RENEWABLE ENERGY

Industry Analysis

Luiss Business School

14 December 2012

Davide Novelli

Eleonora Stentella

Vincenzo Minicozzi

Asya Samsa

Giovanni Madella

Letitia Chabannes

Munkhbileg Enebish

1) Introduction

What is renewable energy?

Renewable energy is the energy produced from natural phenomena such as sunlight, wind, tides, plant growth, and geothermal

heat. International Energy Agency defines renewable energy as:

“Renewable energy is derived from natural processes that are replenished constantly. In its various forms, it derives directly

from the sun, or from heat generated deep within the earth”.

Global market and Industry overview

Renewable energy replaces conventional fuels in four distinct areas: electricity generation, hot water/space heating, motor

fuels, and rural (off-grid) energy services. In all over the world more than 16.7% of the consumed energy is renewable. Over

recent years the global renewable energy market has experienced both growth rates and decline rates. After the acceleration

observed in 2010, the market is forecasted to sustain strong growth up to 2015. The growth in global investment for renewable

energy is driven by the following 3 important factors;

1) Concerns about climate change.

2) The increasing cost of fossil fuels.

3) The national economic policies to create jobs.

Renewables 2012, Global Status Report: Renewable Energy Share of Global Final Energy Consumption, 2010

So as to speak with numbers, according to the Data Monitor Renewable Energy Market Report;

“The global renewable energy market had total revenue of $322.5 billion in 2010, representing a

compound annual growth rate (CAGR) of 6.4% for the period spanning 2006-2010. Market consumption volumes increased with a

CAGR of 3.5% between 2006-2010. The market's volume is expected to rise to 4,203.6 billion kWh by the end of 2015, representing a

CAGR of 4.7% for the 2010-2015 period. The performance of the market is forecast to accelerate, with an anticipated CAGR of 8.3% for

the five year period 2010-2015, which is expected to drive the market to a value of $479.9 billion by the end of 2015”.

Looking forward, global investment in renewable energy projects is raised from $195bn in 2010 to $395bn in 2020 and to $460bn by

2030, according to Bloomberg New Energy Finance analysis. Through 2030 this growth will require nearly $7 trillion of new capital.

Typical renewable energy sources are:

o Geothermal Energy: energy deriving from the heat of the earth.

o Solar Energy: energy coming from the sun (both photovoltaic and thermal).

o Wind Power: energy deriving from the power of the wind through turbines

o Biomass: energy mostly from food and waste used to produce heat, electricity and transport fuels.

o Hydropower: energy coming from falling water or, recently, from the ocean.

2) The Five Force Analysis on the Global Renewable Energy Market

The Porter’s strategic analysis will be carried out in order to disclose the attractiveness of the whole renewable energy

generation industry, from a single external investor point of view. Focus of his interest is a long-term investment in a profitable and

value creating industry.

In a perfectly competitive industry, where companies are involved in a cruel fight for market shares, offers the worst prospect for

long-run profitability. The weaker the forces collectively, the greater will be the opportunity for superior performance.

THREAT OF ENTRY

The seriousness of the threat of entry depends on the barriers present and on the reaction from existing competitors that entrants

can expect. The higher are barriers to entry and the sharper the expected retaliation from the market leading competitors, the less

serious will be the threat of newcomers entry into the market.

Economies of scale.

Economies of scale are for the energy market in general one of the most significant barrier to market entry. They deter new

entrances by forcing the aspirants to come in on a large scale or to accept a cost disadvantage. Companies serving extensive markets

and holding high market shares will mostly benefit of economies of scale, managing to minimize their cost per unit of energy both

produced and distributed. This enables market leading companies to be more flexible in fighting off new market entrants.

Capital requirements

Extremely high financial investments both in fixed facilities and R&D also represent a very important and considerable barrier

for new entrances. Plants and technological equipment constitute unrecoverable expenditures, which increases the risk involved in

entering the renewable energy industry. Depending on the specific energetic segment this can vary from more costly (in the case of

large geothermal or hydro-power plants) to less costly (in the case of solar panel plant).

Cost disadvantages independent of size

Potential rivals also have to face cost disadvantages which are not directly related to the size of entrenched companies. These

might already have access to the best raw materials (in the case of biomass energy producers) or benefit of the most favorable

location (for all other segments: solar, wind, hydro etc.).

