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Trends in Market SegmentsTowards More Solar Parks or Individual Installations?
EPIA2nd International Conference on Solar Photovoltaic Investments
EuPD ResearchFrankfurt, February 19th, 2008
2
Agenda
A. Concept of Market Segmentation1. The Need for Market Segmentation2. Requirements of Market Segments3. One-Dimensional Market Segmentation for PV4. Multi Dimensional Segmentation for PV5. PV Market Segments in Europe
B. Market Segmentation Data1. Customer Segmentation in 20072. IPP vs. Individual Installations in 2007 (Cum. Market Volume and Annual Investments) 3. IPP vs. Individual Installations in 2010 (Cum. Market Volume and Annual Investments)4. Conclusion
C. Implications for IPP Investment Decision Making1. IPP Factors of Success in Country Markets2. Investment Allocation via Portfolio Theory
D. Summary
Editorial
3
The Reason Why Helps to identify different market portionsAllows companies to satisfy potential customer needs
Results of Market SegmentationInternally homogenous and externally heterogeneous segment membersBeing as similar as possible within the segment, and as different as possible between the segments
The Need for Market Segmentation
Mass marketing refers to a treatment of the market as a
homogenous group and offering the same marketing
mix to all customers.
Target marketing recognizes the diversity of customers
and does not try to please all of them with the same
offering.
No segmentation Segmentation
vs.
A.1.
4
Requirements of Market Segments
For a segmentation to be practical, the respective groups should be evaluated against the following criteria:
The differentiating attributes of the segments must be measurable so that they can be identified.
Identifiable
The segments must be reachable through communication and distribution channels.
Accessible
The segments should be sufficiently large to justify the resources required to target them.
Substantial
To justify separate offerings, the segments must respond differently to the different marketing mixes.
Unique
The segments should be relatively stable to minimize the cost of frequent changes.
Durable
A.2.
5
One-Dimensional Market Segmentation for PV
Customer type
Appliance
Flexibility
System size
Technology
Private customers
Commercial customers
Agricultural customers
IPP/Solar funds
Public customers
Rooftop Open space Building Integrated PV(BIPV)
0-10 kWp 11-20 kWp 21-100 kWp101-1,000
kWp> 1,000 kWp
Monocrystalline Polycrystalline Thin film New materials
On-grid Off-grid Mobile
Portfolio of PV Market Segmentation
A.3.
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Multidimensional Segmentation for PV
TYPE X
PV Appliance
PV Customer type PV System size
If marketing activities are to be oriented towards certain market segments, it is advisable to combine the identified one-dimensional segmentation criteria.
A.4.
7
PV Market Segments in Europe
Private person investing on his own behalf in solar power by installing a PV plant on his own residential building Typical system size: < 10 kWpRooftop, BIPV
Type A Private
Customer
Commercial body or company installing a PV plant on own buildings such as warehouses, supermarkets, factories etc. Typical system size: 10 - 100 kWpRooftop, BIPV
Type B Industrial Customer
Person – in particular a farmer – investing in PV installations on barns or stables or land areas not agriculturally usedTypical system size: 10 - 100 kWpRooftop, BIPV, open space
Type C Agricultural
Customer
Public entity that invests in PV installations on public buildings such as town halls, schools, hospitals or theaters etc.Typical system size: 1 kWp - 100 kWpRooftop, BIPV
Type D Public
Customer
Professional investors such as investment banks bundling capital of contributors to invest in large-scale PV systemsTypical system size: > 500 kWpOpen space, rooftop
Type E IPP/Solar
Funds
A.5.
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Agenda
A. Concept of Market Segmentation1. The Need for Market Segmentation2. Requirements of Market Segments3. One-Dimensional Market Segmentation for PV4. Multi Dimensional Segmentation for PV5. PV Market Segments in Europe
B. Market Segmentation Data1. Customer Segmentation in 20072. IPP vs. Individual Installations in 2007 (Cum. Market Volume and Annual Investments) 3. IPP vs. Individual Installations in 2010 (Cum. Market Volume and Annual Investments)4. Conclusion
C. Implications for IPP Investment Decision Making1. IPP Factors of Success in Country Markets2. Investment Allocation via Portfolio Theory
D. Summary
Editorial
9
According to theresults of theEuropean Business Climate Index (quarterly inquiryamong expertsand marketparticipants) theshare of customersegments variesacross Europe.
