Renewable Energy-focused Power Players Coming into Spotlight
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com. -- Ed.
1) Solar energy market
Solar energy installations to slide for first time
Global solar energy installations are projected to slip 7% y-y to 110GW in 2020. While more than 130GW in installations was expected prior to the outbreak of Covid-19, backed by greater installations in North America, China, and Europe, projects with a combined capacity of at least 25GW have been delayed due to the spread of the virus.
Pent-up demand to boost solar energy installation growth in 2021; Attention to new markets required
However, if Covid-19 subsides, solar energy installations will likely climb to 145GW in 2021, driven by pent-up demand. While solar energy installations are likely to increase mainly in existing markets, growth should accelerate in new markets as well. We note that in markets other than Asia, Europe, and North America, solar energy installations reached 20GW in 2019.
Prices remain sluggish amid sustained oversupply
A longstanding issue plaguing the PV value chain has been that despite strong demand, sustained excess supply has resulted in continuous price decline for PV products. Even today, PV companies with strong cost competitiveness (mainly those in China) have been expanding their capacity, while in the US, deepening trade protectionism has prompted US PV module makers to expand their production capacity as well.
Falling raw material prices support cell and module margins
That said, we note that prices have declined relatively less for high-efficiency and high-purity products. In addition, as for cell modules, despite falling product prices, raw material (poly-si and wafer) price decline has helped related plays to defend margins.
Technology upgrade and business expansion essential for long-term earnings generation
While global PV demand is expected to recover, for the time being, overall market circumstances are likely to limit PV product price increase. Against this backdrop, we believe that cell module companies need to achieve either: 1) sales volume growth and ASP improvement on high-efficiency product development; or 2) business expansion into downstream areas (engineer-procure-construct: EPC) in order to generate stable earnings over the mid/long term.
N-type solar cells to be introduced
So far, solar cell and module technologies have been advancing at a rapid pace. For example, it took only three years for the transition from multi to mono for wafers to be completed. Of late, companies have been aggressively introducing new technologies such as PERC, Bi-facial, and Half-cut in order to improve solar cell/module efficiency.
New capex cycle to kick off
Going forward, we predict that N-type wafers and cells will emerge as the new mainstream, replacing the present P-type products. And, the introduction of new technologies such as N-type Top-Con and heterojunction technology (HJT) should improve PV modules’ generation efficiency from today’s 22% to 25%. Given that capex investment is essential for the mass production of next-generation PV modules, chances are that PV cell and module companies will kick off a new capex cycle in the future.
Product manufacturing no longer guarantees sustainable earnings generation
Given the superior cost competitiveness of Chinese solar power players, it should be a challenge for domestic companies to focus on individual product manufacturing and generate stable earnings over the mid/long term. In the short term, Korean solar power players are to benefit from the anticipated growth of the US PV market, thanks to their relative technological edge and US-China trade conflicts. However, it should be noted that such advantages could disappear at any time depending on political developments.
Advance into downstream arenas looks advisable
In this regard, domestic PV firms will likely need to look beyond the manufacturing of solar products, expanding their business scope to include downstream segments such as installation, operation, and maintenance services. For reference, the downstream business is known to warrant margins of around 7~20%. In particular, Korean companies with specialties in product manufacturing should be able to build solar plants at a reasonable price by using their in-house produced cells and modules. And, post-installation maintenance services could serve as a long-term revenue source.
New opportunities
In our view, Korean PV firms should turn their eyes to the PV EPC markets in India, Southeast Asia, and the Middle East, and build related track records in these regions. Given that large-sized PV installation projects are to be underway in Korea (led by the Saemangeum project), we believe that the securing of domestic PV EPC orders will serve to build an important track record for Korean companies to expand their presence in the overseas market.
2) Global wind power market outlook
2020 global wind installations to expand 9% y-y
In 2020, global new wind power installations are to increase 9% y-y to 66GW. Excluding China, where local companies are dominating, global wind power installations are estimated to expand 12% y-y to 36GW. We note that the annual new wind installations forecast has been revised down due to Covid-19, but unlike solar projects, only a limited number of wind power projects are to be delayed. We predict that global new wind power installations will increase strongly in 2021, led mainly by the US, which in turn should lead to greater sales at related companies next year.
Offshore wind growth deserves attention
In particular, the growth of offshore wind farms deserves attention. Given that offshore farms should take longer to complete than onshore wind facilities, new offshore wind installations are likely to increase at a moderate pace. That said, with large-sized offshore wind projects included as a key measure of many countries’ renewable energy policies, offshore wind power installations should rise by more than 9GW pa from 2021.