Government policy

Many governments are involved in energetic policies aiming to boost the whole renewable energy industry, in order to create

profitable and sustainable future perspectives. Nevertheless most of financial resources invested in renewable comes either from the

private sector or from corporations (see Exhibit 1). Governments grant financial support especially for R&D projects (see Exhibit 2).

Product differentiation

No product differentiation represents one of main feature of any energy market, thus any efforts to create brand identification

would turn out being useless beyond unnecessary. Therefore customers’ focus will be addressed especially to competitive prices.

Access to distribution channels

Newcomers have to secure distribution. In most cases energy producers already own (or use through special agreements with

distributors) most of distribution channels. Therefore this might turn out being a too high barrier to be surmount, that new

contestant must create its own distribution channels.

Overall, the threat of new entrants is quite moderate, not representing a particular danger for entrenched companies in the

renewable energy production.

SUPPLIERS POWER

Suppliers in exerting a certain level of bargaining power might participate in reducing profit margins and the industry profitability.

They can raise prices or reduce the quality of purchased goods and services, with catastrophic results for companies unable to

recover cost increases in its own prices.

Concentration of suppliers’ industry

The more concentrated is the whole supplier’s industry the higher is their bargaining power. Concentration of suppliers’

industry depends very much on the energetic segment. As a matter of fact one can observe:

A highly concentrated market in the geothermal turbines manufacturers industry (see Exhibit 3.1), where the first 4 leading

companies hold almost 80% of the market share.

A moderate concentrated market in the wind turbines manufacturers industry (see Exhibit 3.2), where the first 4 leading

companies hold something more then 40% of the market share.

A low concentrated market in the solar panels manufacturers industry (see Exhibit 3.3), where the first 4 leading companies

hold something more then 20% of the market share.

Switching costs

Mostly renewable energy producers heavily invest in specialized equipment and after-sales services related to those products

(especially in the case of geothermal and wind power plants). This makes them face particular high switching costs in changing

suppliers.

No substitute products

Due to their rather specialized technology, suppliers are not obliged to contend with another product for sale to the industry.

Only in the case of the biomass sector where the nature of “bio-supplies” is very varied and suppliers can be easily changed.

Forward integration

The forward integration threat doesn’t really assume remarkable dimensions due to the size, both in terms of value and

production capacity, of many market leading companies.

Industry importance for suppliers

Suppliers fortunes depend very much on the renewable energy industry’ s ones, therefore it represents an important customer

for them. They will be interested in protecting their sustainability in applying reasonable pricing and and assistance in many other

fields e.g. R&D.

In conclusion one can say that suppliers power is weak to moderate, not representing a particular danger for entrenched companies

in the renewable energy production.

BUYERS POWER

In the same way as Suppliers can squeeze the profitability of an industry, customers likewise can force down prices, demand higher

quality or more service, and play competitors off against each other.

Concentration of the market

Buyers in this energy market in general are primarily individual consumers, although there is also a strong demand for

renewable energy from the industrial and transport sectors (Exhibit 4 compares the energy users distribution in EU with the

Brazilian one). The high number of buyers in this market, coupled with their small size, diminishes the impact on market players of

losing one consumer and weakens buyer power considerably.

Undifferentiated products and price sensitivity

As the product “energy” is undifferentiated, buyers always have the possibility to find an other suppliers based purely on price

discrimination. Besides this, energy does not affect the quality of the buyer’s products or services, becoming therefore unimportant

to it. This makes buyers more price sensitive.

Low-cost switching

Generally buyers do not have to face enormous expenses in changing energy supplier, what increases their bargaining power.

Backwards integration

Since buyer are mostly of a very small size compared to normally very big energy producers, no considerable threat of

backwards integration exists.

Overall, buyers’ bargaining power in the renewable energy market is to be assessed as weak.

SUBSTITUTE PRODUCTS

The most direct substitute for renewable energy is electricity generated in fossil-fuel or nuclear power stations. Traditionally they

have also been more economical than renewable sources of energy. Despite this one of the most exciting developments in the

renewable energy sector in recent years has been the decline in the cost of important technologies – to the point at which they are

starting to challenge fossil-fuel alternatives, even without climate, health and other benefits factored in (see Exhibit 5).

