Appendix 5 Wind Turbine Manufacture on PEI

Introduction

This virtual case study was carried out as part of the Knowledge Assessment Methodology Project in Prince Edward Island. As one element of that methodology, virtual case studies are used to explore the weaknesses and strengths of PEI's knowledge economy, using as a vehicle the planning of a hypothetical, knowledge-based enterprise in an area of comparative advantage that is affected by technical change. It is emphasized that this report is almost entirely drawn from the expertise and experience of the participants, and is not intended to propose that such an enterprise actually be established on PEI.

The virtual case study on wind turbine manufacture was conducted on the Charlottetown campus of the Holland College on May 13, 1998. Participants included representatives of the University of Prince Edward Island, Holland College, the Atlantic Wind Test Site, the Canadian National Research Council, the Atlantic Canada Opportunities Agency, Maritime Electric Company, the Provincial Government, and the private sector. The U.S. National Research Council was represented by Jamie Chapman, president of OEM Development Corporation, manufacturer of control systems for wind turbines; Andrew Kruse, co-founder of Southwest Windpower, Inc., the largest manufacturer of small wind turbines in the world; and Michael Greene, director of International Development Programs at the National Research Council.



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--> Appendix 5 Wind Turbine Manufacture on PEI Introduction This virtual case study was carried out as part of the Knowledge Assessment Methodology Project in Prince Edward Island. As one element of that methodology, virtual case studies are used to explore the weaknesses and strengths of PEI's knowledge economy, using as a vehicle the planning of a hypothetical, knowledge-based enterprise in an area of comparative advantage that is affected by technical change. It is emphasized that this report is almost entirely drawn from the expertise and experience of the participants, and is not intended to propose that such an enterprise actually be established on PEI. The virtual case study on wind turbine manufacture was conducted on the Charlottetown campus of the Holland College on May 13, 1998. Participants included representatives of the University of Prince Edward Island, Holland College, the Atlantic Wind Test Site, the Canadian National Research Council, the Atlantic Canada Opportunities Agency, Maritime Electric Company, the Provincial Government, and the private sector. The U.S. National Research Council was represented by Jamie Chapman, president of OEM Development Corporation, manufacturer of control systems for wind turbines; Andrew Kruse, co-founder of Southwest Windpower, Inc., the largest manufacturer of small wind turbines in the world; and Michael Greene, director of International Development Programs at the National Research Council.

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--> Background Canada has a small wind energy community, and the members are not yet big players in making national energy policy. Although, worldwide, there are more new installations in wind turbines than any other form of energy supply, wind does not yet figure highly in the energy strategy of Canada. Most of the energy utilities are Crown Corporations belonging to the provinces, and energy prices are kept relatively low. In PEI, most of the energy is purchased from New Brunswick Power and brought in by cable from New Brunswick, where it is produced mainly by nuclear and thermal plants. The cable presently has excess capacity; peak demand is 145 MW, and the cable capacity is 200 MW. There is a 30 year old thermal plant on the Island that can be used as a supplement at peak demand but is usually idle. Worldwide, the wind energy business generates $1 billion in revenues. There are three categories of product. The largest wind turbines, of the order of 500 kW to 1 MW, have blade diameters like the wings of a large airliner, and are used for wind farms connected to the grid through a bank of transformers. These wind-driven turbines are now competitive when aggregated into power plants on the scale of 100 MW. For example, Northern States Power, a large utility headquartered in Minneapolis, selected a commercially available 750 kW, variable-speed wind turbine, the Zond Z-46, for a 100 MW wind plant on Buffalo Ridge in southwestern Minnesota. Total delivered power world-wide is about 8,000 MW. These are high-technology units, with sophisticated aerodynamics, advanced materials and alloys, and they depend upon control theory and computer-controlled manufacturing; the installed capital cost can be as low as US$ 1,000 per kW, and falling. The competition for these installations is with other energy sources, like coal, nuclear, and thermal. The cost of energy from a wind farm is about 4-6 cents per kWh, which in the United States tends to be higher than the cost of alternatives, but the competition, such as gas-fired combustion turbines, is also becoming more efficient. In any case, the large castings required and transport costs of getting materials and product on and off the Island probably make this category not suitable for PEI. Smaller machines, however, would be achievable for Prince Edward Island with a straightforward extension of current capabilities. These turbines are used for village power systems, agribusiness, and water pumping. The largest of these turbines are in the range from 10-15 kW up to 50 kW. The market for this range is growing in the Canadian Arctic, and developing countries. They are useful in remote areas, but they are capable of supporting an urban life-style for a home or residential compound. The capital cost is in the range $2,000-$2,500 per kW. In markets where electric energy is now unavailable at any price, these installations can be the most attractive option to provide needed service. At the small end of the range are microturbines of about 500-1,000W capac-

