The most profitable components in the wind turbine

fes-windturbinesbluemountains

A few months ago a friend and I were discussing some investment opportunities.  He mentioned that he was considering investing in a company that produces blades for wind turbines.  I had read several research articles related to the economics of wind power and upon first thought it seemed to be a valid investment interest that could warrant further investigation.  At the time I didn’t give it a whole lot more thought than our brief conversation and I’m not even sure if he ever ended up investing in the company, or even which company it was.

The Economist this last week was littered with articles and ads related to wind power and it got me to thinking on this subject a little more.  I was also reading some of Clayton Christensen’s thoughts on modular and interdependent architectures and how they relate to commoditization and can help managers predict profitability within an industry.  Specifically, I was looking at how to be profitable as a component of an overall modular architecture.  My research was for a completely different issue in a completely different industry, but my mind was sort of set in the mode and it made me wonder how versatile this framework actually was.  Could it be used to gain a better understanding of the wind turbine industry?  Could it reliably predict whether the blade (component) of the overall wind turbine system would be a performance-defining subsystem and command the highest profit margins, ultimately driving a successful company?  If it isn’t the blade, then what are the most profitable components in wind turbines?  I knew that if I wanted to successfully answer these questions, I needed to start by investigating the overall architecture of the industry, finding out where it was in the cycle of integration to modularization.

I briefly touched on modular and interdependent architectures in an earlier post, iPhone and Android: Modular to Interdependent and Back to Modular Again, but taking a quick second to review the concept in a little more depth before diving right in might be needed.

Interdependence and modularity

Interdependent architectures are systems in which one component or subsystem cannot be created independently of the other component.  That is, the design and manufacturing of one component depends on the design and manufacturing of another component.  The interface between two components has unpredictable interdependencies, usually requiring the same company to design and develop both components.  These architectures optimize performance, in both functionality and reliability.  The architecture also tends to be proprietary because of these unique interface designs –think Apple iPhone. Within modular architectures exist clean, specific, predictable interfaces that allow components to fit and work together in a well-understood, specified system.  This allows many component manufactures to compete in the market, as long as their products meet the specifications –think Windows OS.

When a product or service is not yet good-enough, optimization, reliability and improved functionality are needed.  The goal is to make the best possible product out of the technology that is available.  Interdependent architectures allow firms to achieve this goal through integration of the design and manufacturing of every critical component needed to complete the overall system.  In the early stages of a new technology or service, integrated firms tend to make higher profit margins because their differentiation is straight forward and the high ratio of fixed to variable costs that is intrinsic in the design and manufacturing of interdependent products creates steep economies of scale.

However, there is a progression from interdependent to modular architectures as products improve enough to overshoot customer requirements (see Disruptive Technology subsection in previous post).  This leads to a performance surplus and speed, convenience and customization become important.  Modular architectures help firms compete on these dimensions because they can introduce new products faster by upgrading crucial individual subsystems without redesigning the entire system.  These firms begin to form standard interfaces.  Although standard interfaces may lead to some issues in the overall system performance, these issues will not be noticeable as there is already a performance surplus.  Standard interfaces enable independent, non-integrated firms to buy, sell and assemble components and subsystems.

Finally, with modularity comes commoditization.  A modular architecture makes it very difficult to see or understand the differentiation in the performance or cost of a product versus those of the competitors, who use many of the same components in their own products due to standardization. Therefore, the attractive profits in the future will most likely be earned elsewhere in the value chain of the overall system or architecture.  Usually this happens in places in the formerly modular and undifferentiable processes, components, or subsystems.  The only way systems providers or assemblers (former interdependent architectures) can make profits in modular architectures is to find the very best performance-defining components in order to make the best possible product.   Their demand for improvements in performance-defining components throws the suppliers of those components back into the not-good-enough arena.  As a result, competitive forces compel suppliers of these performance-defining components to create interdependent, proprietary architectures within the subsystems. Hence, the performance-defining subsystems become de-commoditized as end-use products become modular and commoditized.

The wind turbine industry

Wow, that was a mouth full!  So, from here how do we now apply this framework to the wind turbine industry?  I figured the most important first step was to figure out where the industry is in the integration to modularization cycle.  Is it currently an interdependent architecture or a modular one?  So, I started by wrapping my head around the mechanics of a wind turbine and what components make up the overall unit.