LCOE trend declining
Meanwhile, wind power generation cost (levelized cost of energy: LCOE) has been falling steadily on the introduction of new large-sized turbines and intensifying price competition among turbine makers. Backed by the emergence of ultra-large-sized turbines, the ongoing LCOE downtrend should accelerate further, led by offshore farms.
Top-tier wind turbine makers to solidify their market share
We note that unlike the solar power market, where product makers and facilities maintenance service companies are separated, wind turbine makers are also in charge of maintaining and repairing existing wind power facilities. In other words, in addition to installation sales, turbine companies are generating stable revenue from maintenance services. In the global wind power market (excluding China), the big-3 turbine players (Vestas, Siemens-Gamesa, and GE) have been solidifying their presence, taking advantage of their technological edge (turbine capacity) and track records relative to late-starters in the market.
3) New trends: Residential solar power and offshore wind farms
Residential solar power market expansion benefits inverter firms
In 2019, in line with a rapid expansion of the global residential PV systems market, sales grew explosively at inverter companies along with residential PV systems lease players. We note that Enphase and Solaredge Technologies, the two players that enjoyed the strongest share price rise in PV ETF, are inverter suppliers.
Residential PV systems market growth to be fastest in US
It appears that due to the Covid-19 pandemic, residential PV systems market expansion will likely stall from 2Q20. That said, we believe that the spread of distributed generation systems and improving solar module efficiency have created favorable conditions for residential PV market expansion. Against this backdrop, appropriate promotion policies could serve as a catalyst for the related market’s explosive growth. In the state of California, PV installations have become mandatory for new 3-or higher-story buildings from 2020, and it is known that other states are considering amending their existing policies to follow California’s case. Residential PV market expansion is expected to be witnessed in Europe and Korea, as well. However, the anticipated market growth should be the fastest in the US, as in the country, households are installing residential PV systems not only to generate extra income, but also in order to secure supplementary power sources as the US’s power supply tends to be highly instable.
EU places great emphasis on offshore wind power industry
In its renewable support policies, the EU is placing strong emphasis upon offshore wind power. As they are located far away from humans, offshore wind power facilities are relatively free from the various constraints placed upon onshore facilities, a difference which makes it easier to develop large-scale wind farms off shore rather than on land. The fact that the global offshore wind energy market is mainly led by European players provides further motivation for the EU to support the offshore wind power industry.
Europe’s offshore wind power capacity to rise from 22GW at end-2019 to 65~85GW by 2030
By end-2030, the EU plans to expand its offshore wind power capacity to 65~85GW. Given that Europe’s offshore wind power capacity totaled 22GW as of end-2019, we foresee an average of 4~6GW worth of capacity additions pa over the next ten years, a level exceeding the current record-high annual capacity addition of 3.6GW seen in 2019. It has been also reported that the European offshore wind industry needs to have around 450GW of offshore wind capacity by 2050, in order to reach carbon neutrality by 2050.
SGRE and MHI Vestas to maintain dominant market positions; CS Wind to benefit from offshore wind power market expansion
As of end-2019, the European offshore wind power market (22GW) is divided by UK (9.9GW), Germany (7.4GW), Denmark (1.7GW), Belgium (1.6GW), and Netherlands (1.1GW). Turbines, key components in wind power facilities, are mainly offered by Siemens Gamensa (SGRE) and MHI Vestas (a JV for offshore wind turbines between Mitsubishi Heavy Industries and Vestas). SGRE and MHI Vestas represented 681% and 23.5% in the offshore wind turbine market as of end-2019. While relative newcomers such as GE and Senvion have recently widened their M/Ss, we expect SGRE and MHI Vestas to sustain their dominant positions moving ahead. Supplying its products to both SGRE and MHI Vestas, CS Wind is to enjoy higher sales moving forward in line with the expansion of the European offshore wind power market.
Renewable energy-focused power players coming into spotlight
Amid an expansion in the offshore wind power market, renewable energy-focused power companies have also been drawing attention. Major energy companies in the European offshore wind power industry include Orsted (boasts largest M/S of 16%), RWE and Vattenfall. We note that Orsted’s share price has sustained an uptrend over the past three years, backed by earnings growth stemming from ramped-up capacity and expectations that it will benefit from ongoing renewable market expansion. With Europe’s renewable energy industry set to grow further on government support policies, renewable-focused power players are likely to enjoy greater EVs going forward.