Analyses of wind energy market

By ZHAO Tian, LI Guang,ZHU Sheng Fudan University Rubicon Team

Outline 1 External Environment 1 Market Analysis &SWOT 2 Proposed Strategies 3 Strategy Goal, Goal Decomposition and Strategy Directions Roles Sites & Modes Manufacturer? Investor? S1: Positioning in Value Chain Case Study 1: AES’s success in a CDM Projects Case Study2: How SK entered Petro Industry In China 2nd Tier Region Off-grid Power S2: Combination of Carbon-free Industry and Off-grid Wind Power SK Vision: Sharing Happiness When Butterfly Meets Wind Background Policy Overview Conclusion: Wind energy industry is very promising in China. Profitability Market Size Industry Analysis SWOT Analysis Conclusion: SK Energy could join hands with players in industry to seize great opportunities in the vast and growing market.

Outline Profitability Market Size Industry Analysis Strategy Goal, Goal Decomposition and Strategy Directions External Environment 1 Market Analysis &SWOT 2 Proposed Strategies 3 SWOT Analysis Roles Sites & Modes Manufacturer Investor S1: Positioning in Value Chain Case Study 1: AES’s success in CDM Projects Case Study2: How SK enter Petro Industry In China Tier-2 Region Off-grid Power S2: Combination of Carbon-free Industry and Off-grid Power SK Vision: Sharing Happiness When Butterfly Meets Wind Conclusion: SK Energy could join hands with players in value chain to seize great opportunities in the vast and growing market. Background ,[object Object],[object Object],[object Object],Policy Overview ,[object Object],2

Increasing Demand for Energy in China Traditional Energy China is in need of renewable energies! 3 Background Proposed Strategy Market Analysis and SWOT External Environment With modern industrialization around the world, energy crisis is becoming more and more manifest. The scarcity of traditional energies and negative impacts on the environment are becoming a global concerns. Negative impacts of traditional energy CO 2 Emission leading to global greenhouse effects. CO Incomplete burning of oil and coal, resulting in toxic gases emission. SO 2 Resulting in acid rain, causing damage to the eco-system. Dust Increasing risk of Respiratory Disease. NO X Severely poisonous, giving rise to risks of lung cancer and other diseases Electricity’s Demand Growth, Supply Growth (Net Capacity Increase) and Generation Hours under Optimistic Expectation Source: China Galaxy Securities, 2008 Energy Insight ,[object Object],[object Object],[object Object],Key Factors Affecting Demand

Wind energy development is booming around the world. Trend of Wind Energy Exploitation around the World Background Summary Proposed Strategy Market Analysis and SWOT External Environment 4 Country Share of New Installed Capacity 2008 All Source: World Wind Energy Report 2008, Global Wind Energy Council World Total Installed Capacity and Incremental Capacity MW Installed Capacity: Top 10 Countries MW ,[object Object],[object Object],[object Object]

Energies Overview Source: China Galaxy Securities: Energy Structure in China Wind energy is playing a more important role in China ,[object Object],[object Object],[object Object],[object Object],Proposed Strategy Market Analysis and SWOT External Environment Growing Wind Energy Advantages of Wind Energy 5 2000 2020E Background 2010E China Annual Capacity Add Additions and Wind Energy Growth GW,% Source: China Galaxy Securities, 2008 Energy Insight ,[object Object],[object Object],[object Object]

2006.1 2006.10 2007.8 2008.1 2008.4 Political will in China is striving for propelling wind-power market Political Will Fuels Wind Energy Industry in China Proposed Strategy Market Analysis and SWOT External Environment Renewable Energy Law ,[object Object],[object Object],[object Object],[object Object],Tax and Tariff Reduction ,[object Object],[object Object],Financial Support National Development and Reform Committee improve the standard of subsidies and lower the qualifications of the companies to acquire loans from the bank and funds. Price Reform NDRC set the bottom line for the auction price of biding for the permission to exploit wind energy to avoid malign competition and attract more foreign investments. 6 Policy Market Open Policy ,[object Object],[object Object],[object Object],[object Object],[object Object]