I found that the turbine can be broken down into three major components which can then be broken down even further.  The rotor component includes the blades, hubs, pitch mechanisms and bearings, spinner and nose cone.  This accounts for roughly 20% of the overall turbine cost.  The generator components consists of a low-speed drive shaft, bearings, a gearbox, break, generator, variable speed electronics, hydraulic and cooling systems, a yaw drive and mainframe.  This major component accounts for roughly 34% of the overall system.  The structural support component is made up of the tower and the rotor pointing mechanism and is roughly 15% of the overall cost.  Each one of these components within the three major components has a material and labor cost that can be broken down into a percentage of the overall component.  For instance, in an advance blade component, the fiberglass fabric accounts for 60% of the cost, whereas the threaded metal fasteners accounts for 3% of the blade costs.  I’m not going to take the time to list all of these figures out here , they can be found in the sited document, but it is important to remember this concept.

O.K.  So there’s a lot of components here.  If we were to assume for the time being that the industry was currently working in an interdependent architecture –it is as will be discussed shortly– we would want to be able to reliably predict which of these components were best positioned to become the performance-defining components in the overall system as the industry moves to a more modular architecture.  Now whether it does or not and when, is still to be seen.  But, if this cycle was actually predictable in any industry, we would expect these turbines to eventually become good enough, be it in efficiency (the theoretical maximum efficiency of a turbine, worked out by Albert Betz, is 59.3% and modern turbines are about 50% efficient) or the price per kWh that would make it cheaper that alternative energy sources.  This would eventually produce a performance surplus, causing the customer to begin demanding improvements along the dimensions of speed, convenience and customization.  So, we would expect many of these turbine systems to start looking very similar in areas of efficiency and cost as their design begins to incorporate best practices, based on years of R&D and operation, and standardization begins to set in.  Customers will begin to exhibit higher bargaining power over turbine assemblers/manufactures because their products will be less differentiable.  Assemblers/manufacturers will turn to their components or subsystem suppliers and require innovative improvements that cut manufacturing or delivery times or allow for more customization and convenience for the customer.  We can see the cycle begin to take shape!

Alright, so this now causes competition among turbine component suppliers and forces their engineers to devise designs that are increasingly proprietary and interdependent in order to differentiate themselves from their competitors.  Their product must deliver the best performance in order to help differentiate the final, seemingly commoditized turbine from competitors’ turbines.  The leading providers of these components will find themselves profitably selling differentiated, proprietary products, increasing their supplier bargaining power.  So, back to the original question, which components are the ones best positioned to be a performance-defining subsystem?

To answer this question, the first thing I did was look to areas where improvements needed to be made.  This usually helps define the complexity of the system and identify those components that determine its performance.  From what I have found, we can expect there to be multiple solutions for these components, as they are not yet good-enough and many firms are developing different technologies to do the same thing, hoping that theirs will be the one that sets the standard.  I then investigated the overall design.  Because it is an interdependent architecture, the overall design plays a large role in the final product.  I wanted to see what components were being used and how many different substitutions there were for the various components.  These component suppliers would also be competing to set the standard.  Many of these may even overlap.  In wind turbine design, bigger is better.  For every increase in 10m of height, the wind speed can increase by 20% and the power output by 34%.  So, getting to those higher wind speeds is the goal.  However, there are barriers to how big these things can get.  There are issues with performance and durability in high wind speeds, geographical location, radar disruption and, oh yeah, transportation, construction and maintenance –ah, components that I had not yet considered.  These too are part of the interdependent architecture of the turbine industry.

Design

tech_drawing_151

So, let’s start with design.  This includes tower height and diameter, blade count, rotation control, furling, and yawing –at least for this discussion as there are many other components that make up the overall design and I’m not trying to write a book here.   The tower, aside from aesthetics and space requirements, seems to be limited by strength of material, transportation and construction.  Doubling the tower height generally requires doubling the diameter and increasing the material by a factor of eight.  That seems pretty straight forward.  So, how about blades?

