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BETTING ON THE SMALL SCALE TURBINE INDUSTRY VESTAS

B ETTING ON THE SMALL SCALE TURBINE INDUSTRY V ESTAS Institute - SP Jain Centre of
B ETTING ON THE SMALL SCALE TURBINE INDUSTRY V ESTAS Institute - SP Jain Centre of

Institute - SP Jain Centre of Management, Singapore

Submitted by

Team: Zephyrus

1) Geetika Karamchandani

geetika.gapr09@spjain.org

+65 91245073

2) Sahil Arora +65 97161071

sahilar.gapr09@spjain.org

3) Utsav Bhatt

geetika.gapr09@spjain.org +65 91245073 2) Sahil Arora +65 97161071 sahilar.gapr09@spjain.org 3) Utsav Bhatt
geetika.gapr09@spjain.org +65 91245073 2) Sahil Arora +65 97161071 sahilar.gapr09@spjain.org 3) Utsav Bhatt
geetika.gapr09@spjain.org +65 91245073 2) Sahil Arora +65 97161071 sahilar.gapr09@spjain.org 3) Utsav Bhatt
geetika.gapr09@spjain.org +65 91245073 2) Sahil Arora +65 97161071 sahilar.gapr09@spjain.org 3) Utsav Bhatt

utsav.gapr09@spjain.org

+65 97164515

4) Ashwin Unnikrishnan

+65 97161077

Contents

1.

Executive Summary…………………………………………………………………………

3

2.

Business Concept………………………………………………………………………………7

3.

Market Research and Marketing Plan………………………………………………………8

4.

Supporting Market Research………………………………………………………………

14

5.

Organizational Plan………………………………………………………………………….16

6.

Operational Plan……………………………………………………………………………

17

7.

Expansion Strategy…………………………………………………………………………

20

8.

Financial Plan………………………………………………………………………………

21

9.

Solutions for Additional Organizational Issues……………………………………………27

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1. Executive Summary

1.1 Introduction

Looking at the growth prospects in the small scale wind segment and the low growth in the current segment we propose that Vestas should venture into the small scale wind turbines industry. Ideally Vestas should try and acquire an established player like Southwest wind power to make an entry into this market. However, we believe Southwest wind power is the biggest player and would not be looking to sell off its business. Also most of the players in this segment are private players and the growth in the installed capacity in this segment is expected to be 30 fold in the next 5 years (as per the AWEA Report for Small Wind Industry 2009), so most of the players would not be looking to part with expected growth that this sector has to offer. Considering the synergy between the current business of Vestas and its correlation with the small scale wind turbines segment we are proposing that Vestas should enter into the small scale wind turbines segment in the North American region on its own. The following business plan would help Vestas to establish itself in the small scale wind turbines segment.

1.2 Local Market Research & Supporting Marketing Plan

In North American region, the US currently produces 4.9% of its total energy from wind energy and total energy market of $321 billion. Canada with assets of C$148 billion has major contribution of Hydro (61.7%), Steam (20.6%), and Nuclear Energy (14.8%). Bob Shively and John Ferrare (Authors of Understanding today's Electricity Business), advocate that by year 2030 renewable source of energy would be the primary source of electricity in North American region. In order to see the viability of the market for Vestas, it is important to understand the future business needs of their clients. In the energy business value chain, government has opened the retail and energy generation segments to the private players. In order to meet the new developments at Copenhagen Summit on Climate change, Kyoto protocol and a move towards Green Energy‟, aforementioned segments of the value chain would make investments in wind energy. Ontario Power Authority (OPA) has come out with „Green Energy Act 2009‟ in which they have mentioned that the proposed replacement of Coal plants should be with Renewable sources as it takes 8-10 years to build and commission nuclear plants. Wind energy investment in FY2006 increased by 113% in a year when in 2005 OPA proposed the contribution of 15% by

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wind energy out of total energy mix by year 2025. GE and Google are planning to set new grids for USA and there is a push towards „Distributed Generation‟ and „Smart Grid‟ technologies. Distributed Generation would allow commercial & industrial customers along with residential customers to set up their own energy generation units, become self-sufficient and supply the excess power back to the grid; this saves the wastage of excess capacity in base load plants and avoids setting up of new environmentally unfriendly intermediate and peaking plants. US Department of Energy in the report „20% Wind Energy by 2030‟ (July 2008) have given special focus on Distributed wind technology which earlier was restricted to off-grid homes but is now getting into main stream. Above all, US market in FY2008 had new installed capacity for small turbines at 10,386 units, which is 55% of total world installations. We think that small turbine market would be an ideal fit for „Distributed Generation‟ initiative and would also be essential for Energy Retailers who want to move upstream and provide only green energy plans to their customers (like Bullfrog power in Canada and Alter systems in US). Vestas being a big brand in this segment should target fragmented small wind energy generators and energy retailers.

1.3 Expansion Strategy Vestas should first launch the product in Colorado, US. We are fairly certain about the success of small scale wind turbines in the Colorado market. Vestas should then venture into other US markets. The main market as we understand it is the great lakes region (states like Michigan, Wisconsin, New York, Illinois, Ohio) because of high wind speeds 1 and presence of fair number of mid scale to small scale commercial properties and large number of vineyards and farms. Tax incentives (ITC and PTC) in this area are also favorable.