State Stimuli for Wind Energy Just Revealed Proposed Strategy Market Analysis and SWOT External Environment China’s new energy promotion plan, focusing on wind power 7 2009.5 ,[object Object],[object Object],[object Object],News Source: Xinhua ,[object Object],China is ready to develop wind energy! Policy

Outline Background Strategy Goal, Goal Decomposition and Strategy Directions External Environment 1 Market Analysis &SWOT 2 Proposed Strategies 3 Policy Overview Roles Sites & Modes Manufacturer Investor S1: Positioning in Value Chain Case Study 1: AES’s success in CDM Projects Case Study2: How SK enter Petro Industry In China Tier-2 Region Off-grid Power S2: Combination of Carbon-free Industry and Off-grid Power SK Vision: Sharing Happiness When Butterfly Meets Wind Conclusion: Wind energy industry is very promising in China in future. ,[object Object],[object Object],[object Object],Profitability Market Size Industry Analysis SWOT Analysis 8

Chief Distribution and Exploitation of Wind Energy in China Source: China Wind Energy Association, Century Securities Wind energy market in China is vast, exploitation remains unbalanced. Proposed Strategy Market Analysis and SWOT External Environment 9 Market Size Chief Distributions of Wind Energy in China 10 7 W Year 2007-08 Installed Capacity Increments 10 6 W Source: China Investment Annual 2005 Inner Mongolia Xinjiang Heilongjiang Gansu Jilin Hebei Shandong Jiangxi Jiangsu Guangdong Zhejiang Fujian Hainan 0 2 4 6 Inner Mongolia Liaoning Hebei Jilin Heilongjiang Jiangsu Gansu Xinjiang Shandong Guangdong Fujian Zhejiang Hainan 3.9 2007 2008 Increments Source: China Wind Energy Association 2009 2.6 1.3 0 Fastest Growing % Hainan 568.97 Zhejiang 311.04 Liaoning 142.52 Inner Mongolia 138.93 Hebei 126.00 Tier 1 Tier 2 Energy Distribution ,[object Object],[object Object],Current Exploitation China’s Total Installed Capacity and Total Growth ,[object Object],[object Object],[object Object]

Estimated costs of Wind and Coal Energy Source: Wind Energy 12 in China, China Galaxy Securities 2 nd Tire 1 st Tire ,[object Object],Price Differentiation and Cost Trends The price of grid-connected wind electricity by province (Highest) Current Pricing and Cost ,[object Object],Future Prospect ,[object Object],[object Object],Return of wind energy will become more Profitable in near future. Proposed Strategy Market Analysis and SWOT External Environment 10 Profitability 0.5 0.4 0.7 0.6 0.3 0.2 0.1 0 2000 2005 2010E 2015E 2020E Wind Energy Coal No. Name of wind plants Highest Price Yuan 1 Inner Mongolia ZhuRihe Wind Farm 0.609 2 Inner Mongolia Shangdu Wind Farm 0.609 3 Hebei Zhangbei Wind Farm 0.984 4 Xinjiang Danban City No.1 Wind Farm 0.533 5 Liaoning Donggang Wind Farm 0.915 6 Zhejiang Cangnan Wind Farm 1.200 7 Hainan Dongfang Wind Farm 0.560 8 Guangdong Nanao Wind Farm 0.740 9 Shanghai Chongming Nanhui Wind Farm 0.773 Average Price 0.769