Modern turbines almost universally use either two or three blades. The aerodynamic efficiency of the system increases with the blade count but with diminishing return. Increasing the blade count from one to two yields a 6% increase in aerodynamic efficiency, whereas increasing the blade count from two to three yields only an additional 3% in efficiency.  Any additional increase in blade count yields minimal improvements in aerodynamic efficiency and sacrifices too much in blade stiffness as the blades become thinner.  However, cyclic stresses fatigue the blades, axel and bearings.  The backwards force and torque on a blade peaks when it is at the top of its rotation and is lowest when the blade is at the bottom of its rotation –when it is aligned with the tower.  These effects twist the bearings.  Therefore an odd number of blades is preferred so that there are no instances of one blade enduring the peak effects of force and torque while another is simultaneously aligned with the tower.  These two variables seem to dictate the three blade design, which is believed to be the dominate design in the industry for some time.  Looks like a standard is forming here!  Blades are also getting larger and larger mostly due to new types of materials and new manufacturing methods.  They are upwards of 80 meters in diameter. Fiberglass seems to be the dominate material currently and makes up 60% of the cost of the blade.  As blades get bigger and bigger, carbon may be necessary to provide the required stiffness.  Mass reduction as a function of blade length appears to be the goal.

LM Glasfiber is a leader in turbine blade manufacturing.  Its new line of blades takes advantage of lower-weight root design.  Carbon is included in one blade, but not the other two, lower weight blades.  Another blade manufacturer, TPI Composites, is also looking to develop low weight blade designs.  It performed a low weight design study that used several technology improvements to reduce blade weight.  The study produced two blade designs, one was all fiberglass, the other included carbon fiber.  It also developed two root designs, one with 120 studs the other with 60 T bolts.  All four permutations of the blade and root design resulted in blades of similar mass and cost.  Interesting.  It sounds like they have similar products and are both innovating in the same areas of design.  Another point of interest here is what is advertised on the two competitors’ websites.  TPI is focused on its approach to blade supply, having focused factories that produce custom solutions that optimize cost and performance for its customers’ target markets.  It selects manufacturing sites that are local and optimize transportation and labor costs.  It has its own patented technology and combines it with its “error proof” manufacturing and in-house tooling systems.  LM Glasfiber strongly advertises it expertise in design and process/development innovation.  It has over fifty years of experience with glass fiber and holds over 29 patents on key discoveries and innovation.  Very interesting!

As for rotor control, today’s turbines are designed to spin at varying speeds.  These newer turbines can accelerate quickly in gusts of wind, improving the generation of electricity.  Typically wind turbines generate electricity through asynchronous machines that are directly connected with the electricity grid. Often the rotational speed of the wind turbine is slower than the equivalent rotation speed of the grid –typical rotation speeds for wind generators are 5-20 rpm while a directly connected machine will have an electrical speed between 750-3600 rpm. Therefore, a gearbox is inserted between the rotor hub and the generator. This also reduces the generator cost and weight.  Electrical generators inherently produce AC power.  In contrast to older style wind turbines, modern turbines are not governed by AC power line frequency.  This is because they incorporate technologies such as doubly fed induction generators or full-effect converters where the variable frequency current produced is converted to DC and then back to AC, matching the line frequency and voltage.  This requires expensive equipment and may lead to power loss, but at the same time turbines can capture a significantly larger portion of wind energy.  As it does not seem likely that turbines will go back to constant speed rotation or that power line frequency will be adapted for wind turbines, some sort of double fed induction generator, or generator/converter combination will be needed.  This appears to be the beginning of another standard interface.  There seem to be multiple solutions here with no clear winner yet, which means that this is one of those interfaces that is not quite good-enough yet.

vestas-v52-turbine

Furling has an interesting affect on turbine design because it is needed to reduce induced drag from the lift of the rotor in strong wind gusts that cause sudden acceleration and to decrease audible noise levels.  It is done by changing the angle of the blades using some form of pitch angle control mechanism.  Older turbines used to use stalling methods, but it now seems that furling has become the standard for modern ones.  Currently, there are different types of pitch control systems being used in turbines.  Many turbines use hydraulic pitch control systems. These systems are usually spring loaded so that blades automatically furl in instances of hydraulic failure. Other turbines use an electric servomotor for every rotor blade.  This appears to be the more intelligent system of the two.  A servo is an automatic device which uses error-sensing feedback to correct the performance of a mechanism. These systems provide feedback or error-correction signals that help control mechanical positions –blade pitch– or other parameters.  Within this subsystem it is clear a standard has been set, in the sense that furling is the winning design.  What is not clear is which pitch control system will set the standard as turbines move to a more modular architecture.   At first glance, it would seem that a servomotor would allow for more room to innovate.  However, that additional performance may not be necessary.  Hydraulic systems may prove to be good-enough.

