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Wind Power Sector Driving ESG Wins
China’s wind turbine manufacturing ecosystem and potential
In the face of a global transition to a low carbon economy, countries around the world are shifting from fossil fuels to a cleaner energy mix such as renewable energy, in support of and complementary to their national climate commitments. The advantages of utilizing renewable energy in general, and particularly wind power, are obvious to investors as well, as seen by the meteoric growth in both institutional and retail ESG portfolio mandates. Indeed, it squarely addresses ESG “must haves”. In environmental terms, wind power is emissions-free, sustainable, and clean; a key enabler of the United Nations Sustainable Development Goal 7 (Affordable and Clean Energy). From a societal and corporate governance perspective, the sector continues to add jobs and provide cost-effective energy without harming the environment or interfering with agriculture or other outside-based industries.
China now leads the world in wind power generation. It boasts the largest installed capacity of any nation and enjoys sustained, rapid growth in new wind facilities. With its large landmass and long coastline, China has exceptional wind power resources, an estimated 2500GW of exploitable capacity on land and 2000GW offshore. China is forecast to have 2370GW of wind capacity by the end of this year as part of the government’s pledge to produce 15 percent of all electricity from renewable resources by then.1 It has set out a road map for wind power up to 2050, with capacity goals of 4000GW by 2030 and 10,000GW by 2050, respectively.
According to Wood Mackenzie,2 global wind power capacity additions are expected to maintain a figure of 77GW annually from 2020-2029, representing 112% growth in global installed capacity over the next ten years. Although covid-19 global pandemic has impacted capacity additions for 2020 and 2021, the need to comply with long-term energy and climate targets should result in makeup orders as the virus abates. The EU, Middle East, Africa, and Asia will continue to be key growth drivers, while the outlook for the US remains a bit uncertain due to possible political constraints.
The value chain of wind turbines, following original equipment manufacturer (OEM) specifications, consists of the wind turbine itself (made up of a nacelle, rotor, and tower); array and export cables; structural components such as tower foundations; and electrical components that include an onshore substation, batteries, and an offshore substation.
Wind turbines are usually manufactured by global specialist capital goods companies. The top three turbine manufacturers by installed capacity are produced by Vestas, Goldwind, and GE. The market for turbine manufacturing is consolidated, with these top three accounting for nearly 50% of global installed capacity. However, the rest of the market is highly fragmented, with several smaller players such as Siemens Gamesa, Envision, Enercon, Ming Yang, Nordexand other Chinese players all competing for a piece of the pie.
A key component of the turbine is the blades, which although often manufactured by specialist manufacturers also can be produced in-house by turbine OEMs. Here too, the blade market is highly fragmented, with several Chinese firms each holding a small share of the market. These include Sinomatech Wind Power Blade, Zhuzhou Times New Material Tech and others. On the other hand, turbine OEMs source their blades internally.
The nacelle, or engine, is a core part of the wind turbine. Nacelle manufacturers produce everything that makes up a wind turbine, such as the generator, gearbox, drive train, and brake assembly. The nacelle manufacturing space is even more fragmented than that of blade manufacturing, but is characterized by having a significant presence of Chinese companies. Even so, the majority of this market is still controlled by the integrated turbine manufacturers such as Vestas, Siemens Gamesa, GE, and other large players. Outside of the large international companies, Chinese firms such as Shanghai Electric, Guangdong Mingyang, China Creative Wind Energy, and Sinovel Wind are next in terms of scale.
We believe Chinese companies in the wind turbine manufacturing value chain have better prospects for faster growth than do others by virtue of the country’s strong domestic demand and penetration into the supply chains of global OEMs. At the same time, many countries are increasingly shifting towards wind power as a sustainable form of alternative energy. We think Chinese companies also have a cost advantage over foreign competitors at the same time as technology is continuously improving.
For example, Chinese companies like Titan Wind and Weihai Guangwei have gained market share within Vesta’s value chain. Titan Wind has positioned itself as a supplier of wind towers to global turbine manufacturers since its founding in 2005. It supplies more than 10% of Vestas’ wind tower requirements while also increasing its market share of the value chains of GE and Siemens. Weihai Guangwei is a leading carbon fiber producer in China and supplies Vestas with its production of wind turbine blades.
From an investor perspective, there are additional benefits that may accrue from considering the wind power sector, and especially so for those with or considering ESG mandates. Wind power has proven to be an attractive investment for several reasons, among them that wind turbines are environmentally beneficial in an ongoing manner: every time a wind turbine is activated, zero hydrocarbons are produced and zero emissions are released. Wind power is also a growing source of well-paid, long-term employment, another benefit that has broad positive economic impact. And from the perspective of anticipated returns, the sector’s equities show increasing promise for providing reliable returns, with some companies, such as Vestas, already acknowledged as standouts.
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