Korea s Wind Energy Industry Eyeing Overseas Markets

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1 Departments Korea s Wind Energy Industry Eyeing Overseas Markets KANG Heechan Korea s Potential for Success Wind power, the most price competitive among new and renewable energy resources, 1 is seeing a fast expansion in the global market and drawing attention as one of Korea s new growth engines. As a global leader in heavy industry including shipbuilding and heavy machinery, Korea has the potential to rapidly become a global player in wind energy, an applied field of heavy industries. However, Korea s geographical conditions are not very suitable for wind power generation complexes due to the small landmass and limited wind in many regions. These unfavorable conditions serve as a driving force for Korea s wind power industry to search for markets overseas. Based on its world class machinery and shipbuilding infrastructure, Korean companies have the potential to enter the wind power industry somewhat easily. What s more, they can get most of the related parts from domestic suppliers. For these reasons, Korea s heavy industry companies and parts manufacturers are entering the wind power industry one after another, with the majority looking to overseas markets. However, markets in industrialized countries seem to be a hard nut to crack for latecomers like Korea, especially with technical and financing barriers hindering a smooth entry. This paper takes a look at the current situation of Korean companies advances into wind energy markets and makes recommendations for success in the global market. Global and Korean Wind Energy Markets Despite the recent global financial crisis, global wind energy markets have been growing at an annual average of 31.7 percent over the past five years. Amid the financial crisis in early 2009, most organizations specializing in wind energy predicted that the market would remain or shrink in 2009 compared to the previous year. However, when measured by newly built capacities, the market grew by 41.5 percent from 26 GW in 2008 to 38 GW in 2009, 2 driven by China and the United States. At the current pace, new capacities are expected to reach 40 GW in 2010, nearing 200 GW total. And, by 2015, the global wind energy market is forecast to reach $90 billion, which is equivalent to the current market of the shipbuilding industry. The key contributor to the rapid growth is greater government support for wind energy industries in the United States, Europe, and China. 3 Due to price competitiveness, wind energy is increasingly being selected as the next 1 For example, land-based wind power generation costs per kwh, while solar power generation costs per kwh. 2 Global Wind Energy Council, Global Wind 2009 Report, March The United States increased tax breaks for wind energy, such as the Production Tax Credit and Income Tax Credit. The European Union plans to increase the proportion of new and renewable energy to 20 percent by 2020 through the 2020 Plan. Based on China s 2015 Plan, China also aims to increase the proportion of new and renewable energy to 15 percent by

2 Figure 1 Global Wind Energy Market Growth by New Capacity (MW) 45,000 40,800 38,343 40,000 35,000 30,000 26,029 25,000 19,865 20,000 15,245 15,000 11,531 10, ,270 8,133 8,207 3,760 5, Source: Global Wind Energy Council, Global Wind 2009 Report, March growth engine in both industrialized and developing countries. Korea s wind power generation, which amounted to a mere 278 MW in 2008, is expected to expand to 1.1 GW by The expectations are based on the fact that the domestic wind energy market, which suffered from financing problems, will recover as the global financial crisis is resolved and as Korea s central and regional governments try to expand the market via various support measures such as the feed-in tariff. Above all, the Renewable Portfolio Standard (RPS) 5 scheduled to be adopted in 2012 is expected to be the greatest catalyst for market growth. With the RPS adopted, construction of wind farms will be pursued by primarily Korea Electric Power Corporation (KEPCO) affiliates. In the process, domestic demand for wind power generation systems will increase, and the increased demand will lead to stronger growth and competitiveness of Korean companies that make the systems and those that supply the parts. Korea s Emerging Wind Energy Companies Along with the expansion of wind energy markets, Korea s wind energy-related industries have passed the initial stages (participation of companies) and major companies are now beginning to emerge on the value chain. If the trend continues, Korea s wind energy industry should produce attention-getting companies in the global market within the next five years. Korean companies currently operating in the wind energy sector can be divided into suppliers of critical parts and turbine manufacturers. Among the Korean companies producing critical parts, Taewoong, Hyunjin Materials, and Pyeong San manufacture many of the key forged products. 6 These companies have demonstrated their competitiveness by grabbing nearly 17 percent of the global market. In particular, Taewoong is the world s top manufacturer of forged products, boasting a 13 percent share of the global market and 380 billion in sales rev- 4 ROK Ministry of Knowledge Economy, Korea Goes for Green Growth, Press Release, September 16, When RPS is adopted in 2012, electric power stations that generate 500 MW or more must get at least 2 percent of their total electricity from renewable energy resources such as wind and solar. 6 Forged products tower flanges, turbine shafts, and bearings are similar to those in shipbuilding, machinery, and plants such as propeller shafts, intermediate shafts, channel flanges, and roller shafts. Thus, companies that manufacture forged products for shipbuilding and plants can also make products for the wind energy industry. July 2010 SERI Quarterly 107

