[Green Paradox] Naive ambition of Moon’s wind power project

To revive a comatose economy amid the coronavirus outbreak, Moon last month came up with his own answer: a Korean Green New Deal.

As part of his Green New Deal initiative, Moon looks to the offshore wind farm sector to create 87,000 jobs a year by generating a total capacity of 12 gigawatts -- enough to power 11 million households -- by 2030.

The Ministry of Industry, Trade and Energy conjured up detailed plans for the 63 trillion-won ($53 billion) wind farm project last month.

According to the ministry’s report, Moon wants domestic companies including Doosan Heavy Industries & Construction to develop 8-megawatt wind turbines and wants electricity providers to use those turbines when they begin the construction of the wind farms starting 2022.

The government believes that deploying some 125 of the wind turbines per year can create a solid domestic market and improve the domestic wind power industry’s competitiveness in terms of price and technology.

But at a closer look, the ambition may be farfetched. Here’s why.


Abandoned domestic parts players


The Korea Energy Economics Institute’s job creation prospects from the wind power project are much more conservative at 115,500 jobs, compared to Moon’s 870,000 jobs in 10 years. The prediction is based on how offshore wind farms create 0.2 construction job and two manufacturing jobs per $1 million in investment.

Even with the more optimistic calculation of nongovernmental environmental organization Greenpeace, Moon’s project is expected to create 285,600 jobs, considering that the wind power industry employed 23.8 workers per 1 megawatt in capacity as of 2015.

Fundamentally, more jobs can be created by fostering the industry that makes parts used in building the wind farms.

However, the government does not yet plan to require companies to build wind farms here with domestic parts.

The domestic wind power industry is already vulnerable, as companies here compete with larger and more established foreign players like Siemens Gamesa, MHI Vestas and Sewind, who respectively control 51.5 percent, 16.5 percent and 10.7 percent of the global market.

Korea accounted for 0.2 percent of the global wind power market by capacity as of 2017, according to Energy Transition Korea.

“Korean turbine makers have completed the development of 5-megawatt wind turbines, but are having difficulties in commercializing them due to weak domestic market,” a Jeju Energy Corp. official said.

Unlike Korea, countries including China, Brazil, India, Turkey and Taiwan have required, or still require, wind farms to meet a specific ratio of domestic parts as a precondition for state subsidies or incentives to protect their domestic wind power industries from European companies equipped with superior technology, according to KEEI.

Instead of measures like imposing a minimum quota of local parts, the Korean government has planned generous renewable energy subsidies on the electricity they generate, regardless of such a ratio.

“Creating new demand by injecting public funds is a great idea, but the economic effect can fizzle out as a one-off event unless the competitiveness of the (renewable energy) industry is enhanced at the same time,” another KEEI official said.


Cheaper, advanced options


Korean wind turbines are generally more expensive and less advanced than those of European rivals, according to industry sources. And electricity providers tend to turn away from domestic wind turbines as the high ratio of imported parts drives up their prices, they say.

A domestic wind turbine costs about 1.7 billion won per megawatt in capacity whereas a foreign wind turbine costs 1.3 billion-1.4 billion won.

According to the latest report from the Korea Wind Energy Association, Korean wind turbines have a technology gap of 6.8 years to catch up with European products, and are 20 percent more expensive.

“Significant technology gap exists between foreign and domestic companies. Electricity providers prefer using foreign parts because the technology gap directly leads to the efficiency of wind farms,” an official of South Korean energy company GS E&R said.

“Vestas, a wind power company in Denmark, makes parts all by itself and offers cheap generators. Also, its supervisory command and data acquisition, or SCADA, system allows wind turbines to operate at a 99 percent rate, which is pivotal for the price competitiveness of the electricity generated.”

Another point to consider is that Korean-made parts are not yet at a stage of guaranteeing proper operation of at least 20 years, the average life span of a wind turbine.

According to Energy Transition Korea’s recent report, key parts such as blades and vane bearings have developed here only recently, and do not have the track record or accumulated data to prove they can operate stably without causing problems inside wind turbines for a certain period of time.

“Korean parts, which haven’t been tested for a long period of time, still remain prototypes,” a KWEA official said.


Exports?


With the wind farm project, Moon believes Korean-made turbines will be competitive enough to export by 2030. But Korean players face sizable competition.

“For Korean wind turbine companies, which can’t pull off economies of scale due to a miniscule domestic market, it would be difficult to develop diverse product portfolios,” the KWEA official said.

In South America, Chinese wind turbine makers -- based on China’s enormous domestic market -- are launching promotion campaigns in countries such as Brazil and Argentina by offering interest rates 50 percent below local banks to wind farms in exchange for using Chinese-made wind turbines.

As of 2018, five of the top 10 wind turbine suppliers in the world were Chinese, according to GlobalData.

In the Asia-Pacific region, MHI Vestas, a joint venture between Denmark’s Vestas and Japan’s Mitsubishi Heavy Industries, is standing firm, according to KWEA.

In the US market, local player GE and Vestas together controlled 85 percent of the market as of 2016, according to the Korea Environmental Industry & Technology Institute.

In Europe, 91.6 percent of the market was dominated by traditional players Siemens Gamesa and MHI Vestas last year, according to Statista.

In India, local player Suzlon and Siemens Gamesa together command half of the market, according to Bloomberg NEF.

“Doosan Heavy is contributing to the growth of the domestic industry by keeping the ratio of domestic parts of wind turbines above 70 percent, but in exchange, it is losing price competitiveness against competitors and therefore sits at a disadvantage for mass production,” a company official said.

To stay competitive, Unison, another major wind turbine maker in Korea, supplied nacelle bearings from domestic partner Shilla Precision, but delivered key parts including blades, power converters and main bearings from foreign countries as of last year, according to Energy Transition Korea.

By Kim Byung-wook (kbw@heraldcorp.com)