The wind industry is now established as one of the
highest-growth industries in Europe. It has grown at an average
rate of 12 percent over the last 5 years, and at the end of 2007,
the cumulative installed capacity had reached 57 gigawatts (GW).
That has led to significant job creation, with approximately
145,000 people employed in the European Union (EU) wind energy
sector at the end of last year. Germany, Spain and Denmark have
secured the majority of the benefits from that growth and now
account for more than 70 percent of the EU's installed capacity.
Moreover, due to significant exporting from Germany and Denmark,
these three countries account for more than 90 percent of the EU's
wind-sector employees. Bain's analysis points to four factors that
were common to these countries and critical to the rapid growth of
their wind industries:
- Support schemes to reduce commercial
uncertainty (e.g. feed-in tariff);
- Rapid building of new infrastructure (e.g. the
grid) to accommodate the wind industry;
- A swift process for gaining planning consent
for the installation sites;
- Support for wind energy in local communities,
generated either through opportunities for participation in
ownership of wind farms or through tax revenues paid to local
authorities by wind farms for tangible benefits to the
community.
These four factors attracted the wind-turbine manufacturers, and
manufacturing clusters developed near their factories. Those
clusters consisted of material and component suppliers, as well as
universities and research institutions that provided tailored
education and R&D support. Today, the three main clusters in
Northern Germany, Spain, and Jutland, Denmark account for more than
half of employment in the EU's wind energy sector.
The UK wind industry: a follower with increasing
momentum
The UK largely missed out on this earlygrowth phase. Industry
experts claim that the lack of a proper support scheme, with
elements such as feed-in tariffs, was the primary reason for the
slow start. A few manufacturers chose to build plants in the UK,
but the industry did not develop large-scale momentum beyond those
few investments.
With the introduction of a market-based incentive structure (the
Renewables Obligation, or RO) in 2002, the dynamics of the UK wind
industry were fundamentally changed. The RO is proving to be an
effective mechanism for making onshore wind projects commercially
viable. Whereas prior to 2002, cumulative installed capacity was
less than 600 megawatts (MW), by 2007 it had increased to 2.2 GW
growing at more than 35 percent per year. However, whilst large
parts of the wind industry value chain have become firmly
established in the UK (e.g. development, technical consulting and
construction and installation), the majority of turbines are being
imported from the continent.
The current level of employment in the UK wind industry stands
at approximately 5,000. Of these employees, a large percentage are
located in parts of the value chain where the business models are
local in nature (such as development or construction and
installation).
Market outlook 2020: a step-change
opportunity
Europe is now poised to experience accelerated growth in the
wind industry, to a large extent fuelled by aggressive EU targets
for power generation from renewable sources that have been set for
all member states. The UK will need to add about 260 terawatt hours
(TWh) of renewable energy production by2020 in order to meet its
target, according to the Department for Business, Enterprise &
Regulatory Reform (BERR) and the UK's Renewables Advisory Board
(RAB). Wind energy is expected to be the primary contributor, with
35 percent to 40 percent of the overall renewables target. In our
estimates, that translates into 11 GW of onshore capacity and 14 GW
of offshore capacity that must be added over the next 12 years.
The UK is currently well placed to benefit from the investments
flowing into the offshore wind sector. The offshore market is still
emerging, and the UK is strongly positioned to capture a
significant share of installations due to its excellent offshore
wind conditions and the offshore operating experience accumulated
in the British oil & gas industry.
In this analysis, the benefits from the development of a strong
UK wind industry are measured along three dimensions:
- Capacity installed;
- Level of investment (both domestic and foreign);
- Domestic employment generated.
Our sensitivity analysis shows that the size of the opportunity
along each of these dimensions will be mainly driven by three
factors: political support, degree of local content in production,
and development of the export business. Based on our understanding
across a number of countries and comparable high-growth industries,
we see three potential scenarios for the UK wind industry:
- Solid progress scenario (base case). This
scenario assumes clear political support for wind energy, market
leadership in offshore development, the UK becoming self-supplying,
and achieving a limited degree of export in knowledge-related
activities such as technical consulting and offshore operations. By
2020, this scenario would lead to wind capacity of 27 GW, which is
broadly in-line with current market consensus. This scenario would
generate cumulative investment of £26B and 36,000 jobs.
