iness units t ha t

can bring

expertise in sales, procurement, supply chain management and other experience. They may

be

able to acquire overseas technology,

supply

chain companies, or

even

entire pure

play

Justin Wu wind turbine manufacturers

to

leapfrog

into

the

offshore

wind sector.

+852 2977 2004

jwul66~bloomberg net

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3/7

WIND

ANALYST REACTION 12 December 2011

Table 2: Main participants

Type Organisation name

Korea Electric Power Corporation (KEPCO)

Korea East-West Power

Korea Hydro

&

Nuclear Power

Power companies

Korea Midland Power

Korea

South-East

Power

Korea Southern Power

Korea

Western

Power

Doosan Heavy Industries and Constwction

Daewoo

Shipbuilding

&

Marine

Engineering

Samsung Heavy Industries

Unison

Turbino suppliers 0

Hyundai Heavy Industries

~

Hyosung Corporation

DMSC0Ltd

STX Corporation

~

Source: Minisf,y

of Knowledge Economy

2. STATE OF

THE KOREAN WIND

MARKET

Although t he p la n w il l double Koreas wind project pipel ine from 2014-16 and

add

even more

significant capacity f rom 2017-19,

this

will stiII not create

enough

annual

demand

to

sustain

the

eight

local suppliers and their component providers

without

an export

market.

South Korea is a

latecomer

to

the

wind industry. The country currently has

just

under 400MW of ~

installed

wind

capacity

and

expected

to add

only

22MW

in

2011. The

total pipeline

for

onshore

projects s currently about

1.2Gw

through 2016 and an additional 260MW of projects have been

planned

outside o f this

master plan. Annual project build

out, however,

remains under 300MW

before

2016 and wiI l p ick up to

between

300-1000MW from 2016-1

9, ifthe

Master Plan proceeds ~

according

to schedule. (Figure and

Table

3) Given the

challenges

to

financing

and

technology,

~

the Master Plan will

likely falI short of ts 2.5GW target

in

2019,

though

other project development

~

activity

will

Iikely take place after 2016

as

the RPS is implemented.

Both onshore and offshore domestic wind demand is expected to grow in Korea, following g

implementation

of

its RPS and REC t rading sys tem from 2012 onwards , but the wind

market

is ~

still constrained by several factors

such

as land

availability,

permitting

rules

and access

to

~

financing. Historically, European investment banks

and

turbine manufacturers have been heavi ly ~

involved in Korean projects and many are I ikely to continue to be involved. However, the

domestic

~

f inancing market remains far less experienced than in other mature wind markets. These factors ~

remain uriclear and cause uncertainty

in

the market. 0

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4/7

WIND ANALYST REACTION

12

December 2011

Figure

1:

Korea wind market demand forecast,

2011-2019

(onshore

and

offshore)

MW

change

-73 -29

173 200 47

-17

213

-27 80

33

1200

Offshore master

900 pIan

projects

688

100

Otheroffshore

projects

300 500 700 Onshore project

pipeline

Historic

264

100 300

220 capacity

180

113 100 100 288

31 22

60

160 120 200

200 200

200 9 2 01 0 201 1e 2012e2013e2014e2015e2016e2017e2018e2019e

Source:

Bloomberg New Energy

Finance Note: Onshore

and

other

offshore project pipeline

from

2011-16

based

on BNEF project database. Onshore forecasted pipeline from

2017-19 based on

capacify expected

fo

be announced n the

future

fo meef

RPS

demand.

Table 3: Additional

planned

offshore wind projects

Project

name Capacity

Description

(MW)

Qn

2

September

2011 Korea South-East Power (handling

project

administration and operation) signed an MQU with Doosan Heavy

Korea

South-East

Industries and Construction

and

Posco

ICT (both

handling project

Power Haengwon 60 construction)

for

the estimated

KRW

250bn ( 235m) project, with

Wind Farm

construction to start

in September

2011 and

commissioning

scheduled

for

June 2014.

Korea Southem

Power Jeju Daejung 200

Wind Farm

Qn24

March 2011, Korea Southem Power (KQSPQ) signed

an

MOU

for

the 200MW offshore wind farm development

with

Samsung

Heavy Industries

and

Hyundai Heavy Industries. The first 100MW

phase of the projectwill start operating in 2014 and the second

100MW

phase is expected tobe completed in 2016. Hyundai

and

Samsung

will

supply and instali

their

wind turbines, and KQSPQ will

be

in charge ofmanagement

and operation

after the

construction.

Source: Bloomberg New Energy Finance

Korea

has

just

over 20 commissioned

wind p ro je ct s a t t he end

of

Q3 2011, most ly

developed

by

domestic utilities, turbine manufacturers

and

local governments. A few have a lso been sponsored

by the

turbine

OEMs

themselves

to test

their

turbines.

