Growth Avenue

Growth Avenue

A tremendous growth in installed wind power capacity has in turn created a huge market for wind farm maintenance services. This market represents significant opportunity for independent service providers as well as for private equity investments. The wind industry has grown more than 20 times in the past two decades with installed capacity reaching nearly 370

A tremendous growth in installed wind power capacity has in turn created a huge market for wind farm maintenance services. This market represents significant opportunity for independent service providers as well as for private equity investments.

The wind industry has grown more than 20 times in the past two decades with installed capacity reaching nearly 370 GW by the end of 2014 from only 17.4 GW in 2000. This tremendous growth in installations has in turn created a huge market for wind farm maintenance services. Traditionally, turbines are serviced under warranty contract by the turbine manufacturer for a few initial years. Assuming a standard five year warranty period, round about 160 GW of the global wind capacity is expected to be out of warranty since 2014. Further, more than 40 GW capacity is expected to come out of warranty every year towards 2020.

Independent service providers are getting preference

The turbine service market has traditionally been dominated by the turbine manufacturers, mainly due to their warranty period and technical knowledge. However, as the market is maturing and fleet is coming out of warranty, many localized independent service providers (ISP) have emerged into the market, offering a cost effective alternative to turbine OEMs. They are either specialized service providers or component OEMs.

This growing market has already seen private equity (PE) investments in several large ISPs of Denmark, Germany and USA since 2008. For example, in 2010, UpWind Solutions, Inc. raised € 27.2 million from Kleiner Perkins Caufield & Byers and Mission Capital Group. Polaris Private Equity, in 2012, acquired majority stake in Connected Wind Services.

Parcom Deutsche Private Equity, subsidiary of ING bank, acquired majority share in Availon GmbH in 2008. The investments have proven to be effective as revenues of Availon and Connected Wind Services have nearly doubled since investments. Volker Hichert, who represents the interest of Availon owner Parcom as Managing Director comments: “Availon has exceeded all our targets to date. Our expectation was 20 % annual growth – it has been more than 30 %.”

Eastern Europe expected to emerge

Over the last years, new wind markets have emerged in Eastern Europe due to high potential and favorable policy scenarios. These markets, nearly 10 in number, have collectively added about 8.2 GW since 2006. Nearly 80 % of this capacity is concentrated in Poland and Romania. The growth trend is expected to continue in coming years, for example, installed capacity in Poland alone is expected to reach 6.6 GW by 2020, according to Poland’s National Renewable Energy Action Plan.

To tap this opportunity from services new ISPs are expected to emerge, as was the case in now mature markets of USA and Spain where the number of ISPs increased as the installed base grew and more capacity came out of warranty. ISPs from established markets like Germany and Spain have already started moving into nascent Polish and Romanian markets. For example, Deutsche Windtechnik entered Polish market around 2014 and has been successful in getting maintenance contracts from players like RWE. Availon, another leading ISP in Europe, is also present in these emerging markets.

No doubt that the growing service market will drive the growth of wind service providers, however, this growth must be carefully assessed by PE firms in the screening process itself to identify the targets. Gazelle companies may not necessarily be the ones who will grow in future. In recent years, the landscape of wind services has been shifting from low value, labor based services towards high value, asset optimization services.

In addition to this, services like component remanufacturing, up-tower repairs and data based performance optimization are
increasingly becoming of high value to the asset owners. Hence, in order to grow an ISP must have additional attributes in addition to growing revenue and strong customer base.

Like every emerging market, uncertainties on future capacity additions are present of which both ISPs and PE firms should also be aware. EWEA, in its report on wind growth in Eastern Europe identified the biggest risk as lack of long term policy support. Christian Kjaer, then CEO of EWEA, said back in 2013: “Some countries such as the Czech Republic, Hungary and Bulgaria are without stable renewable energy legislation. Investors and banks will withdraw unless governments put in place long-term renewable energy policies.” This would mean a slow growth of out-of-warranty market size in the region post 2020.

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