(Design & Manufacturing would cover 35 percent of the UK's
offshore turbine market along with a limited amount of
export);
- Dynamic scenario (best case). This scenario
assumes stronger political support for wind energy, recognition of
the UK as the global centre of expertise in offshore development
and manufacturing clusters that allow the UK to become
self-supplying and a significant exporter of both knowledge and
components. By 2020, this scenario would lead to wind capacity of
34 GW, which is broadly in-line with the current estimate from the
British Wind Energy Association (BWEA). This scenario would
generate a cumulative investment of £39B and 57,000 jobs.
(Design & Manufacturing would cover 70 percent of the UK market
for offshore turbines and would be exporting a similar volume to
continental Europe);
- Static scenario (worst case). This scenario
assumes a lack of political support for wind, failure to achieve
leadership in offshore development and the absence of manufacturing
within the UK that would lead to significant imports and limited
exports. By 2020, this scenario would lead to wind capacity of 22
GW, cumulative investment of £19B and 23,000 jobs. (Design
& Manufacturing would remain at its current level, i.e.
covering 15 percent of the UK market or offshore turbines).
Which scenario will become a reality will depend on whether
barriers to future growth can be anticipated and overcome by
industry players and public stakeholders in the UK. Bain has,
therefore, investigated these potential show-stoppers in
detail.
The challenge: potential barriers to future
growth
In recent years, the UK has launched a number of initiatives to
ignite growth within the sector by confronting critical issues such
as grid access (Transmission Access Review), national planning
(Planning Bill), local planning (the Killian Pretty Review), and
the supply chain (establishment of the Office for Renewable Energy
Development) amongst others. However, despite these actions, the
industry still faces significant challenges. According to industry
experts, these are the top five obstacles to growth in the UK wind
industry:
- Grid connectivity. Grid capacity is limited in
the areas where there is good wind supply and site approval is
achievable. Getting significant transmission capacity built out to
remote locations can take up to 10 years. The dominant view is that
gaining access to grid connectivity and the actual connection of
wind farms will remain a challenge;
- Site approval. Experts throughout the industry
share the view that the UK is one of the most difficult places in
Europe to get planning consent; it can take up to five times as
long as in best-practice European countries. The UK is a densely
populated island, and the planning process is very complicated,
with many stakeholders having deeply entrenched positions. Although
the site approval issue is unlikely to be fully resolved, current
initiatives may drive some improvement in the short term. In
addition to this, the site approval process is less complex
offshore, so the shift in emphasis to offshore will gradually
reduce the significance of this bottleneck;
- Employment and skills supply. The UK faces a
significant demand/supply imbalance in the wind energy labour
market already, and the sector continues to grow. The pools of
people with the skills and experience to perform many of the roles
are limited. As growth accelerates, filling the new roles will be
challenging, and a number of specialist roles will become even more
difficult to fill. Industry players currently see this issue as the
fourth most significant barrier to growth in the sector, though it
is set to increase in importance (see below for more in-depth
analysis);
- Supply chain. A number of points in the supply
chain are prone to shortages - the most important of which are wind
turbines, themselves, vessels, cables, and offshore substations.
Significant manufacturing capacity is due to come into operation
into Europe in the near future, and when it does it will go some
way towards addressing certain bottlenecks. Nevertheless, supply
chain shortages will remain a concern, particularly in offshore
wind;
- Offshore operations. The offshore environment
presents unique challenges due to tidal activity, the hostility of
the environment in stormy weather, and the remoteness of many
sites. The trends towards larger turbines and sites which are
further offshore will magnify the challenges. Despite this, experts
believe that time and experience will allow the development of the
expertise and skills that will gradually address such issues.
All five of these growth barriers must be tackled if the UK is
to maximise its chances of success in the offshore wind arena.