Vestas currently

holds

a

69

market

share

with Korean OEMs holding

about

13 , mostly in

smaller scale

test

and demonstration

projects.

AlI of the current ly commissioned projects are onshore. (Figure 2)

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5/7

WIND

ANALYST REACTION 12 December 2011

Figure 2: Cumulative installed

turbine

market share in Korea in

Q3 2011

Other

foreig

n

10 /

Korean

OEMs

13

cciona

16

Total

= 389MW

Vestas

69

E

o

o

0

(o

1)

(o

Source:

Bloomberg New Energy

Finance Note: Data

as

of Q3 2011

and

includes

cumulative gnd

connected ~

projects

only.

Other

foreign

ncludes Gamesa and Mitsubishi.

Korean OEM5 with

installed turbines

include

~

Unison,

Hyosung, Hanjin, Doosan

and

Samsung.

~0

3.

LEAPFROGGING STRATEGIES: BUILD YOUR

OWN OR BUY

THEM OUT?

0

1)

Offshore

wind

is

p robably the best e ntr y point

for

the eme rgin g Korean w ind

turbine

o

manufacturers given their

existing

experience in

marine englneerlng, shipbuilding

and

power

~

equipment. However,

as

latecomers

and

without

a

domestic

market to sca le , Korean turbine

manufacturers

wiIl face

a

cost

disadvantage against

Chinese firms and an

experience deficit

versus

European companies.

Unlike their Indian or Chiriese competitors that took t ime

to

scale in their home markets, Korean ~

companies

have targeted export markets

almost

immediately. Further

distinguishing themselves

from Chinese OEMs, they

have

also avoided emerging wind markets in

Latin

America,

Asia,

and

~

Africa and chose to focus instead on offshore and mature markets in Europe and North America.

The

main reason

for

is

that most

of

their

sales,

marketing, port facilities and other

business

unit

resources are

located in Europe,

the

US

or Canada.

No Korean manufacturer

has currently

sold more than 100MW of wind turbines, but many have ~

already

installed units in Europe or the United States.

In

contrast, Suzlon and Goldwind both took

~

six years

to

install

their

f lrst 100MW worth

of turbines

in

their

home markets before

focusing

on

exports (Figure 2). This

lack

ofscale puts Korean f irms at a disadvantage in

temis

of operational

experience

and pricing against other

turbine manufacturers

but does allow them to provide

more

resources

to exports

without having to

worry about

a

heavily competitive

domestic market.

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WIND ANALYST REACTION

12

December 2011

Figure

3:

Key milestones of Asian wind

turbine

manufacturers (years)

(2008)

1

Sl El

(2006)

Firstexport

sale

~~GOLDWIND

Marketentry

(1998)

to first 100MW

nstalled

6 2

(1995)

199519971999

2001

2003 2005 2007 2009

Source: Companies, Bloomberg New Energy F inance Notes : Yea rs i n parentheses indicate the year the ~

companys wind

division

was establlshed. Numbers in each

bar represent number

of years

it took for

~

company

to

achieve that milestone.

u)

On

the plus side,

Korean

industrials

are well-capitalised

and

have multiple business units that

can

bring expertise in sales, procurement, supply chain management and other experience. Several ~

have already acqui red European

turbine manufacturers

(Daewoo,

Doosan,

and STX) and

designers and are

likely

to acquire more

technology

or

supply chain

companies in the future.

A a

less

costly strategy would be

to

use l icensing agreements or

hire

design companies for certain ~

components

(blades,

control systems, gearboxes, etc.)

and

then

build

the turbine in-house. ~

Though

less

costly than

an

acquisition, this strategy has more

technology

r isk as the

designs

i

would come from a variety

of

sources.

Most Chinese companies have used

a

mixed strategy, employing design companies for certain

key

components (such

as

blades

and control systems),

sourcing

others from suppliers

and

~

redesigning and improving older l icensed technology (Sinovel, Dongfang, Ming Yang, Guodian ~

United Power).

Only

a

few (Goldwind

and

XEMC)

have

acquired European turbine

manufacturers

(Vensys

and

Darwind).

o

ci)

-o

o

ce

ce

ce

o

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WIND

ANALYST REACTION

12

December

2011

a)

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ABOUTUS

SUBSCRIPTION DETAILS Wind,

Asia &

Oceania

Insight

[email protected]

0

a)

CONTACTDETAILS

Justin

Wu, Head of

Wind

Research jwu166~bIoomberg.net +852

2977 2004

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2011-12-12-korea offshore wind master plan_is leapfrogging possible

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