meyer sebastian

Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 1

Sebastian Meyer Director of Research & Advisory Azure International Beijing

Data and information in this presentation is proprietary to Azure International Do not distribute or copy without permission, seek permission to reprint excerpts or figures

Winterwind Ostersund, Sweden 12 February 2013 Live Presentation

Chinese wind turbine market:

Characteristics, experience, export potential

Happy New Year!

Confidential & Proprietary: Do not distribute or copy © 2012 Azure International

Azure International - company summary profile

A clean energy technology research & advisory, commercialization & investment boutique founded in 2003

Based in Beijing and dedicated to leveraging the Chinese clean energy market and value chain into businesses with global potential

Team’s professional experience combines deep local and international cleantech business management; strong network of technical, financial and institutional partners

Unique, in-house research/knowledgebase combined with hands-on execution capabilities in sourcing, operations and marketing

Proven decade-long track record in commercializing clean energy technologies in China

2

Engineering Market Research Investment Consulting & advisory

Sebastian Meyer, Azure International

Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International Sebastian Meyer, Azure International 3

Presentation overview - outline

(1) Introduction to Azure International (2) Capacity & potential in China (3) Operating history & track record (4) Export potential (5) Conclusions


Total funding need: • RMB 2.6 Trn to 2015 • RMB 6.2 Trn to 2020 Wind funding needed: • RMB 180 Bn to 2015 • RMB 340 Bn to 2020

Solar funding needed: • RMB 190 Bn to 2015 • RMB 350 Bn to 2020

Sebastian Meyer, Azure International 4

Plans, pipelines, capital - China plans to add 1.2TW generating capacity

0

500

1000

1500

2000

2500

Now 2015 2020

Planned Power Generation Capacity (12th 5-year plan, GW)

Solar

Wind

Nuclear

Hydro

Coal

Source: 12th 5-year Plan, SERC, Azure International estimates


Plans, pipelines, capital - China plans to add 1.2TW generating capacity

vehicle exhaust: trucks

5% vehicle exhaust: pass

cars2%

coal combustion

14%

road dust7%

biomass burning

8%

soil dust12%metal

processing5%

industry5%

cigarette smoke

1%

secondary sources

34%

other7%

PM2.5 emission sources Beijing

Source: positive matrix factorization, various sources

Adding 1.2TW generating capacity (mostly coal) poses an unprecedented environmental challenge already obviously problematic: Water, Air quality, Global warming...

Resource limitations mean wind power likely to outpace plans


Plans, pipelines, capital - renewable energy targets & pipelines

-

2

4

6

8

10

12

14

16

18

20

< 2005 2006 2007 2008 2009 2010 2011 2012

Installed capacity (GW, annual)

-

10

20

30

40

50

60

70

80

90

< 2005 2006 2007 2008 2009 2010 2011 2012

Installed capacity (GW, Cumulative)

• China has seen an unprecedented scale-up and is now the operating the world’s largest wind fleet

100% y-o-y growth !

Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International

Plans, pipelines, capital - renewable energy installed

7

• Pipeline activity reflects economic transactions leading to capacity • Wind power Installed base already world’s largest

Solar PV 5+GW

Wind 70GW

Source: Azure International, Google Earth Source: Azure International data


Plans, pipelines, capital - renewable energy under development

8

• Ongoing early development activity across the country indicates considerable further potential

Wind 450GW

Solar PV 85GW

Source: Azure International, Google Earth Source: Azure International data


Target

Pipeline

Mid Term Target (~2015) Long Term Target (~2020)

150GW

105GW 450GW

100GW (connected)

Plans, pipelines, capital - renewable energy targets & pipelines

Target

Pipeline

Mid Term Target (~2015) Long Term Target (~2020)

50GW

18GW 85GW

21GW

Solar PV

3GW

Wind

65GW

Source: Azure International for pipeline data, targets from NDRC and other Chinese government planning authorities

• Central targets and bottom-up pipelines intersect reasonably well and confirm economic interest in out performing capacity targets in the long run if feasible


Plans, pipelines, capital - China’s big 5 generators

• Lots of assets (SOE groups total RMB 2.6Tr or US$ 400Bn) • Profits low (2010 net margins average 1.6%, Datang posts loss) • All net profit practically invested in capacity additions (2010 RMB 14bn

or US$ 2.2Bn) • Overall balance sheets weak (2010 d/(d+e)=>80%)