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--> ity. This is the fastest growing market, with many consumer applications and a potential market of 2 billion people without power today in rural areas of developing countries. The smallest wind turbines sold in North America today are about 300 watts and sell for less than $500, including the supporting tower, well within the range of developing country microfinancing schemes. The variable nature of the wind resource diminishes as an issue when the turbine is one component of a diverse village power system that includes photovoltaic collectors, battery systems, diesel generators, and the like. Wind turbines would capture a significant share of this market. In a database of some 300 village power systems installed worldwide, maintained by the National Renewable Energy Laboratory, 52 include some form of wind turbine. For the smaller machines it would not be necessary to set up a foundry or die casting facility, which greatly simplifies the manufacturing. They could use a direct drive transmission system, so that a gearbox, which otherwise would have to be imported, would not be necessary. The business could be mainly an assembly plant, which would fabricate the blades and perhaps contract out the rest. If suppliers with the necessary facilities were available, the plant would not need to acquire a lot of capital equipment. The major part of the business would be to assemble, test, and market. There are several good reasons to locate a wind turbine manufacturing enterprise on Prince Edward Island. The Atlantic Wind Test Site on PEI, a Federal facility, is available to carry out research as well as testing of wind machines. Slemon Park industrial park houses aerospace and electrical component manufacturing companies that could serve as component suppliers, and provides infrastructure for turbine manufacturing. The cost of doing business in PEI has been assessed by the Atlantic Canada Opportunity Agency (ACOA) and compared to other Canadian provinces, Europe, and the United States. The results show relatively low capital and labor costs, and a favorable tax situation. Startup funding is likely to be available from a variety of sources, both governmental and private, on the Island and off. The enterprise selected for the case study would produce category 2 and 3 wind turbines for an off-Island market. With low energy prices and a small population, PEI does not offer a sustaining home market for wind turbines. The company would seek marketing opportunities in more remote Canadian territories and islands where connection to the grid is not an option, in developing countries, and for camper, boat, and battery charging use. The Enterprise Statement of Purpose The enterprise would establish a wind turbine manufacturing business on PEI.

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--> What is the product? Initially there would be two product lines: small wind turbines of 500 and 1,000 watts wind turbines in the 10-15 kilowatt range. In the medium term, the company will move into integrated wind energy systems, combining wind with diesel and perhaps photovoltaic for remote applications, or for net metering applications in urban areas. In the longer term, it would explore the potential for larger wind turbines of several hundred kilowatts that would be used to manufacture hydrogen for on-site sale to the anticipated motor vehicle fuel market. Who are the customers? The initial product lines would serve the following markets: the small 500-1000 watt turbines would be aimed at the rural remote residential market in Canada and developing countries where connection to the grid is not available or not affordable. It would also be suitable for use aboard boats and in campsites. The larger 10-15 kW turbines would serve users in remote areas, including rural communities or businesses. Who are the competitors? A large number of firms are engaged in the manufacture of wind turbines, but most of them are not doing well. However, the potential market is so vast that many feel that the entry of additional companies expanding the technological base and advertising their wares helps enlarge the market for all, and there is much cooperation among wind machine producers. The real competition is with diesel generators, solar energy systems, and small gas turbines. What technologies would be used? The technologies required in the manufacturing process include, among others: die casting, injection molding, stamping, armature winding, powder coating, welding, CNC automated machining, circuit board manufacture, and special packaging. The enterprise will be mainly an assembler, with most manufacturing outsourced locally.