3 Korea s Wind Energy Industry Eyeing Overseas Markets Figure 2 Current Stage of Korea s Wind Energy Industry Time Industrial Advancement Participation of Companies Value Chain Established Global Companies Leading Global Companies enue for Having secured long-term supply contracts with wind turbine manufacturers such as Vestas, General Electric, and Siemens, Taewoong will continue to grow. Pyeong San is trying to enter the Chinese wind energy market through aggressive measures like acquiring German gearbox maker Jake, 7 and building additional factories for forging products in China. In Korea s turbine manufacturing sector, major heavy industry companies, such as Hyundai Heavy Industries, Hyosung, Samsung Heavy Industries, Doosan Heavy Industries and Construction, and Daewoo Shipbuilding & Marine Engineering, are showing outstanding performance in all aspects, including technology, manufacturing facilities, and acquiring overseas markets. These companies were able to enter the wind turbine field because their technological know-how in machinery and shipbuilding are applicable to the wind energy industry and their deep pockets and established global networks provide an advantage. Hyundai Heavy Industries built a 70,000 m 2 wind turbine assembly plant that produces 1.65 MW wind generators in North Cholla Prov- ince. The company plans to expand its manufacturing facility to a 400,000 m 2 plant that equates to an annual production of 800 MW by Hyosung has the technology to manufacture core parts such as electricity generators, distribution boards, and gearboxes, while Doosan Heavy Industries and Construction is in the process of attaining certification on a 3 MW turbine it developed for offshore wind power generation. Doosan is also capable of independently developing core parts. However, since the majority of Korean companies still outsource core technologies, there is an acute need to secure core technologies (see Table 1). Export Conditions of Korean Companies Korea has unfavorable conditions for the development of wind farms because of its small geographic size and limited wind power resources in many areas. However, these disadvantages can play a positive role in the future development of Korea s industry, strategically forcing it towards offshore wind power and an exportdriven wind energy industry. 7 The gearbox is a core component that controls the speed of the blades, adjusting the RPM to properly generate electricity

4 KANG Heechan Table 1 Korea s Major Wind Turbine Manufacturers Hyosung Hyundai Heavy Industries Production Plan Scheduled to complete a 200 MW turbine factory in 2010 Completed a 600 MW turbine factory in 2009 Core Parts Supply Plan Manufactures gearboxes and generators on its own Outsources for most parts Samsung Heavy Industries Unsettled Outsources for most parts Doosan Heavy Industries and Construction Unison Certification of 3 MW turbine under way Certification of 2 MW turbine under way Developing some core components such as gearboxes Manufactures towers, forged products, and generators Source: Respective companies. Since the majority of Korean companies still outsource core technologies, there is an acute need to secure core technologies. With the announcement of a development strategy for its green energy industry in 2008, 8 the Korean government decided to focus on offshore wind power rather than land-based wind power. Korea aims to establish offshore wind farms amounting to 2 GW by Accordingly, with government support, Doosan Heavy Industries and Construction developed a 3 MW offshore generator and is in the process of demonstrating the product, while Hyosung is currently developing a 5 MW generator. In addition, for the sake of stable operations, there has been an increase in the construction of offshore wind farms. At the end of 2009, Korea s first offshore wind power plant (750 kw * 3 units) on a small island in Kyonggi Province started operations. The Korea Institute of Energy Research is building the second offshore plant with 2 MW generators on Cheju Island. In addition, KEPCO is evaluating the feasibility of a offshore wind farm on Korea s west coast to begin in The aim of an export-driven wind energy industry is led by the private sector. Samsung C&T Corp. recently won a contract to build a 2.5 GW complex that will generate electricity 8 ROK Ministry of Knowledge Economy, Korea Goes for Green Growth, Press Release, September 16, July 2010 SERI Quarterly 109