The most spectacular change was the plunge in prices for the PV solar panels (at the start of 2012 were nearly 50% down on a year

earlier), caused by increased competition, particularly from China. Something similar was happening to the wind turbine

manufacturing industry. In 2011, turbine prices compared to the first half of 2009 dropped by 25% reduction.

Anyway the common fossil-fuel alternatives place a ceiling in prices that can be charged, limiting the potential of the renewable

energy industry. However the relation renewable-fossil, which is now by 15% to 85%, will even out in a long term perspective (see

Exhibit 6) reaching a 50% - 50% relation in 40 years time.

Till now fossil related energy still represents in certain cases (e.g. gas or coal for household) a better price-performance trade-off

compared to renewable energy such as electricity. The threat of substitutes is the one of the most significant.

RIVALRY

In general many factors influence the rivalry within an industry. In the case of renewable energy it can vary very much from country

to country according to specific key factor which characterize that specific market. However following factors have a more global

value and belong to the most relevant ones that describe rivalry in the renewable energy sector, independently from particular

regional or local market features.

Global industry growth

A moderate to strong industry growth will avoid expansion-minded companies (especially in this specific industry where

economies of scale play an extremely important role) fights for further market share. As mentioned above in 2015 the global

renewable energy market is forecast to have an increase of 25.8% since 2010 reaching a production volume of 4,203.6 billion kWh, (a

49% growth in the market value).

Lack of diversity and rivals differentiation

The lack of differentiation in the product does not give market members the possibility to create brand identification and

loyalty. Therefore companies’ strategies cannot be remarkably differentiated. As a consequence customers cannot be locked in and

companies are forced to steal customers from their competitors.

Exit barriers high

The very specialized asset needed for energy production represent very high exit barriers, what keeps companies competing

even though they may be earning low or even negative returns on investment.

Cost conditions

Running entire energy power plats involves extremely high fixed costs, what once again highlights the need of decreasing unit

costs especially related to economies of scale.

Specific and country related factors

Other specific and country related factors (like market concentration and growth) will be analyzed and discussed taking into account

national markets. The latter will be chosen according to following specifications:

1. The total amount of new investments on the national market for renewable energy.

2. Economic growth perspectives

3. Total population growth forecast

4. National energetic policy

These three factors particularly influence the supply-demand relation of country internal energetic markets, representing the

important framework where to carry out a detailed economic analysis of the renewable energy industry.

Four macro-economies were selected: China, Brazil, India and USA. Three of them are BRIC countries, where flourishing economic

perspectives attract potential investors from all over the world. Likewise that potential economic growth will be translated in a

steady increasing energy demand. Moreover those country (together with the US) represent the economies which mostly invested in

the renewable industry (see Exhibit N° 7).

BRAZIL

1. RENEWABLE ENERGY DOMESTIC MARKET OVERVIEW

The Brazilian renewable energy production grew by 3.3% in 2010. Future perspectives for 2015 foresee an increase of 17.3% since

2010, in order to reach en economic value of the market equal to $87.9 billion, an increase of 51.6% since 2010.1

Both booming GDP (5% per year for the next 5 years2) and population growth (7% by the year 2015) represent the most significant

economic drivers for flourishing future expectation concerning the energy demand. According to estimations the overall demand for

energy will increase of 60%, two thirds of it will be used for the industrial and transport sectors.3 The renewable energy industry will

play in this particular scenario an extremely important role, as it currently already represents 44,7% of the entire energy generation

mix.

HYDROPOWER

With 81,9% the hydropower generation segment plays the major role within the renewable energy industry.4 The market is highly

concentrated. The three leading companies, Electrobras SA (almost totally publicly owned, only 33% is in the hand of private

shareholders), CEMIG and CPFL Energia hold 50% of the market share.

WIND ENERGY

Also the Brazilian wind energy market is characterized by an high concentration. Energias do Brasil SA holds alone 38% of the entire

market.