Colarado

Great lakes region (U.S and Canada)
Great lakes
region (U.S and
Canada)
Other Canadian and US states promoting Wind energy
Other Canadian
and US states
promoting Wind
energy
Other parts of the world
Other parts of
the world
states promoting Wind energy Other parts of the world 1 Wind Energy resource atlas of the

1 Wind Energy resource atlas of the United States, 1987

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1.4 Operational Strategy

Vestas currently has its North American Headquarters at Portland, Oregon and has manufacturing facilities mainly in Colorado, where it operates a blades factory, nacelles factory and is coming up with another blades factory and a tower manufacturing factory 2 . It is also setting up a research center in Colorado. It is recommended that Vestas sets up a unit for small wind turbines near the existing blades and nacelles factory at Brighton. The research team being set up can service the small wind division too. The towers for small winds are mainly composed of standard pipes which are assembled and the requirement for these can be outsourced. There is a huge potential for sales in the North-Eastern part of the country and near the Great Lakes region. This region is not only the most densely populated region of the country, but also has the required wind energy resource 3 . To better cater to this market, it is recommended that Vestas sets up with a sales and service office in this part of the country. The Canadian market can be served from the existing office in Toronto.

1.5 Organizational Plan and Management Structure

Since Vestas already has a manufacturing plant in Colorado and it has certain sales and service divisions in other parts of US and Canada, we‟re proposing the structure as given in Appendix C As per Exhibit 1 (Appendix C) Vestas Small Wind should be a separate division in the entire organizational structure of Vestas wind power. Under the small wind divisional arm will be four main divisions for Vestas small wind services, small wind operations, Vestas small wind R&D and Vestas small wind sales and marketing. Under the small wind operations will be manufacturing heads of small wind blades, nacelles and head of small wind assembly.

1.6 Financial Plan

The following graph (Refer Appendix D: Exhibit 3) depicts the growth in revenue based upon the expected sales growth in the first three years, followed by growth of 30% and then 18% after the initial five year period. Based upon the expected Capital expenditure on Property, Furniture, Fixtures and Research & Development, we expect the company to break even within the period of 7 years. Since this sector would have about 2 or 3 models ranging between the 10kW - 100kW

2 http://www.vestas.com/en/about-vestas/company-structure/vestas-americas.aspx

3 http://rredc.nrel.gov/wind/pubs/atlas/chp3.html

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range we have forecasted the sales at the average sales price per unit to be USD 140.000. This sector would also require additional capital expenditure within the next 5-10 years. This would be towards development of newer technologies and development and expansion models and capacity.

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2. Business Concept

This business plan offers a strategic approach for Vestas to enter the small wind turbine industry. It aims to answer questions such as the demand in this segment, business model that Vestas should adopt to enter this segment and the promising geographic regions in this segment.

The Business plan recommends that Vestas should enter this segment in the US. The American Wind Energy Association estimates that the cumulative installed capacity in the small wind segment would be 1700 MW in the next 5 years, from a base of 80MW in 2008. The foundation of business plan capitalizes on these growth assumptions and the extension of the Federal Tax Credit till 2016. Also with the recent awareness about renewable sources and rising electricity prices more households and commercials are shifting towards Wind energy as the source of Electricity. Also wind energy is expected to be more cost competitive that Solar PV and achieve grid parity sooner that Solar PV. By leveraging on these factors Vestas should be able to establish itself as the key player in the Small Wind segment.

The Small wind segment sales are dominated by turbines in the range from 1-10kW and 21- 100kW (Appendix A- Exhibit 1). The 21-100kW range is completely grid connected and this trend is expected to continue and expand into other segments (Appendix A- Exhibit 2). Using this information as the backdrop we suggest that Vestas should enter the market in the 11-100kW range of wind turbines.

This would mean targeting the community level residential clusters and the commercial market segment.

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3. Market Research and Marketing Plan

The core strategy for marketing of Vestas small wind turbines is going to focus on the “Go Green” movement. The increasing tariff rates in the US for all the three segments i.e. residential, commercial and industrial is going to be a pain area that is going to be targeted in the marketing strategies.

The Copenhagen Summit has created a lot of awareness regarding renewable sources of energy which can prove to be an advantage for Vestas. Also wind energy is currently poised to be the only renewable energy source which is expected to compete with conventional sources of energy.

The tariff rates in Colorado, US are on the increase and the average retail price is 9.28 cents/kwh. The residential, commercial and industrial rates for US are given as follows:

Tariff

4 (cents/kwh)

Residential

11.61

Commercial

10.27

Industrial

6.96

The levelized cost of electricity (LCOE) from wind is 4.3 cents/kwh

 

Wind 5

Fuel Cost

0

O&M cost (cents/kwh)

10

Capital Expenditure ($/kw)

1710

Project life

25

PTC (cents/kw)

2.1

Capacity factor

35%

LCOE (cents/kwh)

4.3

This cost breakup and comparison with tariff rates is going to be the basis for targeting the price sensitive commercial and residential segment.

5 Alternative Energy ,Credit Suisse, 28 January,2009

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3.1 Geographic Segmentation

According to Pike Research, individuals and commercial businesses around the world are moving towards small wind turbines in order to fulfill their requirements. Industry of small wind turbines had $203 million revenue in 2009 which is projected to grow to $412 million by year 2013. Among the green options, comparatively higher cost per watt of solar panels will further increase the demand of small wind turbines. Following points make the North American market the most preferred choice for Vestas;

Government support in terms of incentives, tax credits and municipal height restrictions for structures being lifted for small wind turbines.