5 Korea s Wind Energy Industry Eyeing Overseas Markets from new and renewable energy resources such as wind and solar power in Ontario, Canada. Hyundai Heavy Industries signed a contract to supply a 1.65 MW generator to an American company WadeWind, while Samsung Heavy Industries signed a letter of intent to invest in the joint construction of a third power generator in Texas with the American company Cielo. After acquiring Dewind, an American wind energy company, Daewoo Shipbuilding plans to build a complex holding twenty 2 MW wind turbines with plans to later expand to 420 turbines. Moreover, exports by Korea s major parts suppliers in the wind energy industry are on the rise. Dongkuk S&C forged a $6 million contract to supply 2.3 MW wind generator towers to Siemens, while in early 2010 Taewoong signed a 17.5 billion contract to supply parts to Europe s Debran and an 11 billion contract with the Chinese firm BYM Wind Technology. Also, Korea s Younghyun BM entered into a 7.5 billion contract to supply parts to Shengjin Trading in China, and Unison concluded a deal to supply 1.5 MW power generators to Juhl Energy Development of the United States. As illustrated above, Korea s wind energy industry is looking to the outside world and making continued efforts to gain in overseas markets. However, despite the recent noticeable performance of domestic companies, Korea s industry does not hold a high standing in the global arena. Also, Korea has yet to have a global company in the sector and few domestic companies retain technologies with high entry barriers. In order to enter advanced markets such as the European Union and United States, Korean companies will need to overcome technological barriers. Therefore, the current approach to entering the overseas markets needs a new strategy wherein Korean companies can grow to become leaders in the global market and maintain Korea s wind energy industry is looking to the outside world and making continued efforts to gain in overseas markets. growth. The next section will elaborate on this new strategy. Strategy for Korean firms Korean companies need a multilateral approach to enter the global market more aggressively they need to be competitive in terms of technology, market share, and financing. In terms of technological competitiveness, the key is to secure core technologies. Since technical dependability is the most crucial aspect for parts used in wind energy generation, technical evaluation is highly important. Especially in the case of offshore wind power, maintenance costs are higher than land-based generation due to the difficult conditions. Thus, a highly credible system is essential. More importantly, foreign markets are currently demanding proven track records of successful operations at sea rather than on land. Without the best technology, Korean companies will face an uphill battle against foreign competitors despite having a region-focused export strategy

6 KANG Heechan Another reason for technological competitiveness is the potential loss of domestic market share. With the RPS scheduled to be adopted in 2012 and without technological advances, Korean companies may find themselves merely competing against better equipped foreign companies at home. To enhance competitiveness, state-run projects led by the government must focus on basic materials and next generation technologies. Commercial technologies that are currently attainable in the market should be acquired through various channels including M&As and joint development. As for technological competitiveness in the private sector, the most crucial factor is timing. Accordingly, the government should help the private sector receive efficient financing and information acquisition. Global markets that have been led by the European Union thus far are now increasing rapidly due to the markets of the United States and China catching up fast. Therefore, Korean companies must target the United States and China as the next export destinations. In addition to the advanced markets, it is also important to target newly emerging markets such as Australia and South America. It is worth noting that developing countries have very high opinions of Korean companies because, despite their inexperience in wind energy, many have already proved their competitiveness in price and overall ability. In entering the markets of developing countries, the most crucial factor is financing ability. Korean companies can raise capital in more diverse ways via various financial programs for development projects from organizations such as the World Bank and Asian Development 9 EPC companies short for Engineering, Procurement & Construction services purchase the tools and materials and build facilities. Bank. They also need to conduct a feasibility study, based on a long-term strategy to enter new markets, by making active use of the government s official development assistance for developing countries. Another key to entering the overseas market including developing countries is superior negotiating power. Since most Korean companies have weaker technological competitiveness and less operating experience, going it alone into new markets means a higher chance of failure and difficulties in supplying wind farms independently. Instead, a strategic consortium should be formed by power companies, wind energy system companies, and EPC 9 companies. This kind of consortium will provide stronger negotiating power and stronger financing ability. Translation: KIM Young-Kyu Keywords wind energy, wind technology, Korean industry, emerging companies, foreign markets, Renewable Portfolio Standard, export driven KANG Heechan is research fellow at SERI. His current research focuses on environmental and resource economics, applied microeconomics, and econometrics. He holds a PhD in Agricultural, Environmental, and Development Economics from Ohio State University, Columbus. Contact: [email protected]. July 2010 SERI Quarterly 111