2. LEGISLATION

At the beginning of the 2000s, Brazil's energy sector underwent market liberalization especially for oil production. The key objectives

of the new economic policy aim to increase competition in the energy market, and investments in power generation. The state

monopoly of oil and gas exploration was ended, and energy subsidies were reduced. However, the government retained monopoly

control of key energy complexes and administered the price of certain energy products. Current government policies concentrate

mainly on the improvement of energy efficiency, in both residential and industrial sectors, as well as increasing renewable energy.

1 Data Monitor; Renewable Energy in Brazil, pag. 2.

2 Ministério de Minas e Energia, Política Energética Brasileira Papel das Fontes Alternativas Renováveis, pag. 21 3 EPE (Empresa de Pesquisa Energética), Plano Decenal de Expansão de Energia – PDE 2020, pag. 2 4 Ministério de Minas e Energia, Balanço Energético (BEN), Sintese do Relatório Final, pag. 31

CHINA

1. RENEWABLE ENERGY DOMESTIC MARKET OVERVIEW

China’s renewable energy market has experienced an important growth of 15.5% these past few years and will grow further of

32,5% by the year 2015. Its development is part of the state government’s long-term domestic diversification and self-sufficiency

strategy. According to China’s 12th Five-Year Plan, the country will spend $473.1 billion on clean energy investments over the next

five years. China’s goal is to have 20% of its total energy demand sourced from renewable energy by 2020.

SOLAR ENERGY

China dominates the solar-panel market as 5 Chinese companies are in the top 10 of solar companies. While China pricing has been

devastating for American and European solar manufacturers, it has been no less devastating for their Chinese rivals. In an highly

concentrated market Yingli Green Energy and Trina Solar Limited hold more than 50%.

WIND ENERGY

Also for the wind energy, with its exceptional wind resources, the market presents an high concentration. In 2010, it became the

largest wind energy provider worldwide. Leading companies like Sinovel, Goldwind and Dongfang Electric hold more than 51% of the

market share.

BIOETHANOL ENERGY

The bioethanol market in China is heavily state-controlled. All of the major bioethanol plants in operation are either wholly or

partially owned between China National Petroleum and Chemical Corporation (Sinopec), PetroChina (the main subsidiary under China

National Petroleum Corporation) and China National Cereals, Oils and Foodstuffs Corporation (COFCO). Foreign companies can only

invest in ethanol production in China as a minority joint-venture partner.

2. LEGISLATION

The Chinese government is implementing multiple policies to promote renewable energy. From 2008 to January 2012, China held the

top spot in clean energy investment. The Renewable Energy Law passed in 2005 explicitly states in its first chapter that the

development and the usage of renewable energy is a prioritized area in energy development. The Twelfth Five-Year Plan, the current

plan, also gives great emphasis on green energy including incentive policies and programs providing financial subsidies and

technology support

INDIA

1. RENEWABLE ENERGY DOMESTIC MARKET OVERVIEW

India is nowadays one of the most important actors in producing renewable energies and is forecast to experience a 55,6% increase

by 2015. The hydropower and wind sectors are the mostly developed sectors, while solar energy will become a protagonist of the

market in the future. Estimations foresee India as the most populous country in the world by 2030, increasing dramatically the future

energy demand.

Suzlon Energy is leader in wind energy with a market share of 43%, while Tata Pb Solar in leading the solar energy market with 35%

of market share. These two companies define a very concentrated market not so easy to enter. But with the new policies of the

government this probably the course will change in the future.

WIND ENERGY

Wind power in India started developing in the 1990’s and in 2011 it reached the 70% of the total renewable energy ranking 5th in the

world. The short gestation periods for installing wind turbines, and the increasing reliability and performance of wind energy

machines have made wind power an important resource in India.

SOLAR ENERGY With most parts of India with 300 – 330 sunny days a year, solar power is inexplicably almost absent in the scenario of Indian energy.

The future of solar energy in India, however, is going to be brighter. It is expected a significantly growth in the next ten years thanks

to the always increase of fossil fuels prices and a sharply reduction of technology costs.

2. LEGISLATION

Indian government has carried out a very strong policy in favor of renewable energies. In 2003 The Electricity Act was approved and,

in recently years, a long term program was launched called National Solar Mission. The aim is installing capacity of 20,000 MW by

2020. The policy provide tax facilities soft loans for new renewable enterprise, feed-in-tariffs in both wind and solar energy and other

in order to reduce barriers of entry for new investors and create a less concentrate market.