-800

-600

-400

-200

0

200

400

600

800

Datang Huanneng Guodian Huadian CPI

Big 5 net assets (RMB Bn) Total liabilities Total assets

-50

0

50

100

150

200

250

Datang Huanneng Guodian Huadian CPI

Big 5 profitability (RMB Bn) Group profit


Source: public declarations y SOE group level companies, not audited or confirmed


Plans, pipelines, capital - Hong Kong listed renewables subsidiaries


• Better capitalized with funds raised in HK IPOs • Room for more leverage on balance sheets, but eventually capital is

required for continued asset expansion • Given current capital market conditions, companies will be trying to

conserve capital

0% 10% 20% 30% 40% 50% 60% 70% 80%

Longyuan

Huaneng

Datang

1H 2012 Net Debt / D+E (%)

Source: Company financial statements

6GW (3Yrs)

4GW (2Yrs)

1/2GW (1Yrs)

80% MAX


Plans, pipelines, capital - surcharge & redistribution fails to deliver cash

• Interconnection delays likely caused by delayed cash reimbursement to deficit grids; ie lack of funding causes delays!

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

2005

1H06

2006

1H07

2007

1H08

2008

1H09

2009

1H10

2010

1H11

2011

1H12

(GW)Cumulative wind capacity installed & connected

capacity installed & connected capacity installed not connected

Source: Azure International


Plans, pipeline, capital - surcharge & redistribution fails to deliver cash

• Curtailment is also correlated with degree of deficit under Surcharge & Redistribution mechanism

• Lack of funds also means economic uncertainty once grid connection is completed

黑龙江

吉林

辽宁

河北

山东

福建

江西

安徽湖北

湖南

广东广西

河南

山西

内蒙古

陕西

宁夏

甘肃

青海

四川

贵州

云南

西藏

新疆

浙江

北京

重庆

Above 20%

10-20%

0-10%

Curtailment by province (2009-2011)

Source: CEC, Azure International


Plans, pipelines, capital - receivables in the value chain

(20)

(15)

(10)

(5)

-

5

10

15

YE09 1H10 YE10 1H11 YE11 1H12

Goldwind - receivables vs. payables (RMB Bn)

Payables (+) Receivables (-)


(20)

(15)

(10)

(5)

-

5

10

YE09 1H10 YE10 1H11 YE11 1H12

Mingyang - receivables vs. payables (RMB Bn)



• Sinovel, Goldwind, Mingyang together represent 43% of all installed wind generation capacity as at end Oct 2012

• Knock-on effect clearly affecting working capital of equipment suppliers • Payables less receivables already at RMB 9bn (neg) for Sinovel, Goldwind

and Mingyang • Market saw relatively stable installations in the timeframe • 1H 2011 working capital funding increase basically locked-up all capital

raised in previous IPOs of the equipment manufacturers

(20)

(15)

(10)

(5)

-

5

10

15

20

YE09 1H10 YE10 1H11 YE11 1H12

Sinovel - receivables vs. payables (RMB Bn)




Plans, pipeline, capital - borderline bankability caused by administration

Average plant age close to 1.5 years operating only, with most operating projects actively repaying long-term loans 70GW+ installed, financing 80% debt (2-year repayment holiday) puts sector exposure on banks at some RMB 280bn

•7-year repayment and 6.5% interest means wind sector must repay RMB 50bn in fixed principal and interest payments p.a.

2012 sector revenue at 2k effective hours by WA FIT is RMB 78bn, with: • RMB 46bn from the OGT, and • RMB 32bn from top-up to FIT, of which

This leaves some RMB 50bn of timely received cash revenue for servicing debt payments Further capacity expansion can’t effectively be funded through retained earnings/cash; utilities must access (existing) equity


Operating history in China - overview

13-Feb-13 17

• Over 5 years operating history documented

• Azure International data shows turbines are operating reasonably well

• 5 GW shown; data set covers 20% theoretically available generation for market (’06-’11) shows net performance of 22%