According to Ernst & Young report for attractiveness of countries for investment in wind energy, U.S. and Canada come in the list of top 10 countries, with US at first position and Canada at number seven. (Refer Appendix B- Exhibit 1 for details)

US manufacturers have a share of 49% of worldwide small wind sales in the year 2008 and maintain its dominant position. US and Canada combined dominate the market for manufacturers of small wind turbine. (Refer Appendix B- Exhibit 2 for details)

Ontario Power Authority (OPA) has come out with „Green Energy Act 2009‟ in which they have mentioned that the proposed replacement of Coal plants should be with Renewable sources as it takes 8-10 years to build and commission nuclear plants. Wind energy investment in 2006 increased by 113% in a year when in 2005 OPA proposed the contribution of 15% by wind energy out of total energy mix by year 2025. (Refer Appendix B- Exhibit 3 for details)

US Department of Energy in the report „20% Wind Energy by 2030‟ (July 2008) have given special focus on Distributed wind technology which earlier was restricted to off- grid homes but is now getting into main stream.

Because of the aforementioned advantages that North American region has over other geographies and the government plans to move ahead in this area, we believe this market to be ideal for Vestas.

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Why Colorado to start with? Boulder, Colorado (US) has become the first smart grid city in the world 6 . The project has been provided to 50,000 homes for free on a trial basis. The city offers the ideal mix of residents and commercial customers. City has academic and research institutions such as the Colorado University, National Center for Atmospheric Research which are working on this technology and analyzing the long term benefits. This system when fully integrated will provide customers environmental, financial and operational benefits. The set up at Boulder has been estimated to be approximately $100 million effort. This technology lets the customer have detailed information through home monitoring tools. The potential benefits for this technology are the operational savings, customer-choice energy management, conservation options, the increase use of renewable energy and intelligent home appliances. The tools are small web based programs designed to give the customer real time view of how much energy they are using, which appliances consume most energy. The technology lets the customer save 5-15% of their monthly bill. This technology is customized for the consumer in the sense that they can select when to use a certain appliance. For example, the customer could be in any part of the world and still be able to see how much electricity is being used in their house, or customize which appliance is to be used at particular time of the day or night. Customers can start charging their plug in electric vehicle in the middle of the night when the rates are the least. This project allows clean energy become a reality in the future and reduce the green house effects and carbon emissions this system has taken the energy system in the digital age and ensures reliability, cost effectiveness, and a hazard free environment. Because of the awareness of the community about notion of distributed generation and readiness to embrace green energy, along with current installations of solar panels, small wind turbines can be promoted easily. As Vestas has its manufacturing facility in Colorado, it would be convenient to manufacture market and deploy the installments. Reduced transportation costs would further make the selling price competitive.

U.S. Department of Energy Secretary Steven Chu announced on January 21st, 2010 about selection of five projects to receive more than $20.5 million from the American Recovery and

6 http://smartgridcity.xcelenergy.com/learn/technology-overview.asp

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Reinvestment Act to support deployment of community-based renewable energy projects, such as biomass, wind and solar installations 7 . These projects will promote investment in clean energy infrastructure that will create jobs, help communities provide long-term renewable energy and save consumers money. They will also serve as models for other local governments, campuses or small utilities to replicate, allowing other communities to design projects that fit their individual size and energy demands.

The project in Phillips County (Holyoke, CO) proposed a community-owned 30 MW wind energy project with an ultimate goal to build a 650MW wind farm within Sedgwick, Phillips, and Logan counties in Northeastern Colorado. This project will impact the local economy by sharing the project‟s revenues with local landowners and other project participants, by generating local jobs, substantial property taxes, and providing clean renewable energy for the area‟s primary communities. Plans for sharing this ownership model are part of the business plan and will be coordinated with DOE to increase national delivery of the message. DOE share: $2,500,000

3.2 Target Market

Vestas would target community level residential clusters, commercial units and farms. These include schools, businesses, municipalities, community centers etc.

3.3 Product

The range of product offering would be from 10kW - 100kW, having three categories namely Zephyrus Low, Zephyrus Mid and Zephyrus High. „Zephyrus‟ being the name of wind god in Greek mythology would be the brand name given to the small wind turbine segment. This is done in order to differentiate its product from existing products. System would comprise of nacelles, blades and tower. It would be shipped to the customers in quickest possible time post taking the orders. For doing so Vestas can leverage on the current engagement with its supply chain members.

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3.4 Price

Average selling price of Zephyrus Low, Zephyrus Mid and Zephyrus High small wind turbines would be in the range of US $3 to US $5.7 per watt, which is the offer price range for competitors. This would include the cost of entire system including the tower which, depending on the type, would be either outsourced or manufactured in the tower manufacturing facility of Vestas. Vestas with market pricing would be able to get an upper hand over competition because of the brand name and quality standards.

3.5 Promotion

The following comment by the US president sets the basis for the promotional efforts of Vestas small wind turbines.

A green, renewable energy economy isn’t some pie-in-the-sky, far-off future it is now. It is creating jobs now. It is providing cheap alternatives to $140-per-barrel oil now. And it can create millions of additional jobs, an entire new industry, if we act now." -- US President: Barack Obama, June 24, 2008.