USA

1. RENEWABLE ENERGY DOMESTIC MARKET OVERVIEW

The United States renewable energy market grew by 1.5% in 2010 and is forecast to experience an increase of 23.2% since 2010 to

2015 (which reflects an increase in value of 35.4% since 2010; 12.4% of the global renewable energy market value). Renewable

energy accounted for 11.14% of the domestically produced electricity in the US in (2010) and the consumption by source was:

Hydropower 35%, Biomass Wood 22%, Biomass Waste 5%, Biomass-Biofuels 21%, Wind 13%, Other 4%. While hydropower is the

biggest source of renewable energy, solar power is far away the smallest. The market for hydropower is very concentrated, as well as

most of the other renewable sectors. Exhibit N° 8 shows that while over two-thirds (69%) the plants are owned by private owners,

nearly three-quarters of the total capacity is owned by federal and non-federal public owners (respectively 51% and 22%).

In recent years the US renewable energy market has fluctuated widely, posting high rates of growth and decline because of the

development in the global market competition and the decline of renewables index. The U.S. energy sector is large and complex and

it is not so easy to understand because each country as a particular legislation and behind every small green energy firm most of the

time we can find big holdings which are involved in differente sectors of production. Today, fossil fuels are the dominant sources of

energy, comprising 83% of total U.S. primary energy supply.

2. LEGISLATION

The adoption of the Portfolio Standard (a central energetic policy regulation) aims to increase the production of energy from

renewable energy sources, such as wind, solar, biomass, and geothermal. The creation of barriers on green energy imports and

technologies should stimulate the domestic energy demand.

4) Financial Analysis

In order to be able to make any kind of discussion about the profitability of the renewable energy market of the listed countries, a

quantitative interpretation of leading companies’ performances needs to be carried out. These were associated with the market

capitalization (Market Value = Mv) of single companies, taking into account their actual book value (=Bv). The former includes and

reflects all investors’ expectation for the future, while the latter measures the actual accounting company value. In case the ratio

Mv/Bv would be >1 (as average of a large sample of companies), then we could affirm that the whole industry is “creating value”,

guaranteeing potential investors a Return on Equity (ROE) greater than its Cost of Equity (Ke).

5) CONCLUSION

The results of such analysis show that all local market, which had been considered, did not assure investors a suitable remuneration

of the risk involved in equity acquisition. All local energy market were underperforming (see Exhibit N° 9). Many reasons could be

responsible for that. First of all specific company-related factors might influence their performances. However, as it has been

discussed during the global analysis, the particular threat that substitute products represent (covering 85% of world energy demand)

and non-competitive production costs structure, penalize the whole industry.

Nevertheless, some reasons to believe in green energy might be:

1. There is a huge potential for further generation cost decline, especially for solar and wind power: around 50% until 2020,

according to a 2011 EPIA study.

2. The volatility shown by the oil market (price fluctuations) is now pushing the company through an energy self–generation process.

Such giants as Siemens, GE and Martifer in the recent year have committed major resources to renewable energy as project

developers and equipment producers. A number of well-known large corporations like IKEA and Toyota, for example, have launched

initiatives to generate their own energy in order to reduce energy price volatility, increase security of supply, decrease costs or meet

carbon objectives.

3. Most of the States are now adopting the so called “twin pillars”, a new energy model that create a correlation between energy

efficiency and renewable energy policies. To reduce Gonvernment spenditure many countries are already using new standard of

efficiency, and are also investing in mini-power grids linked to the new generation of photovoltaic panels.

4. As already happened in Us, in the future energy-smart technologies will find a natural evolution under the “Smart Meter

Deployment”. (A smart meter is an Internet-capable device that measures energy, water or natural gas consumption of a building or

a home. The integration between intelligent technologies and renewables will be driven by the Governments and new venture

capital.