Turbine Manufacturers Market share of Domestic and Chinese-foreign joint venture turbine manufacturers in 2008 Market share of foreign owned turbine manufacturers in 2008 State Generators Top 3 State generators in wind market Summary of turbine manufacturers in China ,[object Object],[object Object],All Source: China Wind Energy Association ,[object Object],[object Object],[object Object],Proposed Strategy Market Analysis and SWOT External Environment Summary of state generators in China 11 Industry Analysis Brand Manufacturer Capacity (kW) % of domestic and joint venture capacity % of increased total capacity Sinovel 华锐 1402500 29.71% 22.45% Goldwind 金风 1131750 23.98% 18.12% DEC 东汽 1053000 22.31% 16.86% Brand Manufacturer Capacity (kW) % of foreign owned capacity % of increased total capacity Vestas 599700 39.30% 9.60% Gamesa 508300 33.31% 8.14% GE 145500 9.53% 2.33% Brand Market status Main focus Guodian (Longyuan) A specialized wind power development company owning the largest shares of installed wind power capacity in China. Three North Region, Southeastern China. Case study: Jiangsu Rudong Wind Power Concession Project Datang Rank No.2 in China wind market ownership. With great impact in the Northern China electricity market. Northern China. Shanghai. Case Study: Shanghai Donghai Bridge Offshore wind farm. Huaneng The largest independent electricity generator in Asia. With solid government background. Inner Mongolia, Shandong, Sichuan, Guangdong, Case Study: Huaneng Zhaobei Wind Farm

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Strength Weakness Opportunity ,[object Object],[object Object],[object Object],Threat ,[object Object],[object Object],[object Object],Proposed Strategy Market Analysis and SWOT External Environment 12 SWOT Table

Outline Background Profitability Market Size Industry Analysis Strategy Goal, Goal Decomposition and Strategy Directions External Environment 1 Market Analysis &SWOT 2 Proposed Strategies 3 Policy Overview SWOT Analysis Roles Manufacturer? Investor? S1: Positioning in Value Chain Case Study 1: AES’s success in CDM Projects Case Study2: How SK enter Petro Industry In China SK Energy could expand his roles in the value chain and create additional value. Conclusion: Wind energy industry is very promising in China in future. Conclusion: SK Energy could join hands with players in value chain to seize great opportunities in the vast and growing market. 13

Goal To enter China’s wind power market and implement “Green Ocean” strategy by investing in wind energy market of China. To cut down the cost and gain a higher profit To choose a niche market to enter and boost its share (Social Responsibility Investment) To secure its position as a top global “Low Carbon, Green Growth” company, to create and share happiness with Chinese people. Market Profitability SRI To be a pure turbine manufacturer or a Wind Farm Investor? To find a new wind-farm new potential areas and model ,[object Object],[object Object],1.Goal Setting 2. Decomposition of the Goal 3. Strategy Directions Proposed Strategy Market Analysis and SWOT External Environment 14 Strategy Goal, Goal Decomposition and Strategy Directions Criteria Evaluation The difficulty to enter the market Current market share The technology advantage The number of core technology patent of main turbine manufactures The trend of the market development The share of different types of the turbine company in different years

A turbine manufacturer or a wind-farm investor? Wind Equipments Market Share in China (Domestic and Foreign Investors) The market share change for foreign manufactures is declining in recent years and domestic companies have lead the turbine manufacturing industry. Top 10 Institutes (People) with Most Patents in Wind Energy Technology in DII Database SK doesn’t have a technology advantage when competing with these industry leaders. It is not the proper time for SK to become a turbine manufacturer in China. SK could use its great capital power to invest in the construction of wind farms. Proposed Strategy Market Analysis and SWOT External Environment Source: DII Database 15 Proposed Strategy 1: Positioning in the Value Chain Rank Institute Name Patent Numbers Original Country Business Realm 1 GE 211 U.S. Electrical Manufacturing 2 Mitsubishi 211 Japan Electrical Manufacturing 3 (Person) Wobben Aloys 141 Germany Wind Power Generation Equipments 4 Vestas 93 Denmark Wind Power Generation Equipments 5 REpower System 63 Germany Wind Turbine 6 LM Glasfiber 56 Denmark Turbine Blade 7 Siemens 48 Germany Electrical Manufacturing 8 Ebara 47 Japan Fluid Conveying Equipment 9 Fuji Heavy 47 Japan Electrical Manufacturing 10 Gamesa 52 Spain Wind Turbine