Vestas should launch the Zephyrus brand of small turbines with full media glare and join hands with members in the energy domain who are pushing forward for Distributed generation idea. Recent Copenhagen summit has generated tremendous media attention and viewer awareness on the „Go Green‟ concept, which can be leveraged by Vestas to reach the untapped business segment and community initiatives. Vestas can tie up with government agencies to set up community wind turbine plants and thus highlight its presence in the market. Vestas can promote Zephyrus brand at print/electronic media, trade shows and green summits. For the first year which would be launching in Colorado, a budget of US $2 million can be allocated. Next year when full scale production will commence, marketing budget of US $3 million is considered. Apart from the conventional form of advertising and promotion, we recommend that Vestas should use the newer mediums like social networking sites and Google ad words to reach users.

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Riding on Facebook, Twitter, MySpace and other networking sites, Vestas could communicate its product features and promoting the green campaign at lesser cost and get deeper reach.

3.6 Place

Vestas should enter Great Lakes region which includes Canadian province of Ontario and U.S. states of Minnesota, Wisconsin, Michigan, Illinois, Indiana, Ohio, Pennsylvania, and New York having high wind intensity. According to survey of residential turbine providers (AWEA report) Ohio and New York (part of great lakes region) were in the list of top 7 states were highest sales of small wind turbine was witnessed, this was also because of the tax incentives in offered in the region. (Refer Appendix B- Exhibit 4)

3.7 Marketing Budget

Based on our understanding of general marketing budgets, the following should be the costs allocated to the different segments of marketing plan.

budgets, the following should be the costs allocated to the different segments of marketing plan. Page

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4. Supporting Market Research

4.1 Policies

Renewable energy sector is greatly affected by the Federal and state government policies. In 2005 when the state government had announced an end to Investment tax credits, the wind power industry was adversely affected. Small wind investments now enjoy a long-term, uncapped 30% tax credit for both commercial and residential applications. For all market segments, industry predicts that the federal investment tax credit will continue to help increase production and further reduce costs. In general, states that offer consumer incentives at a level of $2 per Watt of capacity or greater attract the strongest share of the small-wind market. The American Recovery and Reinvestment Act of 2009, H.R. 1 passed on February 17, 2009 removed cost caps. A renewable electricity standard or RES, exists in 28 states in US and has sustained the market for renewable energy. Depending on how the policy is structured, an RES may provide an incentive for utilities to encourage small scale, customer-sited renewables like small wind turbines to be added to the generation mix. Congress may consider legislation in the foreseeable future that would establish a ceiling, or cap, on carbon dioxide (CO2) emissions allowed on an economy-wide basis. Renewable energy systems like small wind turbines, which emit no CO2, could become more cost-competitive under this law.

4.2 Competition

The small wind industry in US is a highly fragmented industry. According to a 2008 survey, US manufacturers accounted for 49% of the global wind sales in 2008 maintaining their historically dominant position 8 . There are 219 manufacturers of small wind turbines in the world. Of these 74 (34%) manufacturers are based out of US.

In 2008, Southwest Windpower headquartered in Arizona is the world leader in the small wind segment. Southwest mainly focuses on the small wind turbines in the range from 1-11 kW.

8 http://www.awea.org/smallwind/pdf/09_AWEA_Small_Wind_Global_Market_Study.pdf

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However since we are suggesting that Vestas entire the market with turbines in the range of 11kW-100kW, Southwest would not be a direct competitor for Vestas.

Northern power with its key product Northwind 100 (100kW) targeted mainly at communities and commercial segments is the main competitor for the Vestas in the US market.

is the main competitor for the Vestas in the US market. Figure 1: Competitor sales (kW)

Figure 1: Competitor sales (kW)

Entegrity Wind Systems based out of Colorado is in direct competition with Vestas. It has multiple products and is mainly focused in the 21kW-100kW range.

Bergey WindPower Company based out of Oklahoma mainly produces products in the 1kW to 10kW range. Hence Bergey WindPower is not a direct competitor in for Vestas at the entry level

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5. Organizational Plan

Since Vestas already has a manufacturing plant in Colorado and it has certain sales and service divisions in other parts of US and Canada, we‟re proposing the structure as given in Appendix C. As per Appendix C- Exhibit 1, Vestas Small Wind should be a separate division in the entire organizational structure of Vestas windpower. Under the small wind divisional arm will be four main divisions for Vestas Small Wind services, Small Wind operations, Vestas Small Wind R&D and Vestas Small Wind sales & marketing. Under the Small Wind operations will be manufacturing heads of Small Wind blades, nacelles and head of Small Wind assembly.

We suggest that Vestas should start the Small Wind division with an employee strength of 50 employees divided in the small wind blades, nacelles and assembly divisions. Vestas will initially use its sales offices based out of Colorado. It will also need to set up a sales office in great lakes region preferably Ohio. For sales in Canada, it should use its existing office in Ontario.

Separate Marketing and sales divisions should be set up for Small Wind turbines. The sales and marketing strategies for small wind will be different from the marketing and sales of traditional large wind turbines. The existing HR division in Colorado should be able to manage the new workforce. Although a few new recruits might be needed to handle the increased workforce.

A separate R&D department would be needed for the small wind arm. Although the design for small wind turbines is the same as large turbines, the manufacturing processes are different. The R&D department should try and optimize the process costs to reduce the final cost of offering since it a price sensitive segment.