Japan Toshiba 25%

Japan Mitsubishi 23%

Japan Fuji 19%

Ita ly Ansaldo 12% C4 = 79%

Israel Ormat 11%

USA Genera l Electric 5%

Others 5%

China Suntech Power 5,8%

US Firs t Solar 5,7%

China Yingl i Green Energy 4,8%

China Trina Solar 4,3% C4 = 20,6%

Canada Canadian Solar 4,0%

USA Sun Power 2,8%

Japan Sharp 2,8%

China Tianwei New Energy 2,7%

China Hanwha-SolarOne 2,7%

China LDK Solar 2,5%

Others 61,90%

Denmark Vestas 12,7%

China  Sinovel 9,0%

China  Goldwind 8,7%

Spain Gamesa 8,0% C4 = 38,4%

Germany Enercon 7,8%

US GE Energy 7,7%

India Suzlon Group 7,6%

China Guodian United Power 7,4%

Germany Siemens Wind Power 6,3%

China Ming Yang 3,6%

Others 21,2%

EU Brazi l

Transport 32,1% 30,0%

Industry 26,9% 35,8%

Household 25,3% 13,5%

Services 12,1% 4,4%

Others 3,7% 16,3%

Exhibit N° 1: Global new investment in renewable energy by asset class, 2004-2011 Exhibit N° 2: Global new investment in renewable energy by asset class, 2004-2011

Exhibit N° 3.1; Geothermal turbines manufacturers industry: Renewable 2010 Global Status Report

Exhibit N° 3.2; Wind Turbine Manufacturers: Cleantech magazine, Volume 6, Issue 2; - Global Market Share

Exhibit N° 3.3; Solar Panels Manufactures: Glob.Status

Report pag. 48

Exhibit N° 4; EU Copper Institute, Energy Conservation in Industry: Impact on the bottom line, pag. 7

Ministério Energia, Balanço Energético (BEN), Sintese do Relatório Final, pag. 32

Exhibit N°5; Global Trends in Renewable Energy Investment 2012;

Levelised cost of electricity for different generation technologies, Q1 2012 Vs. Q1 2011 per MWH

Mv Bv Mv/Bv

Suzlon Energy Limited 3270,35 11914,13 0,27

Rel iance Infrastructure Ltd 13562,39 27688,61 0,49

Moser Bear Solar 117,31 2115,94 0,06

Oreient Green Power 526,12 1330,81 0,40

Av(Mv/Bv) 0,30

India (thous. crone rupie)

Brazil (in B $)

Mv Bv Mv/Bv

Eletrobras (33% publ icly traded on the stock market) 3,41 40,51

CEMIG (Companhia Energética de Minas Gerais S.A.) 10,42 6,61 1,58

Companhia Paul is ta de Força e Luz - CPFL Energia 10,45 14,70 0,71

Energias do Bras i l SA 2,92 0,90 3,24

Companhia Paranaense de Energia (copel ) 4,05 8,80 0,46

Av(MV/BV) 1,50

Mv Bv Mv/Bv

Duke energy 45,3 63,08 0,72

Southern Company 31,18 60,9 0,51

3Degree 45,3 63,08 0,72

Ge Energy 225,56 694,12 0,32

Cl ipper Windpower 74,41 7465 0,01

Ge Energy 225,56 694,12 0,32

Southern Ca l i fornia Edison 14,59 49,39 0,30

Renewable Energy Group 0,19 0,552 0,34

Exxonmobi l corp 403,09 329,64 1,22

Chevron corp 209,34 219,38 0,95

av(Mv/Bv)= 0,54

USA (in B $)

Mv Bv Mv/Bv

Wuxi Suntech Power Holding Co. Ltd 0,162 4,4 0,04

Yingli Green Energy 0,276 4,8 0,06

Trina Solar Limited 0,266 3,2 0,08

JA Solar (received chinese government subsidies)0,116 2,4 0,05

Sinovel 3,10 5,6 0,55

Goldwind 1,9 3,8 0,50

China Hydroelectric Corporation 0,101 0,815 0,12

Av(Mv/Bv) 0,31

China (in B $)

Exhibit N° 6: WBGU’s World Energy Vision 2100

Exhibit N° 7: Global Trends in Renewable Energy investment 2012, pag. 15

Exhibit N° 8: A Study of United States Hydroelectric Plant Ownership, pag. 2

Exhibit N°9, Financial Analysis of local Markets: INDIA, CHINA, BRASIL, USA