How wind auctions will drive collaboration


February 13, 2017

This content is from our archive. Some formatting or links may be broken.

We must collaborate more. That’s the hoary old cliché in the development world, and it is right. Developers and others must work together to make sure schemes get built.

But there are limits. Collaboration is important on particular projects, but it must also be supported by robust commercial negotiations and business sense. There’s no point getting too cosy if you may need to sue your partner at some point in future.

So where are these limits in relationships between developers and manufacturers? The answer is set to change in the next couple of years, because of the move by more governments to adopt competitive auctions to award support for onshore and offshore wind projects. Vestas raised this point in its results last week.

The Danish manufacturer highlighted that the move towards competitive auctions in more countries will put pressure on developers and manufacturers to drive down the costs of schemes, if they want to win these auctions. That means more collaboration early on, and is likely to mean sharing more information.

It is an important trend. Argentina, Brazil, Chile, Mexico, Peru and South Africa have all adopted auctions, and now established markets like Germany are joining in. These auctions will be “the new normal” and commercial relationships will change.

And it is not just auctions putting pressure on these companies.

Manufacturers and developers will not be able to rely on a growing market to help them grow in the next few years. Vestas highlighted that annual wind installations rose from 32GW globally in 2013 to 55GW in 2016, and are now set to carry on at 53GW-60GW each year to 2020. This means that firms will be trying to grow in a market where activity is steady – and so will be fighting hard to win a bigger slice of the same size cake.

That means being more competitive on cost, and for Vestas the solution is more collaboration. It says entering partnerships with developers in the project planning stages will help them deliver projects more cheaply and win more in auctions.

Working closely sounds fine, but how close is too close?

After all, a developer and manufacturer may only be teaming up on one project. This means there is a limit to how much information the manufacturer will feel comfortable sharing about their turbines. A partner on one project could become a competitor on another, and so giving away sensitive data could compromise future auction wins – or even end up in the hands of rivals. These are big risks.

Such partnerships are not new, of course. Companies have always worked together to achieve shared goals when necessary. A good example in the wind sector is when developers want to enter new markets but need turbines better suited to local conditions, so work with manufacturers to adapt existing machines. As more countries move to auctions, such collaboration will be more common.

It will be up to manufacturers how much information they are willing to share. If they are not comfortable working this closely with developers, there is an alternative.

In our view, this could open up opportunities for firms like Vestas to get involved on the project development side. Well, why not? It has spent the last couple of years getting more involved in O&M, and we see no reason why it couldn’t develop too.

Such an approach would let manufacturers work up plans for new projects with no need to share any secrets about their turbines. There are plenty of developers in the market that would be good acquisition targets.

Then, if their project wins the auction, they could sell it to another firm to crystallise the value created in the pre-planning; or keep the scheme and build itself. Either way, this approach would create a guaranteed source of customers for its turbines.

They may see this as too risky, or too much hard work, but it’s worth considering. Collaboration can be great – but sometimes it’s more profitable to go it alone.

Investment expertise. High-quality events. Exclusive content. Lead generation.

Talk to the Tamarindo team today to find out how membership would benefit your business.

Related content