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6. Operational Strategy

6. 1 Manufacturing

Vestas currently has its North American Headquarters at Portland, Oregon and has manufacturing facilities mainly in Colorado, where it operates a blades factory, nacelles factory and is coming up with another blades factory and a tower manufacturing factory 9 . The new blades and nacelles factories are coming up in the

Denver suburb of Brighton, Colorado. The tower manufacturing facility will be the largest of its kind and will be producing 900-1000 units a year. The towers for small winds, viz. guyed towers and lattices are mainly composed of standard pipes which are assembled and the requirement for these can be outsourced. The monopoles would be sourced from the tower manufacturing plant being developed.

sourced from the tower manufacturing plant being developed. To better service the demand for guyed and

To better service the demand for guyed and latticed towers; Vestas can get into arrangement with a leading pipe manufacturer to supply the kits for the towers. These kits would be made available at local hardware stores in the region.

6.2 Research

Vestas is also setting up a research centre in Colorado. As the technology for the large wind turbines and small wind turbines is the same, this research centre can also be used to develop the technology for the small wind turbines. But dedicated personnel would be required to be developed for the small wind energy who would report to the R&D head of Small Wind Energy division.

9 http://www.vestas.com/en/about-vestas/company-structure/vestas-americas.aspx

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6.3 Procurement

Vestas is currently developing a wind energy cluster near these upcoming plants in Brighton. Though the technology for large and small wind turbines is the same, the process and scale of production of nacelles and blades differs. By integrating the manufacturing setup for small wind turbines with these facilities or by locating the required facility in the vicinity of this cluster, Vestas will be able to capitalize on the possible synergies. This will also help the company to reduce its procurement costs by possibly sourcing from the common supplier base and saving on the transport costs. Additionally, Vestas can also establish a procurement centre along with its sales office in the eastern part of the country to channelize the procurement efforts there.

6.4 Sales and service

To begin with and till stabilisation of the new operations, Vestas will be developing 10kW and bigger turbines. These are targeted at industrial users, farms and communities. Hence, the sales efforts will not have to toward individual residential users. This would help Vestas utilize its current sales and service setup.

Vestas already has a sales and service centre in Portland, Oregon and in Toronto, Ontario 10 . That apart to serve the new target market, Vestas will need to set up sales and service centre in the Great Lakes region too. This region is not only the most densely populated region (great lakes region and north east region) of the country, but also has the required wind energy resource 11 . This can be located in the city of Cleveland, Ohio.

The existing Toronto centre can be equipped to serve the small wind customer base too. A separate sales team would need to be put in place at each of these locations to promote the small wind products.

10 http://www.vestas.com/en/about-vestas/find-vestas.aspx?RegionID=11

11 http://rredc.nrel.gov/wind/pubs/atlas/chp3.html

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6.5 Possible issues with the operations

The small scale wind energy market is expected to witness a phenomenal growth of 84% CAGR for the next 5 years. Depending on the market share Vestas is able to capture, it might have to invest more in the tower manufacturing plant to ramp up the capacity. On the other hand, any new investment will bear a risk as the demand for small wind energy is heavily dependent on government policies and subsidies apart from the availability of private equity investments.

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7. Expansion Strategy

2012-2013:

Geographical expansion in U.S. and Canada

2016: Tax Laws to be relooked in U.S.- Contingent plan for the same

2010: Plant Set up in Colorado 2014-2015: Global expansion
2010: Plant Set up
in Colorado
2014-2015: Global
expansion

2011: Launch in Colorado followed by launch in Great Lakes Region (U.S. and Canada)

Year 2010: Vestas would set up the plant in Colorado. The Gestation period is assumed to be 1 year. Year 2011: As the facility becomes fully operational, the capacity of the plant would be maximum 2,000 units. Boulder being the first smart grid city in the world provides an excellent market for Vestas to try its products. After the initial launch in Colorado, Vestas should launch the product in the great lakes region. This capacity would remain constant till 6 years and would then increase due to further expansion plans. Year 2012-13: After selling the product in Colorado, Great Lakes region which includes 8 US states and Ontario province (Canada), Vestas should expand its reach and move towards other states in US which have high wind speeds. This would include the US West region namely California, Arizona, Nevada and Oregon; and Canada‟s Quebec province. Year 2014-16: In the year 2016, the tax laws will be relooked by US government and therefore, Vestas should look at other geographies like Germany, India, China and other countries which are attractive for wind energy implementations. Hence, after establishing base in North America, Vestas should start preparing to launch the products in other geographies around the world.

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8. Financial Plan

The financial projections have included factors such as Working Capital expenses, Fixed Costs, and Expenses towards future increase in capital expenditure.

8.1 Revenues

The revenues of the company, Vestas Small Wind would primarily be from the sales of small wind turbine plants in the North American region with most of the sales concentrated in United States & Canada. Since the Vestas Small Wind plant would be setup in Colorado close to the location of its existing plant for the large scale turbine, nacelle and tower manufacturing; we expect a lot of synergistic cost efficiencies to be present. Considering the current year 2010, we expect that the plant operation to begin in first half of 2011. Hence we predict that the initial sales to come in from the Colorado region towards the beginning of 2011. We expect to see an initial jump in sales and expect the primary demand to come from Colorado, Great Lakes Region, New York and Canada.

Since the prices of small wind power units are expected to be between the prices of $3-6/Watt 12 ; we have priced the turbine at the rate of $3.5 per watt. Considering that we would be having 3 turbine designs at offer ranging between the 10kW to 100kW range and looking at the current demand observed and expected demand for the small wind power units between these ranges, we have assumed that the average wattage of every turbine sold would be 40kW. This expected demand has been calculated based upon the unit sales observed and expected in the United States in the coming 5 years as per the AWEA Small Wind Turbine Global Market Study Year Ending 2008.