Value Chain Positioning State Generators Chinese Developers Foreign Entrants State Generators Chinese Developers Chinese Developers Foreign Entrants Local players seeking technical expertise ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Foreign players seeking vertical integration(ownership limited to 49% for CDM qualification) SK Energy could expand his roles in the value chain and create additional value. Proposed Strategy 1: Positioning in the Value Chain Site Acquisition Technical Development Permitting Negotiation Financing EPC Operation State Generators Proposed Strategy Market Analysis and SWOT External Environment 16 Proposed Strategy 1: Positioning in the Value Chain

Case Study 1: AES’s role in a CDM Project Project Title: Guohua Hebei Huanghua 49.5 MW Wind Farm Project (Phase I) Completion Date: 24th December 2008 What SK may do Project Process Outcome About: AES operates 132 power generation facilities worldwide. Investor Equity share: 49% Guohua AES (Huanghua) Wind Power Co. Ltd. Consulting Merrill Lynch Commodities (Europe) Ltd. Project Guohua 49.5 WM Wind Farm Project (Phase I) GE, Vestas, Sinovel Completion date: 12-24-2008 Invest via CDM Turbine Supplier Funding Wind Energy Sells to Yearly Capacity: 99,160WMh North China Power Grid ,[object Object],[object Object],Financial Indicator for the Proposed Project IRR (Total Investment) Benchmark Rate = 8% Without CDM Revenue 6.24% With CDM Revenue 9.58% All Source: United Nations Framework Convention on Climate Change CDM is a good way for foreign entrants to invest in the wind energy market in China which would greatly reduce the cost. AES Company Proposed Strategy Market Analysis and SWOT External Environment 17 Proposed Strategy 1: Positioning in the Value Chain

Case Study 2: SK successfully Knocked the Door of China’s Petrochemical industry ,[object Object],[object Object],[object Object],SK’s Trial SK’s Good Relationship with Governments Studied the planned Petrochemical programs in China, Seeking more commercial opportunities. 2006.4 Negotiated with Hubei Province Government on the 0.8 million tons Ethylene projects. 2008.5 No break-throughs were made 1990 Firstly settled its business in china 1992 Establishment of diplomatic relations. SK as a bridge. 2008 The director of SK accomplished the South Korea president’s official visit to China several times. What Can We Learn? well preparation and careful planning good relationship and coordination + = Win-win solution for wind energy in China! Good relationship and coordination play an important role in the trial of SK to knocks the door of China wind energy! Connecting two countries Other competitors competed for the projects 0.8 million tons Ethylene projects in Wuhan Proposed Strategy 1: Positioning in the Value Chain SK Energy, Sinopec Joint Venture 35% Equity Before 2006 Proposed Strategy Market Analysis and SWOT External Environment South Korean President’s official visit to China; SK got approval of the project. 2008.5.27 18

Outline Background Profitability Market Size Industry Analysis Strategy Goal, Goal Decomposition and Strategy Directions External Environment 1 Market Analysis &SWOT 2 Proposed Strategies 3 Policy Overview SWOT Analysis Sites & Modes Tier-2 Region Off-grid Power S2: Combination of Carbon-free Industry and Off-grid Power U-Eco Cities in Northern and Southern China Conclusion: Wind energy industry is very promising in China in future. Conclusion: SK Energy could join hands with players in value chain to seize great opportunities in the vast and growing market. 19