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--> What is the core competency that gives PEI a competitive edge? The core competencies present in PEI are the expertise in wind energy represented by the Wind Test Site, the proximity of suppliers and technical services, and the ingenuity, capacity, and loyalty of its labor force. Production Requirements Traditionally there has been little or no large scale manufacturing industry on the Island. Most manufacturing has been related to farm implements and agroindustry based on the potato crop. There are also small foundries and facilities for propeller manufacturing, including sand casting of marine screws and CNC machining. A cluster of aerospace firms is developing rapidly at the former air force base at Slemon Park, Summerside, however, and there are additional centers of expertise in the other Maritime Provinces. Most of the technical and manufacturing services that would be required are right at hand at Slemon Park. Storage space is available. Die casting could be outsourced to Wiebel Aerospace, Inc., located at Slemon Park. They are set up to do small pieces but could tool up for larger jobs if there were a market. Other companies can be found in Moncton or Halifax. For injection molding, there are small companies in Springhill that could handle the jobs. Armature winding could be done in Moncton, or armatures could be hand wound in-house. Powder coating can be found in most cities, and a paint company is expected to locate at Slemon Park. Welders will be trained at a new welding institute planned at Holland College in Georgetown. CNC machines are available at Slemon Park. For circuit boards, it will be necessary to go to Moncton, but a company is expected locally within a year. Packaging should not be a problem since local boxing plants are capable and underutilized. Testing is important for wind machines of a new design. Company engineers must develop a testing protocol, and the machines must be tested in different environments. An advantage of PEI is that it presents a challenging environment for wind machines, and the Atlantic Test Facility is available to assist with the tests. In potential markets in other parts of the world, it may be possible to get universities to test them by denoting a machine to a science or engineering department. The design is critical. There are three options. The company can license the technology, it can work with an experienced wind turbine engineering company to develop a prototype, or it can do the research and development to design a turbine from the beginning. An intermediate option would be to pay a license fee to get a suitable design in order to get a model on the market and get the cash flowing. Then the design can be modified, with a concomitant reduction in the royalties. Protection of the design of the machine itself is difficult, in any case. This is

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--> especially true if many of the customers are overseas, and it would be necessary to take out patents in many countries, which is expensive and of little value unless the company is prepared to go to court in a foreign country against a local company. It may be better to protect the product by maintaining low prices, high quality, and keep proprietary relationships with suppliers and contractors. If the machine is designed from scratch, it can be expected to take two years to produce the first prototypes. From there, experimental modeling, recasting, and the step to manufacturing can take another year. Finally it will be necessary to test and tear down prototypes in order to analyze stresses for about a year in harsh environments to be sure the product is reliable. For shipping, the industry commonly relies on major carriers such as FedEx, Purolator, and DHL to transport its products to their markets. In PEI, the firm would have access to air transport connecting to Halifax's international airport, trucking, with significantly reduced costs since the opening of the Confederation Bridge, and marine shipping from the port of Summerside. The northern winter climate can have some impacts in terms of iced-in winter ports, and closures of airports and the bridge during storms. Airport closures are rare and short-lived, however, while measures are in progress to ensure transport trucks can continue to cross the bridge under most weather conditions. Firms currently located at Slemon Park attest that logistics have not been a concern, despite initial expectations to the contrary. Human Resources The success of the enterprise ultimately will depend on the people behind it. Some key skills may be combined in a single individual or they may be embodied in a team. Skills are personal; sometimes they accompany an advanced degree from a prestigious institution, and sometimes it is college dropouts who have the energy and vision. Perhaps the key individual will combine technical insight and an understanding of the physics of wind turbines with vision for the future of the market and of the business. There must be at least one individual with the technical and engineering capability to make incremental improvements in the technology, whether it is licensed or designed in house, and to keep the products up to date. There also must be someone with knowledge of markets and with skills at selling in a variety of different environments, national and international. And there must be a ''hard-nosed spender," someone who ruthlessly keeps costs low and is not afraid to say that if a product is not making money, it should be "killed." The engineering skills can either be recruited on PEI or from the other Atlantic Provinces. The university offers two years of engineering, with the opportunity to complete the degree at the University of New Brunswick. It might be worthwhile to attempt to reach and recruit engineers from among the Islanders-away community. It is also possible that skilled people can be shared at an industrial site like Slemon Park, as is currently the practice, individuals who are