• Can be compared to net results for Germany

• Growing verifiable evidence of reasonably robust turbine operations in China

• Results reflect curtailment and seasonality

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0.45

Mar

/06

May

/06

Jul/0

6

Sep/

06

Nov/

06

Jan/

07

Mar

/07

May

/07

Jul/0

7

Sep/

07

Nov/

07

Jan/

08

Mar

/08

May

/08

Jul/0

8

Sep/

08

Nov/

08

Jan/

09

Mar

/09

May

/09

Jul/0

9

Sep/

09

Nov/

09

Jan/

10

Mar

/10

May

/10

Jul/1

0

Sep/

10

Nov/

10

Jan/

11

Mar

/11

May

/11

Jul/1

1

Sep/

11

Nov/

11

Jan/

12

Mar

/12

May

/12

Jul/1

2

Operating track record: net capacity factor (%)Average net performance from 01-Mar-06 to 01-Jul-12 (26 GW reference capacity)

Source: Azure International data

Congestion likely explains declining average technical performance


Operating history in China - average vs. project level

13-Feb-13 18

Revenue of Per kW

-

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

55 projects

(RMB/kW)Average revenue per kW

Individual project revenue per kW

Source: Azure International,UNFCCC

Utilization of wind plant in China

-

500

1,000

1,500

2,000

2,500

3,000

55 projects

(full load hours)

0%

5%

10%

15%

20%

25%

30%

35%

(capacity factor)

Average revenue per kW

Individual project revenue per kW

Source: Azure International,UNFCCC


Operating history in China - cold weather dominates

13-Feb-13 19

Chinese fleet exposure

Cold weather rated Normal


• Most of the fleet in high wind speed areas in north China

• In these regions, equipment is rated to operate regularly in temperatures to minus 35 degrees

• Generally dry conditions in north China mean ice is generally not an overall issue

• Abrasion through fine dust is a common problem


Operating history in China - cold weather dominates

13-Feb-13 20

0

5

10

15

20

25

IMAR Hebei Gansu Liaoning Heilongjiang Jilin Xinjiang Shanxi Ningxia Shaanxi

GW

2012E Installed wind capacity in cold weather rated provinces(>500 MW)


Cold!


Operating history in China - volume accelerates fleet operating experience

13-Feb-13 21

- 5,000 10,000 15,000 20,000 25,000 30,000

Shanghai Eelectric

Mingyang

Guodian United

Dongfang

Vestas

Sinovel

Goldwind

Fleet operating experience (turbine years)

Cold weather Normal



Operating history in China - direct drive leadership?

13-Feb-13 22

- 2,000 4,000 6,000 8,000 10,000 12,000

DNEE

Energine

XEMC

Goldwind

Fleet operating experience direct drive (turbine years)

Cold weather Normal

Confidential & Proprietary: Do not distribute or copy © 2012 Azure International 24 Sebastian Meyer, Azure International 13-Feb-13 24

International expectation of value: “Deeply discounted capacity with manageable risk or reliability tradeoff”

Export potential - value proposition & risk

Azure: Because of differences in market maturity, capital markets, value chain integration, differing levels of quality control and sourcing relationships, international sourcing needs to be carefully managed to ensure highest valued is obtained (& Azure can support international buyers)


Export potential - available capacity & competitive pricing

Sebastian Meyer, Azure International 13-Feb-13 25

0

5

10

15

20

25

30

35

40

45

2006

2007

2008

2009

2010

2011

2012

Supply side (Production plans vs installations)total actual installations tempered production plans (50%)

Source: Azure International Data

3,000

4,000

5,000

6,000

7,000

8,000

9,000

May

-06

Jul-0

6Au

g-06

Oct

-06

Dec-

06Fe

b-07

Apr-

07Ju

n-07

Aug-

07O

ct-0

7De

c-07

Feb-

08Ap

r-08

Jun-

08Au

g-08

Oct

-08

Dec-

08Fe

b-09

Apr-

09Ju

n-09

Aug-

09O

ct-0

9De

c-09

Feb-

10Ap

r-10

Jun-

10Au

g-10

Oct

-10

Dec-

10Fe

b-11

Apr-

11Ju

n-11

Aug-

11O

ct-1

1De

c-11

Feb-

12Ap

r-12

May

-12

Jul-1

2Se

p-12

Nov-

12

Wind turbine bid price in China (incl. VAT) - 1.5MW (RMB/kW)

Source: Azure International Data

“Apparent” excess capacity

strong price competition has halved capacity costs as industry reached scale


Export potential – exports already started

Sebastian Meyer, Azure International 13-Feb-13 26

-

50

100

150

200

250

300

350

400

2008 2009 2010 2011 2012

(MW)

Turbine exports form China (MW)