Considering that the gestation period for the setup of plant would be about 1 year, we do not expect plan to sell any units in the current year.

Case for consideration: Considering the newly setup capacity in Colorado and assuming that if it were possible to manufacture the small wind turbine units from this setup, we would plan to

12 Pg14 COST - AWEA Small Wind Turbine Global Market Study Year Ending 2008

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start to manufacture a small number of units in the current year itself. This would hence help in generating some revenue from the very first year & thus help in lowering the overall cost of finance for new setup planned for the small wind manufacture.

After the initial year of sales for the year 2011, we expect the sales to increase at a rate of over 35% and later expect the growth rate to reduce to 18% after the initial 5 years. This is a conservative projection since the market expectation for the small wind industry is a 30-fold increase in the US market alone within the next 5 years to come which also considers the current market conditions. 13 The AWEA report for Global Small Wind Turbine Market Study 2009 also goes on to mention that the primary reasons for this expected growth is the eight year 30% Federal investment tax credit, potential private equity investments & greater equipment manufacturing capabilities. The Gross Profit Margin has been calculated based upon the average gross profit margin observed by Vestas Wind Systems over the last 3 years at 18.9%. The Selling, General & Administration expenses have been taken at 6.3% of the revenue, which was the last 3 year average for Vestas Wind Systems. But this rate of SGA expenses can be reached only after the initial 3-4 years since there would be high advertisement and marketing expenses of about $2.5 million that has also been considered for the first 3 years in the attached financial projections.

We have assumed that the Small Wind plant would require a plant of 120,000 square feet. This assumption is based upon the fact that similar Vestas plants like the one in Windsor, Colorado is of 180,000 sq. foot. We hence expect the cost of land including the land development costs to be at the rate of $200 per square foot which totals to $24 million. Plant Machinery & Equipment costs would be $42 million. This cost is based upon the fact that 180,000 square foot Windsor, Colorado plant cost $60 million in the year 2007, hence adjusted for inflation the 120,000 square foot plant would cost $42 million. The initial Research & Development required for the smaller designed wind turbine project would be spent by the parent organization, Vestas Wind Systems. This R&D would be done by the parent organization Vestas Wind Systems that has just in the year 2008-2009 invested in developing an R&D center in the Brighton, Colorado and also has

13 AWEA Small Wind Turbine Global Market Study Year Ending 2008

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R&D center‟s being developed in Houston, Texas and Boston, Massachusetts 14 . These centers would cater to the development of the required small wind technology initially.

We have also assumed a contingency fund which is equal to 5% of the cost of Plant, Machinery & Equipment and have assumed an expense of $2 million towards preoperative expenses like Marketing & Project Consultancy.

Please find the attached Appendix D- Exhibit 1 that shows the estimation cost of the project of the Small Wind Project and Appendix D- Exhibit 2 that shows the expected revenue for the Small Wind Project.

Based upon the assumptions made in the financial predictions, we expect that the firm would begin to show positive cash flows from the second year of operations i.e. 2011 and would break even in the seventh year i.e. 2016.

8.2 Costs

On an average, Vestas Small Wind would see that its primary cost drivers would be the Cost of Goods Sold (COGS), SGA Expenses and Interest Expense towards the debt.

Vestas Small Wind would also try to lever its future technology inputs from its parent organisation that is also based from the same location. Since the concept design would be similar we expect a lot of synergies in future developments. Also because of the closeness of an already established parent firm, we expect cost efficiencies to develop further in the long term when the production capacity would be further increased. Employee benefits would also be given if the firm‟s performance targets are met or any significant cost reductions are achieved.

Since the small wind plant is nearby the parent plant, we expect the gross margins to be close to that of the parent organization and hence improving after the initial couple of years. This can be seen in the chart attached in the Appendix D- Exhibit 4. Once the sales offices are established and the staffs are experienced in the new technology operations, we expect the gross margins to improve. The Net Profit Margins which would be low initially would stabilize to around 8% after

14 Local Press Release No. 1/2009 Vestas America

Page 23 of 36

the initial 4-5 years. We also expect $9 million to be spent into capital expenditure increase after 5 years to cater towards future increase in demand. The CAPEX expenditure would be invested split across two years. We have assumed that the Tax rate for the income statement flows would be same as that of the parent organization Vestas Wind Systems at 28%.

8.3 Cash Flows

Cumulating all the cash Inflows & Outflows over the period of 9 years, it can seen from the attached table in Appendix D- Exhibit 3, that break even can be made by the year seventh year i.e. 2016. We have also included an expenditure of $ 9 million towards capital expenditure for future growth in capacity after in the initial 5 years. The depreciation charged in the table is the depreciation from the plant cost & the allocation in contingency funds and preoperative expenses that has been expensed over the period of 10 years.

8.4 Financing the Project

Although the parent firm, Vestas Wind Systems has Cash in Hand of 283 million Euros as per the last quarter published financials in September 2009, we would be raising a 10 year debt to finance 60% of its initial requirements. This is because the cost of debt is much lower than the cost of equity. Since the current long term debt rates are currently at a low of around 3.5%, we have assumed that the firm would be able to raise the required 60% debt at 4% for a period of 10 years successfully. Vestas Wind Systems, the parent organization has been having an average Debt to Equity Ratio of around 10% for the last 3 years and hence it would be possible for Vestas Small Wind to raise the debt at a small premium over the current long term loan rates. This raised debt would help to act as a tax shield and would reduce the cost of capital overall.

