The global recession and the need to trim budget deficits have put a question mark on the support that this industry receives from various governments. They also raise the possibility that growth may slow down dramatically. From the perspective of lubricant marketers, three questions need to be answered. Can the industry continue to grow in the current economic environment? What will be the growth potential for lubricants in wind energy, given the penetration of direct drive turbines and extension of drain intervals? Is this industry an attractive one given its tiny size?

Wind Energy Outlook

Global wind energy capacity stood at 233.5 gigawatts in 2011, compared to a capacity of just 17.4 GW in 2000. The top five markets – China, the United States, Germany, Spain and India – together account for nearly 75 percent of the total installed capacity. Wind energy has enjoyed government support in each of these markets, catalysing growth, but their outlooks are divergent.

Spain has a surplus of electricity production. In the current economic situation, electricity demand from industry and consumers is likely to be weak. As a result, the surplus may increase. The country has poor grid connectivity with neighbouring countries like France and Portugal; hence, it is not always able to export its surplus power. As a result, when wind power generation ramps up, thermal power plants shut down. Spain already meets the European Union target of 20 percent power from renewable sources. On this background, one can reasonably expect new wind capacity addition to slow down.

The situation in Germany is significantly different. Wind energy accounts for just 6 percent of the total power supply in the country. Following the nuclear plant disaster in Fukushima, Japan, Germany has decided to phase out nuclear power by 2022. As nuclear power currently accounts for 22 percent of supply in Germany, there is a large gap that will have to be covered by other energy sources including wind.

Both China and India face rapidly growing electricity demand driven by their economic growth, increased industrialization, and consumer spending. Energy capacity additions have a hard time keeping up with incremental demand. Furthermore, the deteriorating air quality in major cities, even more than global warming, are driving China and India to increase renewable energy supply. Wind energy is expected to show strong growth in the coming years in both markets.

The United States has set a target to generate at least 20 percent of its energy requirement from wind energy. This is in stark contrast to the 1 percent share in energy generation that wind energy currently enjoys. The federal government provides a production tax credit which is set to expire by the end of 2012. Industry experts are perhaps self-serving when they claim that withdrawal of the tax credit will severely hamper capacity addition.

Klines view is that government support in various countries is unlikely to be completely withdrawn. Such a move will be difficult politically. Additionally, the wind energy industry has spurred manufacturing and created jobs, which are stated goals for several governments.

Besides electricity supply-demand balance and government support, there are other factors which affect wind capacity addition. For instance availability of suitable sites for wind farms is fast becoming a problem. There are several constraints for site selection. The wind farm has to be in an area of good wind potential, has to be far from population centers, airports, and paths of migratory birds, and should have easy connectivity with the grid. Furthermore, wind farms should ideally not be clustered, but should be dispersed. If wind farms are clustered, they would be operating or idle at the same time, increasing variability of supply.

The Global Wind Energy Council in Brussels, Belgium, estimates that global wind capacity will grow at a compound annual growth rate of 17 percent to reach 504.5 GW by 2016. Future growth will be slower than historic growth, but still quite significant.

Lubricant Demand Outlook

Three primary lubricant products are required in wind turbines. These are gear oils for the main gear box and pitch and yaw gears; grease for main rotor shaft bearing, yaw, blade, and generator bearings; and hydraulic fluids for blade pitch control systems when a hydraulic system is used instead of an electric system. The consumption of lubricants in wind turbines is affected by two factors: penetration of direct-drive turbines and drain interval extension.

One of the key components of a wind turbine is the main gear box which converts the low-speed high-torque rotation of the rotor shaft to a high-speed low-torque rotation of the generator shaft. The speed conversion is steep and is made more difficult by the rapid changes in speed that can be encountered. It is no wonder that gear box failure is one of the leading causes of wind turbine failures. Direct drive machines avoid this problem by eliminating the main gear box. The rotor and generator are on the same shaft.

However, direct drives have their own set of problems. The generator tends to be bigger which increases the capital cost. Direct drives use rare materials like neodymium for permanent magnets. These materials are difficult to source and can be demagnetized at high temperatures. Finally, direct-drive technology is unproven in offshore installations.

While direct drive will continue to grow, geared wind turbines are likely to dominate. Only a handful of original equipment manufacturers such as Enercon, Siemens, Goldwind and Hara XEMC offer direct-drive technology. Increasing penetration in a market that is already growing at double digits will mean high growth rates beyond the manufacturing capabilities of these companies. Finally, gearbox technology is improving, and the number of failures outside Asia has reduced significantly, undercutting the main value proposition of direct-drive machines.

Oil drain intervals are about three years for on-shore installations and five years for off-shore installations. Most operators aspire to extend drain intervals due to the high cost associated with the oil change operation. Wind turbines are set up in remote locations, and their access may require special equipment as in the case of off-shore installations. There is also a shortage of qualified personnel to carry out these activities.

The prevalence of sophisticated condition monitoring systems and the increasing reliability of gearboxes make drain interval extension possible. But the wind energy industry is risk- averse. Drain interval extension is likely to increase slowly, and only when a sufficient track record has been built. Drain intervals are already quite long, and other wind turbine components could become the rate setting component for maintenance intervals.

In a recent study on the wind energy industry, Kline developed three scenarios for lubricant demand growth based on varying assumptions on capacity addition, penetration of direct drives, and drain interval extension. Demand growth under the three scenarios is as shown in the chart on page 6.

Conclusion

Kline projects that lubricant consumption in wind energy will grow at a compound annual growth rate of 9 percent to 18 percent over the next five years. Even in a pessimistic scenario, growth is quite strong compared to other industrial segments.

On the other hand, the current turbine lubricant market size of 20,000 tons is tiny compared to the scale of operation of most global lubricant marketers. Besides its green image, what makes this business attractive is the high penetration of synthetics, estimated to be above 80 percent. Lubricant sales in this industry are driven by product performance guarantees, track record, and OEM alliances rather than price, making this a high-margin business.

Lubricant marketers have grown their business through OEM alliances, which have also helped them stay abreast of technology developments. This approach made sense when the market was dominated by OEM initial-fill sales, and service-fill volume was low. Service-fill volume will now overtake initial-fill volume as the installed base grows bigger. New end user groups, such as wind farm operators, off-shore operators and maintenance service providers are becoming increasingly important due to their role in selecting the lubricant suppliers for service fill. Lubricant marketers need to develop product and service offers that meet the needs of these new end user groups to maintain and grow their turbine lubricant market share.