Site Acquisition: Tier-1 Vs. Tier-2 Tier-2 areas are more promising than Tier-1 areas. Mode: Grid-Connected Vs. Off-Grid Grid-Connected Mode More prevailing, applied in most of current projects. Wind electricity should consolidated to the State Grid. Difficulty to maintain the stabilization of the grid High cost (0.5-0.6 yuan/kWh) Off-grid mode is more promising than grid-connected mode. Proposed Strategy 2: Site and Mode Selecting Off-Grid Mode More and more mature Serves directly for the large scale industry base Increasing Government Attention Low cost(0.05-0.06 Yuan/kWh) Tier-1: “Three North” Areas Market is relatively saturated. Increasing rate reaching bottleneck Disadvantageous Price Lack of Industrial Integration Tier-2: Costal Areas Remain Relatively Unexploited Faster Growth Higher Electricity Price Denser Industrial Bases Advantages Proposed Strategy Market Analysis and SWOT External Environment 1 2 20 Proposed Strategy 2: Site Acquisition and Mode

Shandong Northwestern Hebei Base Middle-southern Liaoning Peninsula Base Combine the off-grid wind-power industry with the development of Tianjin Binhai New District and the strategy of Revitalizing the Old Industrial Base in Northeast China. Reduce the CO 2 and other toxic material emission. Built Farms Farms Under-Construction The market is incompletely exploited; SK has an opportunity to seize! Hebei Liaoning Tianjin Why Bohai-Rim District? 1 Integration of Off-Grid Wind Power with Revitalizing the Old Industrial Base U-Eco City in Northern China ,[object Object],[object Object],[object Object],’ 97-’06 Bohai-Rim District Wind Energy Installed Capacity 10 4 W Booming Capacity 2 3 Steel, Raw material, Petroleum Fine Chemical, electrolytic aluminum, Chlor-alkali, seawater hydrogen manufacturing industries. Important ports as Qingdao and Dalian. Eastern Shandong Peninsula Base Proposed Strategy 2: Proposed Strategy 2: Off-Grid Wind Power in Bohai-Rim Industrial Bases Proposed Strategy Market Analysis and SWOT External Environment Applicable Industries 21 The Combination of Off-Grid Wind Power with Two Industrial Bases

Zhejiang Jiangsu Combination of Off-Grid Wind Power with Yangtze Delta Carbon-free Industrial Base Shanghai-Southern Jiangsu Base Northern Zhejiang Costal Base Northern Jiangsu Base Combining off-grid electricity with carbon-free energy-hungry industries in Yangtze Delta, develop the eco-tourism. Anhui Jiangxi U-Eco City in Southern China ,[object Object],[object Object],[object Object],[object Object],Why Yangtze River Delta? Built and Under-Construction Wind Farms in Yangtze Delta ’07 Current Status of Exploitation Built Farms Farms Under-Construction 2 1 3 The market is incompletely exploited; SK has an opportunity to seize! Proposed Strategy 2: The Combination of Off-Grid Wind Power with Two Industrial Bases Proposed Strategy 2: Off-Grid Wind Power in Yangtze Delta Industrial Bases Proposed Strategy Market Analysis and SWOT External Environment Newly chemical industries such as Chlor-alkali Industry, seawater hydrogen manufacturing, electrolytic aluminum and steel, Power Machinery industries. Integrating the shipbuilding, steel, machinery industries Applicable Industries 22 Farm Numbers Turbine Numbers Capacity %Nation Shanghai 3 38 27.24 2.63 Jiangsu 3 244 85.80 8.30 Zhejiang 2 264 23.33 2.26 Total 8 546 136.37 13.19

Experiment U-Eco city with combined application of wind energy and SK’s other businesses Realize SRI by enhancing China renewable energy development. CDM is the main method. SRI Active part in Green Ocean Strategy supporting energy solution for in remote areas. Lower the carbon-dioxide release and achieve green growth in electricity generating. Use off-grid wind electricity supporting energy-hungry industrial bases in China. Vision 23 U-Eco City Low Carbon Off-Grid Integration Green Ocean Strategy

Thank You! LI Guang, [email_address] ZHAO Tian, [email_address] ZHU Sheng, [email_address] Fudan University Rubicon Team

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