By David Craik, Europe correspondent

In May 2010 French energy giant Areva took full control of German wind turbine manufacturer Multibrid, forming a new subsidiary called Areva Wind. A few months later in October it sealed a long-term partnership agreement with Beluga Hochtief Offshore, a joint-venture between Hochtief Construction and Beluga Shipping, securing the use of a purpose-built jack-up vessel for offshore wind park installation.

Marc Muhlenbach, European wind energy analyst at IHS Emerging Energy Research, says the Beluga deal was the most “pertinent example” of a continued trend towards vertical integration of the supply chain in the offshore wind turbine sector.

“There is a serious limitation in terms of specialised providers across the supply chain in offshore,” he says. “Whether it’s cables, turbines, skilled workers, ports or logistics it is a nascent industry that is in the process of specialisation. There are bottlenecks that need to be overcome in just about every part of the supply chain. These are being addressed and 2010 was a big year particularly for turbines and vessels.”

Other notable examples of vertical integration in 2010 included energy conglomerate Siemens buying a 49% stake in A2SEA, a supplier of installation vessels for offshore wind farms, for 115million euros and last December’s move by RWE Innogy to invest in purpose-built vessels for installation of turbines and foundations.

United Technologies Company (UTC) also recently completed its £139.5million buyout of wind turbine maker Clipper Windpower.

Utility buy-in

But Ken Rumph, analyst at Cleantech Research Nomura Code Securities, argues that the real driver of vertical integration this year has not been the wind turbine manufacturers but utility firms.

He cites Scottish & Southern Energy’s £11million purchase of a 15 per cent stake in Burntisland Fabrications or BiFab as a prime example. BiFab makes equipment to support wind turbine towers.

“You don’t normally see utilities do this. They don’t want to be in the business of making and installing things. They want someone else to do that and to buy the finished article,” says Rumph.

According to Rumph, other sectors such as coal, gas or nuclear have an existing pool of suppliers who can provide services on a turnkey basis. In wind however, the utilities are discovering that they need to do a bit more on their own balance sheet. “It’s an unusual development,” he adds.

He also notes the “growing interest” being shown in wind by oil service firms such as Brazil’s Petrobras.

“Before they saw wind as a distraction but now they see it as an interesting business,” he says. “They realise that they have natural skills and resources for it. They are organising themselves towards M&A in this sector.”

Rumph agrees with Mahlenbach that the offshore wind supply chain is just not “robust” enough yet and that the increasing demand, interest and investment in wind will make resources even scarcer.

He explains that the investment and rapid scaling up of the industry is putting strain on all parts of the supply chain. “People talk to me about being in the very beginning of the UK Round 3 offshore wind zones process. They tell me that even chartering a technical survey vessel is an expensive and scarce asset and that looking ahead that same scenario applies to virtually every resource. When they put feelers out to book resources up they are finding that there is a shortage. SSE thought that BiFab produced such a critical component that they decided they had to put some money into them to secure their supply.”

Rumph says the downturn is making these types of decision even harder.

“ There is a bit of a chicken and egg game going on between the resource suppliers and the companies. They know they want them but they don’t want to have to pay for them now as the financing difficulties make the process uncertain,” he says. “There isn’t a lot of money to invest ahead of the game but companies are equally nervous that if they wait a year they will be at the back of the queue.”

EPC contractors: everything to gain

What then of the suppliers? Amy Grace, analyst at Bloomberg New Energy Finance, argues that EPC providers have a “One hundred percent need” to group together and offer turnkey solutions to developers and subsequently reduce risk.

Rumph also see more partnering in this area and perhaps some consolidation off the back of last January’s takeover of Norwegian boat operator Seajacks by private equity firm Riverstone Holdings.

“It may well be that they want to spend some more money and roll up some of the other providers,” he states. “Maybe they would do that to build up the value of the asset they have got. I feel that they think they have identified a scarce asset and dived in.”

Mahlenbach adds: “The trend here is towards increased consolidation as EPC providers assume project management roles.”

The vertical integration trend is revealing no signs of slowing in the face of the downturn. Increased investment and interest in the sector, propelled by governments striving to meet environmental targets and secure future energy supply, will further foster consolidation not only among wind turbine manufacturers, but also among new players such as utilities and oil service firms.

In a nascent industry like wind vertical integration has it share of risks. But as a way to bypass supply chain bottlenecks, vertical integration has a clear upside at this stage of the sector’s development.

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