Sunday, December 7, 2008

‘I’ve never seen such a positive environment for renewable energy’

N. Ramakrishnan

Recently in Denmark

It has been a long day for Mr Ditlev Engel, President & CEO of leading wind turbine maker Vestas. He has been accompanying financial analysts to Vestas facilities in Aarhus and Hammel, Denmark, with other senior company officials.

In the evening, Mr Engel, 44, sits down with some Indian journalists, on a visit to Denmark sponsored by Vestas, for a chat on the global economic situation and its impact on the wind energy sector. Mr Engel, who has been President & CEO of Vestas Wind Systems A/S since May 2005, holds a Diploma in Business Economics from the Copenhagen Business School and has participated in a general management programme at INSEAD, France. Excerpts:

What has been the impact of the global economic situation on the wind energy sector?

I would prefer to talk about the impact on Vestas rather than that on the sector, because these might be two different things. In 2007, we did about 5,000 MW at Vestas. We decided to go to 10,000 MW by 2010. Our investment and development have been focussed on getting up to this level of execution capability.

The world changed fast. When we announced our second quarter results in August, the only question analysts asked was whether we could get to 10,000 MW by 2010. I said yes, we can. We have over the last 12 months employed 5,000 people. Even though next year we expect to grow by 25 per cent, we have actually made it clear that we have a cost base now that is 15 per cent too high for a 25 per cent growth.

We have demonstrated that we were on the right track with the kind of ramp-up and investment that we are doing. Our investment next year stands at €1.2 billion. Our confidence in the growth scenario is robust. The energy challenges have become even more daunting and pressing now. We live in a world where people are managing issues from day to day, but energy is about long-term view.

Let me put the financial issue out of the equation and look at the political agenda. I travelled in China two weeks ago with the Danish Prime Minister where he met with both the President and Premier. Denmark is hosting the climate change conference next year. He got the best support ever on a (climate) deal. The EU has also said that financial challenges are not an excuse for not addressing the climate issue.

In the US, the President-elect, Mr Barack Obama, wants to create 5 million new jobs and he has said that energy independence and climate issues are going to be on the top of his agenda. All energy is politically driven and politically regulated. I have been the CEO of Vestas for the last three-and-a- half years and I have never seen such a positive political environment.

On the day we announced our Q2 results, the price of oil was around $140 a barrel and analysts asked me why we can’t double the price of our turbines. Now, when the price of oil is $50 a barrel, the analysts are asking me why we can’t lower the price of our turbines. I said the energy companies have a 20-year view and not the flavour of the day. It is clear that fossil fuels prices will go up. There are customers who are facing difficulties, but, overall, the energy agenda is one of the reasons why we believe that the outlook is robust.

We employed 5,000 people over the last 12 months. There have been no lay-offs, but we have stopped employing people for the moment. We haven’t stopped investing. We believe that these things will start moving again, may be not at the same speed. We are certain that the US agenda for going Green is going to be big and we are certain we will kick ourselves if we had stopped ourselves in the US. We are going to use 2009 to build in the US more than manufacture in the US.

What about access to capital?

We believe that we can make the projects more bankable for our customers. If you take the customers or the banks’ customers through a presentation, when the banks start to release cash again, we believe that it is some of the lowest risk you can actually release. Germany is a market driven by small-medium-sized developers. You have got the German state buying electricity, the same guys who bail out the banks. You got a very high business case certainty.

There would be other projects with a higher risk profile, which would be more likely to be hurt than these kinds of projects. We spend a lot of time reviewing our customer portfolio and the bankability. There are many projects when times were good, when people have had some very exciting projects and we have just said no, we are not going to do it. The marginal projects will have more difficulties, whereas those who have a safe business will go on.

Have you had any order cancellations? Do you see a slowdown in order bookings?

No, none at all. We have seen that those customers who have lost a bank, for instance, when Lehman went in the US, calling up and saying they can’t go on, because their bank has disappeared. Lehman was a big trader for tax credits on the PTC in the US, so the appetite for tax credits has gone down. In some of these areas, we have seen an impact.

We have learned from the financial crisis that big is not equivalent to good. Those, who do not have good projects or whose financing situation is more complicated, will have a bigger challenge.

Those having good cash flows, good management and strong operations would go on even if they are not the largest companies.

The wind energy industry has always said that with oil at above $59 a barrel, wind energy is more competitive. Now, with crude prices falling below that mark, how do the economics work out?

In July, crude was at $140 and people said it will go to $200 by Christmas. The same people are now saying it is going to be at this level for the next 9-12 months. Apart from the price of oil, it is true that higher the fossil fuel prices, the easier it is to understand the attractiveness of our energy.

From the utilities point of view, this is also about balancing their risk. Wind is the only type of energy where you can hedge your risk 100 per cent for the next 20 years. From a risk management point of view, you want to make sure that you have a diversified portfolio.

I think we have not had a price on carbon in the US. I think the new administration is going to put a price on carbon.

Another issue that people haven’t spent so much time on, but I know that some of our customers are factoring in into their business price model is that they don’t believe the price of water for exploration and so many other things will remain at this cost. China has invested $10 billion in pumping water from the South to the North because of drought. Drought is a huge issue in Australia and in certain states in the US. That water will come at a cost. Water is an important part of energy exploration. When you start to factor these things in, which many of the major utilities are doing, you start getting many different mechanisms in your pricing model for wind versus other types of energy. You need to balance the vi