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--> employed by one company but "jobbed out." Although formal research and development may be beyond the reach of a startup wind energy company, it is important that the engineering staff follow trends and product development in order to make incremental innovations in aerodynamics, power electronics, and integration with other power resources. For the marketing specialist, the challenge will be to find someone who is comfortable in many markets, including boats, mobile homes, rural developing countries, water pumping, off-shore oil stations, field monitoring devices. The person must like to travel, even to remote areas, and be at ease with government officials, World Bank economists, and technical sales departments; he or she might even speak several languages. An engineering sales background with skill in proposal writing would be helpful. (Bilateral aid agencies or international development banks will frequently fund sales in developing countries.) It is important that marketing staff be permanent, since long-term relationships with suppliers, distributors, and customers are essential to the success of the firm. The strategic question always will be whether to "buy it or build it": finding and recruiting a skilled person at high cost, or getting a dedicated person who can learn on the job. In general the approach should be to start small with a minimal staff and make use of consultants as long as possible while the staff is being built. The best strategy may be to recruit core competencies, and contract or hire the rest for two years, keeping the company as lean as possible during that time. There are dedicated people in this field, and their resumes can be collected at conferences. A skilled production workforce is also necessary to the success of the enterprise. Experienced, trained fabricators are in high demand. PEI enjoys some notable advantages in this regard. Holland College is planning to establish a new welding and fabrication institute with a two-year program in Georgetown, graduating fifty workers a year trained to ISO 9000 standards. Islanders' commitment to place ensures strong workforce loyalty and low turnover despite relatively low wage rates (estimated to average C$ 12/hour including benefits for floor workers). The Island's primary industry base has fostered an adaptable workforce with a strong mechanical bent and a capacity to work independently. Existing manufacturing firms attest to the ingenuity and work ethic of their employees. Legal And Regulatory Requirements The permits required are related to safety and protection of the environment, and all are standard and normal. The Provincial Government is not likely to erect roadblocks to new industry; to the contrary it will make some effort to assist startups or franchises. There are both Federal and Provincial taxes. Companies established at Slemon Park are entitled to a ten-year holiday from the 23% Provincial tax. The Federal corporate tax rate is 17%, with allowances for carry-forward of losses.

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--> There are additional benefits for companies creating employment in depressed areas, and for training. There are capital cost write-offs for wind generation and separately for non-oil power generation; but some of these may apply only to power generated on the Island, not for generators sold off-island. This would be an additional reason to explore net metering on PEI, where the wind power-equipped home feeds power to the grid, slowing or reversing the meter and saving money when power is generated while drawing from the grid when the wind is low—in effect, using the grid as a battery. Net energy billing does exist in some Canadian provinces but not yet in PEI. The equipment has to be CSA certified, and the approval of an electrical inspector and the utility are required. There are several issues to be explored regarding pricing; for example, whether the energy will be bought for the same price as it is sold for. With the current energy pricing structure on the Island, there is no advantage to the utility to purchase "green energy." An environmental impact statement would probably not be required formally, but the project would be submitted to the Provincial Environmental Department, and there may have to be adjustments to the site or facilities to protect air, water, and soil. The terms, however, could be included in a negotiated package. Standard liability insurance would be required; it is necessary to hold distributors harmless from claims relating to the wind machine. This insurance is not expensive. At present there are no UL safety standards in place for wind turbines, and there is an effort by manufacturers to create them. There are CE performance standards for the European Union. At present ISO manufacturing process standards are not important in the industry, but in the future they may apply to the component suppliers. Canadian CSA standards will be required for the electrical components if the machines are connected to the grid, and certification is expensive and time consuming. Marketing Requirements Multiple markets exist for the micro and small wind turbines examined in this case study. The developing countries are the largest markets in the long term, but these are also the hardest to address. Key issues include cost, service, and local delivery. Those with the largest markets may also insist that some assembly take place locally, although this demand may be met in part by having towers constructed locally. This measure also simplifies shipping by confining it to the high-value product. It may also be necessary to pay local agents to get the required permits from local officials. A strategic asset for this market is Canada's generally good relations with most developing countries. Government agencies such as Canadian International Development Agency (CIDA), the Department of External Affairs, and the Export Development Corporation can all be helpful in identifying, developing, and