Finally, the yaw drive is used to control the turbine so that it is always facing the direction of the wind.  This usually includes some form of wind measurement and position correction system.  Once again, a standard appears to have formed, mandating efficient yaw angles in order to maximize power output and minimize non-symmetrical loads.  What is not clear is what the standard yaw control system will be.

Procurement, construction and maintenance

I’m not going to spend a lot of time on this, but there are some points of interest.  It is estimated that transportation costs can equal up to 20% of equipment costs.  That’s a lot of money!  This is because of the massive size of the blades, tower, gearbox and more.  Not only are they hard to transport, but they are very difficult to install.  Their components are large and heavy and require large expensive equipment and skilled operators to erect them.  What’s interesting about this component, is that it is part of the current interdependent architecture of the wind turbine system.  What I mean by this is that firms such as GE, Nordex and Vestas not only design and assemble wind turbines and some of their components, but also offer everything from project planning, to shipping and installation, to ongoing turbine maintenance and services.  This points to a very integrated architecture.  The evolution of this component will be very interesting as the industry moves to a more modular architecture.  If this were to be compared to something like the commercial construction industry, one would expect to see a few large general contractors that specialize in turbine construction.  They would be in charge of procuring materials, construction, budget maintenance, schedule and close-out –which may include operation and maintenance training.  They would have to follow some sort of specification put in place by an architect of sorts, whom would be working with the owner.  Who knows, as the turbine system becomes more modular, the contractor may be able to choose from a couple different blade suppliers that have been specified based on budget and subcontractor bids.   The thing to point out here, is that if this type of scenario ever did play out, the modular, more commoditized components would become easier to identify as they would become the components that the contractor would have multiple options from which to choose and then integrate into the overall project –it would be like choosing a brand of paint as long as it’s blue.

Geographic location

Both turbine vendors and power companies that buy the turbines employ teams of meteorologists to find the best places to put turbines. It is important to know when the wind blows and how powerfully. A difference of as little as one or two kilometers an hour in average wind speed can have an adverse effect on electrical output. They also have meteorologists sitting in the control centers, making detailed forecasts a day or two ahead to help a company manage its power load. If the wind stops blowing, the turbines stop turning. This is a great challenge for the spread and adoption of wind power.  Another issue is that people do not necessarily live where the wind blows. It is often the opposite. Resolution to this problem is a task for the electrical engineers who link turbines to places where power is needed. This means electricity grids must become bigger and smarter.  There are multiple components here that are not yet good-enough.  This could lead to an entire article in and of itself.  But for now, something to keep an eye on might be wind energy software that helps with infrastructure planning.

Radar

Ah, last but not least, radar.  Turbines create signal clutter.  They can interfere with radar used for air-traffic control.  There are even arguments that they can provide cover for enemy aircraft, causing security issues.  Again, pointing to an area of design that is not yet good-enough.  However, companies are finding ways to innovate around this problem.  For instance a company called Cambridge Consultants has invented what it calls holographic-infill radar.  In short, the moving blades on a turbine create a Doppler effect that returns signals that look like moving aircraft, making it hard to distinguish between the two.  Holographic-infill radar will create a so called “patch” over the entire wind farm, creating a moving radar picture of the farm.  Any unknown aircraft or object would be easy to spot.  The reason I added this section is because it may be problems and solutions like this that either hinder or advance wind power adoption and a truly innovative solution to a pressing problem could prove to be quite profitable.  After all, it may become standard practice to install holographic-infill radar on every farm.

And…your final answer?