Possibleexplanations are:Historicaldevelopment, diffusion stage of segments, architecturalfeatures, feed-incharacteristics, objective targetsof market playersand last but notleast the different absolute size of markets.
What are the current shares of each customer segment in European markets? l
Customer Segmentation in 2007 (%)B.1.
45.4
8.8
35.6
27.4
26.3
29.7
41.4
49.3
12.7
1.4
4.4
6.3
2.5
5.7
6.6
10.1
13.4
3.0
8.7
57.0
19.7
3.4
11.3
36.1
34.0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Germany
Spain
Italy
France
Greece
private customer commercial customer agricultural customerpublic customer IPP/ solar funds n = 41
Source: EuPD Research 2008
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Customer Segmentation in 2007 (MWp)B.1.
14 percent of the total installed capacity in Europe or roughly 600 MW are installed in solar funds.
The relation between IPP and individual installations in Europe is dominated by the situation in Germany.
In MWp, the following allocation of segments is valid for total Europe:
14.0%
6.0%
11.1%
27.7%
41.1%
private customer commercial customer
agricultural customerpublic customer IPP/solar fundsn = 41
Source: EuPD Research 2008
1828 MW
1230 MW
495 MW
269 MW
624 MW
86% (3822 MW)
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As the focus of this presentation is only the relation between IPP and individual installations the previous shown segmentation reduces to a minimum.
Nevertheless, the clear domination of the individual installation sector remains strong.
The same is true for annual investments: Roughly 15 percent of the annual invest-ments , which corresponds to 1.152 billion Euro, were spent for IPP installation.
IPP vs. Individual Installations in 2007 (Cum. Market Volume and Annual Investments) B.2.
For 2007, the allocation between segments and corresponding annual investments … will approximately amount to…?
265 327 624200
3430
3824
84
374
1152
684
374
4910
632
6082
0 MWp
1000 MWp
2000 MWp
3000 MWp
4000 MWp
Greece France Italy Spain Germany Sum
0 m €
1000 m €
2000 m €
3000 m €
4000 m €
5000 m €
6000 m €
7000 m €
Cum. Market Volume (IPP) Cum. Market Volume (Individual)
IPP Investments Individual Investments
Source: EuPD Research 2008
12
Assumed that the relation between IPP and individual installation remains constant until 2010, the annual investment volume for IPP would increase to roughly 1.8 billion Euro, while individual installations reach nine billion Euro.
In case of IPP doubling overall shares (30%), roughly 2.8 billion Euro IPP invest-ment volume per year is possible.
IPP vs. Individual Installations in 2010 (Cum. Market Volume and Annual Investments) B.3.
For 2010, the allocation between segments and corresponding annual investments … will approximately amount to…?
723 1.930
7589
9525
993 749
1316
5004
7727
457
1788
5988
9026
2833
1244
296373 446
0 MWp
1000 MWp
2000 MWp
3000 MWp
4000 MWp
5000 MWp
6000 MWp
7000 MWp
8000 MWp
9000 MWp
10000 MWp
Greece France Italy Spain Germany Sum
0 m €
1000 m €
2000 m €
3000 m €
4000 m €
5000 m €
6000 m €
7000 m €
8000 m €
9000 m €
10000 m €
Cum. Market Volume (IPP) Cum. Market Volume (Individual)
IPP Investments (moderate) Individual Investments (advanced)
IPP Investments (advanced) Individual Investments (moderate)
Source: EuPD Research 2008
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ConclusionB.4.
Share of customer segments non-uniform in Europe: German market mostlydriven by individual installation while Spain as the second biggest market has a focus on IPP
Share of IPP in total in Europe is only 15 percent which corresponds to an annual investment volume of roughly 1.2 billion Euro.
Assuming that customer segmentation will not change in the mid-term, annualinvestments of roughly 1.8 billion Euro are expected in 2010. In case that IPP-share in total might double in Europe, 2.8 billion Euro annual investments arepossible.
Further questions: Which factors are most influential for further IPP growth? What are country-specific factors? How is the optimum portfolio to beconstructed concerning the risk-return profile?