We have also considered that 25% of the Working Capital would be funded by the Firm initially as part of fixed costs in the form of Margin Money for Working Capital and the remaining 75% would be raised as a Working Capital Loan at an interest rate of 4% for a period of 10 years.

Page 24 of 36

Proposed Sources Of Finance

Remarks

Long Term Loan @ 4% - 10 year (‘000 USD)

45305

Assumed that 60% of the Total Fixed Costs in

Long Term Debt Interest Rate

4.0%

 

funded using a 10 year term loan @ 4% annual interest rate

Long Term Debt Period (years)

10

Working Capital Finance @ 4% for 10 years

10787

75% of the working capital Requirement is to be funded with working capital finance

 

Please find attached Appendix-D Exhibit 5 that‟s shows the Loan Repayment Schedule & the Depreciation Schedule for the Small Wind Project.

The Vestas Small Wind Project would also help to serve as a platform for future expansion into the other parts of the world and hence in the future, we can expect the revenues to grow above the financial predictions given in the appendix.

The total value of the firm generated from its future cash flows has been calculated as the net present value (NPV). With the Cost of Debt as 4% and the Cost of Equity as 9%; the Weighted Average Cost of Capital (WaCC) of the project is 5.33% and the Internal Rate of Return (IRR) from the project is at 41.24%.

We have hence performed a sensitivity analysis to better analyze the expected NPV at various growth rates and various WaCC rates as below:

NPV in $ million

Perpetual Growth Rate

0%

2.50%

4%

 

4.5%

355.23

485.55

626.30

WaCC

5.0%

340.25

465.69

601.16

6.0%

312.06

428.34

553.92

 

7.0%

286.08

393.95

510.44

Table: Sensitivity Analysis for NPV Analysis

Page 25 of 36

Hence at 4.5% WaCC and 4% and perpetual growth rate, the expected NPV is $626.3mn.

Considering the positive expected cash flows, low rate of weighted average cost of capital (WaCC), an internal rate of return (IRR) of 41.24% and possible synergistic development required to expand their current business suggests that this project is a good investment.

Page 26 of 36

9. Solutions for Additional Organizational Issues

We have suggested that Vestas should incorporate Small wind as a separate arm in the parent company. However if the value derived from the small wind arm is not realized in the valuation of the parent company then Vestas should look at demerger options.

The Demerger can result in added value being realized for the parent as well as the subsidiary. In the long run, Vestas can look at options like IPO for expansion plans of the subsidiary. A Demerger would mean that a separate facility would have to be set up and this would require substantial capital expenditure. Vestas can look at options like IPO to fund these capital expenditure requirements.

Business Risks

The sales in the wind turbine industry are largely contingent on the federal policies. Alternative energy sources become affordable when tax credits are offered. Any adverse change in federal policies can hamper growth predictions

Small wind systems are approximately 90% steel and incorporate a significant amount of copper in their generators and wiring, and are thus susceptible to fluctuating commodity prices.

If other sources of Alternative Energy like Solar PV become more affordable due to decreasing silicon costs, then the demand for Wind energy will decrease thus impacting the sales for Wind turbines.

Page 27 of 36

Appendix A

Exhibit 1:

Appendix A Exhibit 1: Exhibit 2: Page 28 of 36

Exhibit 2:

Appendix A Exhibit 1: Exhibit 2: Page 28 of 36

Page 28 of 36

Appendix B

Exhibit 1: Relative attractiveness of different countries for investment in Wind Energy CanWEA Report Wind Vision 2025

in Wind Energy – CanWEA Report Wind Vision 2025 Exhibit 2: U.S. and Canada have dominant

Exhibit 2:

U.S. and Canada have dominant share of small turbine manufacturers 15 .

dominant share of small turbine manufacturers 1 5 . 1 5

Page 29 of 36

Exhibit 3:

Understanding Green Movement in Ontario Survey Ontario Green Energy Act 16

in Ontario – Survey Ontario Green Energy Act 1 6  Purpose: To understand the green
in Ontario – Survey Ontario Green Energy Act 1 6  Purpose: To understand the green

Purpose: To understand the green energy movement in Ontario.

Source: Ontario Green Energy Act & Ontario Energy Board.

Methodology of obtaining data: Internet Search.

Key findings: Understood the significance, awareness and acceptability of green energy in Ontario.

16 http://www.greenenergyact.ca/Page.asp?PageID=1224&SiteNodeID=201&BL_ExpandID=43

Page 30 of 36

Green Energy is being widely supported by Ontario government, Industries, Commercial entities and local community. Ontario government has in fact passed the Ontario Green Energy Act to support the development and usage of renewable form of energy. The law was tabled at the Legislative Assembly of Ontario on February 23, 2009 and passed into law on May 14, 2009. The main objective of the law is to “make Ontario a global leader in the development of renewable energy, clean distributed energy and conservation, creating thousands of jobs, economic prosperity, energy security, and climate protection”. The purpose of this Act is to “facilitate the development of a sustainable energy economy that protects the environment while streamlining the approvals process, mitigates climate change, engages communities and builds a world-class green industrial sector” 19 . It will enable all Ontarians to participate and benefit from green energy as conservers and generators, at the lowest cost to consumers. The Green Energy Act would provide a lower cost option to Ontarians. The study conducted by Ontario Energy Board reflects that a renewably-powered electricity system with a greater emphasis on conservation and efficiency would be at least 11 per cent less expensive, and potentially as high as 32 per cent less expensive, than the current systems. Furthermore, as per Moody's Investment Services traditional generating technologies have fixed designs whose costs are rising rapidly while renewable technologies are still experiencing significant advancements in terms of energy conversion efficiency and cost reductions. The Green Energy drive is being pushed aggressively, since there are other benefits associated with Green Energy, like creation of green jobs. Canada's potential in the renewable energy sector could create 13,000 jobs by the year 2012 and produce $10 billion in revenue 19 . The Province of Ontario has abundant sources of renewable energy - the potential of wind, solar and hydro resources in the province is 65,000 megawatts!