What’s really interesting to me is that as I really started to peel back all the layers of the turbine industry, I found that there are integration to modularization cycles taking place in many different tiers of the system, and in all different stages of the cycle.  It is not just the overall system that is currently interdependent, but many of its components as well.   There are also hints of components that are becoming more modular and inching ever closer to commoditization.  This has a lot to do with the fact that it is still an emerging technology, still evolving.  It is not clear that the architecture will soon become commoditized and move to a more modular structure, or that all of its components will become interdependent and de-commoditized.  Just the thought of saying turbines are becoming commoditized seems a bit silly.  Still, I find it fascinating how well this framework works.  It’s great for identifying the complexity of the overall system and gaining insight as to how all of the pieces fit together.  With some of the information we have, we can start to predict how the industry might look in the next 10 or so years.  We might be able to reasonably expect certain components and firms to be more profitable than others.  We can begin to see which of the components or subsystems are in good position to become performance-defining.  These will be the ones that set the standards that all other components will have to design and manufacture to.  Some standards will be dictated by natural forces, while others by innovation.  The key is to look for those components that will be dictated by standard interfaces -like a rotor hub that is designed to support exactly three blades.

If the cycle plays out and these large integrated firms do become more modular, it will be interesting to see where they niche, what components they decide to outsource or develop internally, what role they play in the assembly of turbines, the construction of them, or the services they provide for them.  Take for instance Vestas’s patented OptiSpeed technology.  Will this become the standard for double fed induction generators?  Or will its patented OpiTip technology set the standard for blade pitch control systems?  This probably depends on what Vesta’s core resources and capabilities are, and with those resources and capabilities, which component proves to be most profitable.  However it plays out, these are the type of complex components that I feel are best positioned to become performance-defining components and there is currently a lot of competition in these subsystems to become the standard.  Take a closer look at the two turbine diagrams in this post.  One is a GE assembled turbine, the other  a Vestas.  It is interesting to see where all of these components fit into the design and how similar, yet different they are.  You can almost start to picture where the standard interfaces are starting to take shape.

But since this whole thing started with turbine blades, that seems as good a place as any to finish, so here it is.  In my opinion, turbine blades are one of the components in the modern overall system, discussed in this posting, that are inching closer and closer commoditization.  This is not a bad thing.  The evolution of standards needs to happen for the overall industry to move to a more modular architecture.  And this is one of those subsytems in which standard interfaces appear to be forming.  When that happens, new opportunities for innovation will take shape.  But, for now it seems that blades are destined for commoditization.  I don’t think they can make up a performance-defining subsystem.  That does not mean that blade suppliers cannot be profitable.  As blade performance becomes good-enough in relation to the capability of the overall turbine, turbine assemblers like GE will begin to demand improvement along the dimensions of speed, convenience and customization.  So, if the design of the blade is good-enough, where might a blade supplier improve along these dimensions?  Transportation and logistics?  Customization for specific markets?  Which of the two blade suppliers that I mentioned earlier do you think is best positioned for modularization?  I’ll give you a hint, it just signed a long term agreement with GE to supply blades for its 1.5 megawatt wind turbine.


Chrristensen (2003). The Innovator’s Solution.  New York, NY: HarperCollins Publishers.  pg. 128

Chrristensen (2003). The Innovator’s Solution.  New York, NY: HarperCollins Publishers.  pg. 129

Chrristensen (2003). The Innovator’s Solution.  New York, NY: HarperCollins Publishers.  pg. 150

Chrristensen (2003). The Innovator’s Solution.  New York, NY: HarperCollins Publishers.  pg. 131

Chrristensen (2003). The Innovator’s Solution.  New York, NY: HarperCollins Publishers.  pg. 151

Chrristensen (2003). The Innovator’s Solution.  New York, NY: HarperCollins Publishers.  pg. 153

“Wind Turbine Design Cost and Scaling Model,” Technical Report NREL/TP-500-40566, December, 2006, page 35,36. http://www.nrel.gov/docs/fy07osti/40566.pdf

“Wind Turbine Design Cost and Scaling Model,” Technical Report NREL/TP-500-40566, December, 2006, page 35,36. http://www.nrel.gov/docs/fy07osti/40566.pdf

Trade Winds, The Economist, June 19, 2008

Is it a plane?  The Economist, November 8, 2008

Advertisements