A New Product Alleviates an Expected Downturn in the US Wind Energy Industry

by Konstantin Damm, MBA’13 (8/16/12)
Konstantin Damm, MBA’13

GE develops products to increase revenue streams from its existing install base in an attempt to offset expected revenue shortfalls as the US’ main Wind energy federal subsidy, the Production Tax Credit (PTC), sunsets at the end of 2013.

 



2012 has brought wind turbine manufacturers, such as GE, record turbine orders as wind park developers scramble to commission their sites before the end of 2013 to take advantage of the industry’s primary tax incentive. The incentive, known as the PTC, provides developers a $22 tax deduction for each MWh of renewable wind energy produced. The incentive expiration will likely suppress new site development. Manufacturers with US exposure are worried about next year’s revenue streams; in anticipation Vestas has already announced job cuts.[1]

As the US market share leader in the wind turbine manufacturing industry[2], GE is particularly exposed to the expected development drop off. In an effort to offset the revenue shortfall, GE devoted two of its Renewable Energy Leadership Program (RELP) interns, a student from Yale SOM and myself, to building the business case for an innovative product that could be sold to the existing customer base. The product dramatically increases the capacity factor, or energy production, of existing wind turbines while providing GE with a new revenue stream.

While GE was confident that the product could be profitable if technical and financial risks could be addressed, GE needed insights on the product’s potential contribution margin to the company. We built site-specific installation cost and energy gain models that provided more granular, i.e. wind site specific, insights to the business case. Our results indicated that installation costs are highly dependent on the crane and labor components; as a result the GE procurement team will actively work to ‘lean out’ labor costs and receive competitive crane bids. Our energy gain efforts provided GE with a dynamic model that takes historic wind speed data and applies hypothetical power curves (a turbine specific correlation between wind speed and energy produced) to calculate the product’s energy gains.

We integrated these inputs into a site-specific business model that calculates the product’s value proposition to each site within GE’s universe of installed turbines. This granular approach will provide the sales team greater confidence around which wind sites to target and at what price to start the negotiations.

Further work still needs to be conducted to evaluate the technical feasibility of installing the product, and a pilot installation is already scheduled for later in August 2012. If financial and technical risks are addressed, GE should have a good pipeline to offset new turbine installation revenue shortfalls in 2013 and better weather the financial cycles of the renewable energy industry.



[1] Flemming Emil Hansen and James Herron (2012, January 13). Wind Giant Vestas Cuts Back. Wall Street Journal. Retrieved from http://online.wsj.com

[2] IBISWorld. "Wind Turbine Manufacturing in the US: 33361b." IBISWorld Industry Report, February, 2012 (accessed August 4, 2012).

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