In the scenarios described above, it is estimated that 18,000 to
52,000 additional FTEs will be needed to support the UK wind
industry in the medium-term future. However, the industry is
already facing a considerable staffing challenge today: more than
half of companies currently have vacancy levels of
above 5 percent. In certain specialist roles that
shortage is significantly higher. The urgency of the shortage is
directly linked to the maturity of the industry: roles critical to
the planning & development stage (e.g. project managers) are
currently in particularly short supply. Acute areas of shortage
are:
- Project managers: 46 percent of companies find
this role hard to fill. Project managers are usually qualified
engineers who are responsible for managing either the development
or the construction process;
- Electrical engineers: 40 percent of companies
find this role hard to fill. Electrical engineers are qualified to
design and construct the high-voltage connections between the wind
farm and the national grid;
- Turbine technicians: 25 percent of companies
find this role hard to fill. Turbine technicians have the skills
and qualifications required to operate inside the nacelle of a wind
turbine.
The majority of non-graduate hires into the
sector have experience in some other related industry, such as
another renewable energy, oil & gas, or construction. Hiring
from other sectors, as well as from other markets, must be actively
pursued. The current shortage of skilled personnel within the
sector has also led to employees being lured away to work for rival
firms. That has resulted in above-average wage increases and a high
level of intrasector mobility over recent years.
Current market estimates suggest that the number of engineers
graduating each year in the UK is likely to remain broadly flat
over the next 12 years. As a result, the current share of
new engineering graduates entering the wind sector
is unlikely to be sufficient to support the growth demands of the
industry. Some of the historical issues driving the low percentage
of engineering graduates entering the sector have been addressed,
such as unclear industry prospects, concerns about career path
progression, and salary levels, but more needs to be done. Given
that fresh graduates will not satisfy the demand for specific
skills, firms must also look inward and make significant
investments in training and HR processes to generate in-house
capabilities and experience.
Seizing the opportunity: what's required?
Some steps have already been taken to overcome growth obstacles,
such as simplifying the connection process, reducing the length of
the approval process, and addressing the skills gap. In this
section, we reflect the views of industry experts and our own
analysis along a set of leveraged actions, both from the public
side ("what more can governments do?") and from the private side
("what more can companies do?").
Industry participants highlighted to us that one of the most
fundamental prerequisites for kick-starting the emerging offshore
industry is a clear, long-term, irrevocable
commitment from policymakers to supporting the
wind industry. This is expected to bring more stability and
predictability to the market, thus facilitating incremental
investment. Options that the government could consider to achieve
this are:
- Extend the Renewables Obligation (e.g. from 2027 to 2040 and
beyond);
- Set the obligation level out to 2020, including a headroom
mechanism;
- Review progress towards 2020 renewable energy production
targets annually, and take action if necessary.
A number of actions are required to boost
employment and address the skill shortage. The
shortage of engineers is not unique to the renewable energy sector
and is being addressed at a national level. At the same time, the
industry can increase its share of the talent by doing the
following things:
- First, the wind industry must seek to attract talent by
levelling the playing field with sectors such as oil & gas.
That may require the adaptation of taxation schemes for offshore
wind employees in order to match the tax breaks available to many
offshore employees in oil & gas. In addition, the effective
marketing of career paths that are both challenging and fulfilling
will increase the attractiveness of the sector;
- Secondly, the government is expected to invest further in
education, perhaps through the provision of university grants for
engineers or by continuing in technical colleges. Over time,
specialised education programmes tailored for the wind industry
should be developed;
- Finally, the government and companies alike have a role in
establishing an attractive value proposition for the sector based
on the opportunities and rewards that a high-growth and
ecologically sound sector can present. They also have a role
communicating this to potential employees via educational
establishments and the media. The government and the private sector
need to work together to create a framework for world-class
training and professional development.
Two things that would help to address grid connection issues are
laying out a long-term grid strategy, and enabling
the resolution of current inefficiencies by making amendments to
the grid governance code. The current market mechanisms encourage a
piecemeal and reactive approach to building out the network. A
long-term strategy will increase the likelihood that investment in
infrastructure is made in a logical and structured fashion. Greater
coordination is needed between Ofgem and National Grid to agree to
more strategic investment in the grid - for example by allowing
capacity to be freed up from stagnant projects. Companies can
maximise their chances of achieving a successful connection by
ensuring obligations are clearly understood, giving comprehensive
input, and participating as fully as possible in the connection
dialogue.