Furthermore, a vast majority of Ontarians support Ontario's proposed Green Energy Act, according to a public opinion poll released by a coalition of environmental groups, farmers, labour unions, and industry associations and a separate poll conducted by Ontario Power Generation Authority.

Page 31 of 36

Exhibit 4:

Wind speed intensity in Great Lakes region 17

Exhibit 4: Wind speed intensity in Great Lakes region 1 7 Mean annual wind velocity at

Mean annual wind velocity at 50 m above ground (metres/second) 18

wind velocity at 50 m above ground (metres/second) 1 8 1 7

Page 32 of 36

Appendix C

Exhibit 1: Organizational & Management Structure

Appendix C Exhibit 1: Organizational & Management Structure Page 33 of 36

Page 33 of 36

Appendix D

Exhibit 1: Estimated Cost of the Project

 

Estimated Cost Of The Project

 
 

('000)

Remarks

 
 

USD

(Source-Vestas Press Release No. 2/2009 from Vestas Americas

 

Square Foot Area Of The Plant

120000

Assumed based upon the fact that the Windsor, Colorado Blade plant is of 180,000 sq foot

 

Land

including

 

Land

 

24000

The cost of land is based at the rate of $200 per square foot

Development

   

Plant, Machinery & Equipment

 

42000

PME Cost is based upon the cost of the Windsor, Colorado Blade plant of 180,000 sq foot for $60 million in 2007 & adjusted for inflation

   

Interest

Costs

 

during

 

1812

This cost is based on an assumed gestation period of approx 1 year against the Long Term Loan taken at 4%

Construction period

   

Contingency

   

2100

Assumed to be 5% of the Plant Machinery & Equipment Cost

Preliminary

 

Expenses

 

2000

Assumed

 

(Marketing

&

Project

   

Consultancy)

 

Margin

Money

for

Working

 

3596

25% of the Working Capital Requirement is to be funded by the company

Capital

 
 

TOTAL COST

 

75508

 
 

Exhibit 2: Financial Predictions

 
 

2011

2012

2013

2014

2015

2016

2017

2018

Revenue

105000

136500

177450

230685

272208

321206

379023

447247

 

(Less) COGS

85120

110656

143853

187009

220670

260391

307261

362568

Gross Profit

 

19880

25844

33597

43676

51538

60815

71762

84679

(Less)SG & A Expenses

9580

11554

11120

14456

17058

20129

23752

28027

EBIDTA

10300

14290

22477

29220

34480

40686

48010

56651

 

(Less) Depreciation

4591

4591

4591

4591

5041

5491

5491

5491

(Less) Preliminary Expenses

400

400

400

400

400

0

0

0

EBIT

5309

9299

17486

24229

29038

35195

42518

51160

(Less) Interest Expense

2125

1853

1635

1417

1199

981

763

545

Profit Before Tax

 

3183

7446

15851

22812

27840

34214

41755

50615

 

(Less) Income Tax

891.33

2084.83

4438.23

6387.33

7795.06

9579.88

11691.50

14172.22

Profit After Tax

 

2292

5361

11413

16425

20044

24634

30064

36443

Page 34 of 36

Exhibit 3: Cash Flow Analysis

 

2010

2011

2012

2013

2014

2015

2016

2017

2018

NOPAT

0

3822

6695

12590

17445

20908

25340

30613

36835

Depreciation

0

4591

4591

4591

4591

5041

5491

5491

5491

Net Change in Working Capital

0

10500

3150

4095

5324

1430

1198

835

2539

CAPEX

-75508

0

0

0

-4500

-4500

0

0

0

Cash Flows

-75508

-2086

8136

13086

12213

20019

29634

35269

39787

Net Cash Flows

-75508

-77594

-69458

-56372

-44159

-24141

5493

40762

80549

Cash

Flows

                 

including

Terminal Value

-75508

-2086

8136

13086

12213

20019

29634

35269

867357

Exhibit 4: Financial Chart

-75508 -2086 8136 13086 12213 20019 29634 35269 867357 Exhibit 4: Financial Chart Page 35 of

Page 35 of 36

Exhibit 5: Depreciation Schedule & Loan Repayment Schedule

Depreciation Schedule

Plant Cost (USD ‘000)

42000.00

Allocation of Contingencies & Pre-operative Expenses

3912.19

TOTAL DEPRECIABLE COST

45912.19

Number of Years Of Depreciation

10

 

Loan Repayment Schedule

 

Year

Opening Balance

Repayment

Closing Balance

Interest

1

56092

5609

50482

2187.57

2

50482

5609

44873

1907.11

3

44873

5609

39264

1682.75

4

39264

5609

33655

1458.38

5

33655

5609

28046

1234.01

6

28046

5609

22437

1009.65

7

22437

5609

16827

785.28

8

16827

5609

11218

560.92

9

11218

5609

5609

336.55

10

5609

5609

0

112.18

Page 36 of 36