USA Thailand Cuba Chile

USA India Pakistan England Thailand

USA

USA Vietnam Cyprus

USA Pakistan Ecuador Brazil Australia Chile


Export potential - expectation gaps and context

• At present negotiations for Chinese turbine for developer participation in a growing number of projects around the world are frustrated by huge gaps and different expectations that exist because of differences in China and international markets

• Context: 100% y-o-y growth, average turbine operating experience is just over 1.5 years

• Shift from most turbines under warrantee in early 2013, to most turbines beyond 2-year warrantee period

• Warrantee periods quietly extending…it’s a buyer’s market

13-Feb-13 27

Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 28

China

2 year warranty period Warranty periods currently being expanded Entire Chinese fleet now operational for an average period of under 2-years No public data on failure rates Assumes fixed yearly O&M cost with no major failures

ROW

5 year warranty period is common, but cost of services is charged to client Enercon: warranty period > 12 years Public data on turbine models which have been operating for more than 10 years Project financial model includes failure rates e.g changing 15% of gearboxes every 5 year period

Export potential – context & risk interpretation (capex and opex)

Capex

Opex

Lower cost Higher cost

Confidential & Proprietary: Do not distribute or copy © 2012 Azure International Sebastian Meyer, Azure International 13-Feb-13 29

China Considers losses but not uncertainty

This is the value given in a typical local FSR, it is a P50, there are as many chances that this result is exceeded than chances that it is not reached.

ROW

– Estimated Uncertainty: 15% – P75: 2517 full load hours 75% chance of being exceeded – P90: 2262 full load hours 90% chance of being exceeded

Export potential – annual energy production interpretation

Considers losses & uncertainty

Example: – GROSS equivalent full load hours: 3500h – Estimated energy losses: 20% – Net energy production: 2800 full load hours

This is is the value used by western developers for project assessment


Export potential - other commercial DD & finance related issues

13-Feb-13 30

• Country risk, currency risk, policy risk, political risk

• International banks & insurance difficulty in getting comfortable with risks although international listings have helped add some balance sheet visibility for some leading companies

• Most Chinese banks are unable to lend in foreign currency,

long-term parent company guarantee treatment remains unresolved particularly with regards to potential future asset ownership transfers, PPA uncertainty and unfamiliarity with non-PPA market based subsidies

• Service and maintenance treatment/coverage

Confidential & Proprietary: Do not distribute or copy © 2012 Azure International 32 Sebastian Meyer, Azure International

Conclusion - Closing remarks

13-Feb-13 32

• China is already a world leader in wind markets • The position and its leading companies as an important global

industry leader will be optimized if the industry can demonstrate long-term success in its home market

• International markets and approaches particularly around

policy and finance differ considerably from the China experience

• Execution of growing Chinese brand turbine deals depends on refining approaches to international markets and Chinese overseas direct investment, but experience is growing...


Azure International – Syndicated Research - Other available studies

Other reports available:

C) Wind Gearboxes Bottom-Up (updated annually) D) Large Castings Bottom-Up (updated annually)

A) Wind Development Bottom-Up (updated monthly, predictive) B) Wind Turbine Manufacture Bottom-Up (updated monthly, predictive)


E) Blades Bottom-Up (updated annually)

Bespoke assignments (suggestions/examples):

F) China Offshore Industry: Sponsored by WWF Norway, and available at:

- Market segments, new products, competitor analysis, policy & market analysis - Customer, partner, strategic buyer identification - Project pipeline identification/acquisition (China, Australia, USA, Europe) - Turbine and component quality due diligences, procurement support - Investment related commercial and technical due diligences

http://assets.wwf.no/downloads/china_norway_offshore_wind_final_wwf_march_2010.pdf

- Wind measurement, project design, micro-siting, turbine selection - Permitting & approvals, company structuring & setup -Energy strategy: carbon foot-printing and emissions optimization & offset


Conclusion - final remarks –

34

Reports available through Azure International’s partner Greentech Media (GTM) at www.greentechmedia.com

2012 3Q China Wind Market Quarterly:

2012 China Grid Scale Energy Storage:


Sebastian Meyer Director of Research & Advisory [email protected] Tel: +86 10 8447 7053 Fax: +86 10 8447 7058

Oriental Kenzo Suite H, Office Tower, 6th Floor

48, Dongzhimen Wai Street 100027 Dong Cheng District, Beijing

PR China www.azure-international.com

Happy New Year!

meyer sebastian

Technology

individual project revenue

google earthconfidential

long term target

azure internationalconfidential

operating history

capacity

operating history

track record