Additional actions are required to further facilitate the
site approval process. Local support could be
stimulated by returning some of the tax revenue generated by a wind
farm to the local community. That has proven a key enabler in the
countries which have led onshore wind development to date. Another
key issue is that the incentives of a number of different
stakeholders are often not fully aligned. Government should give
more guidance to public sector organisations on its targets so that
there is less disruption from them in the planning process. By
ensuring that guidelines for these organisations are consistent
with energy policy goals, it should be possible to simplify the
application process significantly. Companies can try to manage site
approval issues by broadening their site portfolio, which will
reduce the impact of a failed approval, whilst at the same time,
they may maximise their success rate in the site approval process
by over-investing in clarity and communication during each approval
procedure.
Certain measures have been taken already to address
supply chain concerns, including the establishment
of the national Office for Renewable Energy Deployment, which will
help UK firms take advantage of opportunities in renewable energy
to build R&D and manufacturing capacity. A key factor in
resolving supply chain issues is the creation of the right
environment for investment to enter the UK. Companies must then
take advantage of that environment and build new R&D or
manufacturing capacity to meet the increase in demand generated by
growth. The European experience demonstrates that a highly
effective way to stimulate growth of the supply chain is through
the development of sector clusters. As previously discussed, in key
European clusters, the establishment of turbine manufacturing
plants was soon followed by component manufacturers, R&D
facilities, and educational establishments. Strong infrastructure
(port facilities, airport, and roads), a deep supply of qualified
but relatively inexpensive labour, proximity of sub-suppliers, and
support and incentives from the government are required to kick off
the growth of a cluster. Key success factors for cluster building
are focus and momentum. By focussing on developing just one
cluster, government will help simplify the decision-making process
for the investor. Once companies start to invest, the proposition
becomes more attractive as suppliers and customers can easily be
found. The successful development of an offshore wind cluster in
the UK would be a significant accelerator for the UK wind
industry.
Finally, the government can help resolve the challenges of
offshore operations by such measures as
underpinning the development of offshore wind with financial
support, placing offshore planning into the hands of a single
approval body (such as the Infrastructure Planning Commission,
which could be achieved by reducing the Marine Management
Organisation planning threshold from 100 MW to 1 MW in the Marine
Bill), and encouraging investment in ports and related
infrastructure. However the required competitive advantage in the
offshore environment can only be developed through companies
building their own experience in offshore operations.
Summary
In summary, the UK wind industry is poised for extraordinary
growth, though for that to be fully realised, numerous obstacles
must be overcome. There are many specific actions that the
government and companies must take to overcome these obstacles. If
that can be achieved, and the sector is promoted in the right way,
then 50,000 new jobs could potentially be created in the wind
industry in the UK.
Dr. Markus Boettcher is a partner at the Munich office
of Bain & Company. He has worked for various industrial clients
in the engineering, machinery, construction, chemical, and
high-tech industries. His experience includes strategy development,
organisational work and operational improvement. Most recently, he
worked on several assignments in the wind industry. He earned a
diploma in Business Administration and Mechanical Engineering from
the University of Technology in Berlin. In addition, he obtained a
Doctorate with a dissertation on industrial marketing in Japan.
Niels Peder Nielsen is a partner at the Nordic office of Bain &
Company and leads the Danish practice. He has sixteen years of
consulting experience and gained specific expertise in the area of
renewable energy from multiple strategy and operations assignments
across Bain's client base of leading companies. Broader experience
includes his work for Bain's logistics, private equity, and telecom
clients on M&A, strategy, and organisation. He holds a Master
of Science from MIT Sloan School of Management, and a BA from
Copenhagen Business School.
Dr. Kim Petrick is a manager at the Munich office of
Bain & Company. He has specialised in strategy, corporate
transformation, and performance improvement, with a strong focus on
Bain's clients in the energy industry in Europe (utilities,
renewables, and oil & gas). Dr. Petrick obtained his doctorate
in International Energy Economics/CO2 emission trading schemes at
University of Technology in Berlin. He holds a diploma in Business
Administration and Engineering from the same institution, and a
Master of Science in Management from EM Lyon.
Contributors to this report include Bain colleagues Morten Bigum,
Charlie Thurstan, and Jim Bojko.