Market segmentation opens up investment opportunities
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Agenda
A. Concept of Market Segmentation1. The Need for Market Segmentation2. Requirements of Market Segments3. One-Dimensional Market Segmentation for PV4. Multi Dimensional Segmentation for PV5. PV Market Segments in Europe
B. Market Segmentation Data1. Customer Segmentation in 20072. IPP vs. Individual Installations in 2007 (Cum. Market Volume and Annual Investments) 3. IPP vs. Individual Installations in 2010 (Cum. Market Volume and Annual Investments)4. Conclusion
C. Implications for IPP Investment Decision Making1. IPP Factors of Success in Country Markets2. Investment Allocation via Portfolio Theory
D. Summary
Editorial
15
IPP Factors of Success in Country MarketsC.1.
Energy import dependence
Opportunity costs
Economic welfare conditions
Institutional investor body
Bureaucracy
Experience and qualifications of market participants
Long-term political support
Public support
Investment grants and promotion programs
Attractiveness of feed-in tariff
Total rating
Natural conditions
Germany
low medium high
Attractiveness of country markets
Spain
low medium high
Italy
low medium high
France
low medium high
Greece
low medium high
Source: EuPD Research 2008 The evaluation of investment opportunities in different countries requires not only the consideration of obvious factors like solar radiation and feed-in tariff, but also an analysis of the degree of bureaucracy, the experience and qualifications of market participants, the possibility of investment grants and opportunity costs.
As far as market segments are concerned, it is to be kept in mind that IPP is highly cost-driven.
What determines the attractiveness of country markets?
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IPP investments across Europe follow a different risk-return profile. Therefore and on account of small correlation coefficients the efficient portfolio of investments can be found using portfolio theory.
1,000 simulations of investment combinations lead to the efficient frontier (blue line) as the geometricallocation of all efficient portfolios.
Question: Which portfolio to choose?
Efficient frontier concerning five assets (country markets)
Investment Allocation via Portfolio Theory IC.2.
Efficient Frontier Simulation ResultsCountry Risk-Return Profile
1.0% 2.0% 3.0%
Standard Deviation
Source: EuPD Research 2008
MinimumRisk Portfolio
DE
IE
0%
5%
10%
15%
20%
25%
GR
4.0% 5.0% 6.0%
F
Exp
ecte
dR
etu
rn
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Answer: It depends on your utility function and the question if you are risk averse, risk loving or risk neutral.
Efficient frontier concerning five assets (country markets)
Investment Allocation via Portfolio Theory IIC.2.
U1
U2
U3U4
Efficient FrontierUtility Function
Simulation ResultsCountry Risk-Return Profile
DE
IE
F
GR
0%
5%
10%
15%
20%
25%
1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Standard Deviation
Source: EuPD Research 2008
Exp
ecte
dR
etu
rn
MinimumRisk Portfolio
18
The osculation point between your utility function and the efficient frontier will lead you to the portfolio to choose, which is P.
This example clearly demonstrates the risk and return improving function of diversification.
Efficient frontier concerning five assets (country markets)
Investment Allocation via Portfolio Theory IIIC.2.
U1
U2
U3U4
PxE(Rp)
Ϭp
Efficient FrontierUtility Function
Simulation ResultsCountry Risk-Return Profile
DE
IE
F
GR
0%
5%
10%
15%
20%
25%
1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Standard Deviation
Source: EuPD Research 2008
Exp
ecte
dR
etu
rn
MinimumRisk Portfolio
19
Agenda
A. Concept of Market Segmentation1. The Need for Market Segmentation2. Requirements of Market Segments3. One-Dimensional Market Segmentation for PV4. Multi Dimensional Segmentation for PV5. PV Market Segments in Europe
B. Market Segmentation Data1. Customer Segmentation in 20072. IPP vs. Individual Installations in 2007 (Cum. Market Volume and Annual Investments) 3. IPP vs. Individual Installations in 2010 (Cum. Market Volume and Annual Investments)4. Conclusion
C. Implications for IPP Investment Decision Making1. IPP Factors of Success in Country Markets2. Investment Allocation via Portfolio Theory
D. Summary
Editorial
20
SummaryD.
Market segmentation is on the one hand a necessity to address and satisfypotential customer needs, on the other hand it is the opportunity to quantifyinvestment volumes.
In contrast to capital markets where diversification across countries is not as promising as in the past, the diversification of investments into the photovoltaicmarket across Europe can lead to better risk-return profiles than investing onlyin one country.
As far as future perspectives are concerned, the differentiation between only two segments is not all-embracing. Especially the potential of industrial customers is promising (roof-exchange). Incorporation of off-grid systems will lead to further heterogeneity.
Market Segmentation allows for transparency
21
Editorial
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