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--> financing export opportunities, while ACOA can assist with domestic efforts including market research and planning. The federally initiated "Team Canada" overseas trade missions with the Prime Minister and the ten Premiers have also played a major role in developing export trade in recent years. PEI's membership in this group provides an opportunity to get wind energy on the national trade agenda, once the manufacturing facility is established. The key competing product is solar power, which many potential customers accept as an effective, non-polluting energy source, with no moving parts and a thirty-year life. It will take an effort to convince them that wind is better. The wind product will have to be reliable and have a long warranty, but also it will be necessary to demonstrate that wind produces more energy, more consistently, than solar power. Often this can best be done by simply donating a machine to a potential customer or partner in order to measure power output, and at the same time measuring customer satisfaction. Customers and pricing should be charted in advance, and a marketing plan produced. Much of the information necessary is available on the World-wide Web. The new company should develop a competitive Web-site. Besides advertising, the Web-site would provide a source for ordering parts and accessories, and for dispensing technical assistance. Payments can be made through secure credit card transactions. To find customers overseas it is often necessary to have a registered agent in the country, and this will require a visit to the country by the marketing director. Next the agent and the director together should find a good distributor to be a partner in the country. This local partner should have multiple retail outlets and an engineer on staff to answer technical questions. The partner places advertisements in major magazines, and even classifieds in selected local media. The partner buys products prepaid or with letter of credit; credit terms are not common. In some circumstances it might be necessary to contract with a local company to make warranty repairs and dispense spare parts. It is critical to gain an understanding of each country in which the product will be sold. Some countries have multiple markets segmented by region, religion, ethnic community, etc., and more than one distributor may be necessary. Sometimes it will be possible to partner with vendors of solar equipment in a promotion of hybrid systems. Finding the right partner for an overseas market is of critical importance. It even may be advantageous to maintain a sales office off the Island. Flying in and out of PEI is expensive, and the local market is not expected to be large. Some Island companies maintain office locations in Ontario, Quebec, or in the United States. In the long term, it would be advantageous to have sales offices in host countries and close to markets. A related option to contain travel costs would be to partner with a Canadian firm to keep in touch with partners and customers. The remote communities of northern Canada, some 350 in number with populations ranging from 150 to 5,000, constitute another major market for the pro-

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--> posed enterprise. Few of them are without power, but most are off the grid and rely on diesel powered generators put in place by the utility companies. A modern diesel plant, well operated for 24 hours a day, produces power at from 25 cents to one dollar per kWh, and the energy use in these areas is very heavy.5 The Canadian Government subsidizes energy costs, including the cost of transporting fuel, and would have to be persuaded to support hybrid systems. In addition, there may be a market in the hunting camps for microturbines with battery chargers, which are cheaper, lighter, and quieter than diesels. In general, utilities can avoid extending the grid to remote areas by setting up integrated renewable systems, and using net metering to pay off the cost. The machines might be sold directly to the utility to install and sell to homeowners. In PEI they may be offered as a backup in the event New Brunswick Power was unable to deliver. In any case, it would be valuable to sell a number of units locally for purposes of testing in PEI's maritime environment, and also for marketing the wind turbines, especially the small machines, as a PEI product, used by "the independent Islanders in Anne's Land." With some ingenuity, a package could be developed that would allow Maritime Electric to include home generated renewables as part of a total energy delivery picture. It might be possible to develop the know-how to offer a complete package, including the economics of net metering and distribution, which could be sold to developing countries. Implementation Plan The new company might start with 500-1,000W microturbine models. According to reported experience in the U.S. Southwest, it would require about C$2 million to begin operations for the first eighteen months. By the end of that period, the company should have about 35 people and produce 250 turbines a month, assuming that the turbine design was licensed or developed on contract. At the end of a five-year growth period, the firm could be producing 1,500-2,000 units per month. This production should provide the cash flow to support refinement of the product design and expansion into new models and markets. An array of financing options is available to assist the enterprise in getting established. Normally, new companies apply to Enterprise PEI and to ACOA for loans, financing, and siting, and frequently are successful in obtaining some form of financial assistance. Loans can cover up to 60% of eligible costs such as buildings, equipment, training, and environmental protection measures, up to a level of $1 million interest free for ten years. Alternatively or additionally, Enterprise PEI might take an equity position, and then allow the company to buy back the shares gradually when it is stronger. Slemon Park Corporation can also provide 5   The cost is much higher in many remote regions than in urban or agricultural centers. Transport costs, limited maintenance capability, and "evaporation" (theft) determine the price, which can be ten times higher than the cost of fuel.

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--> other forms of assistance; for example, it may arrange to carry out the analysis required for an environmental permit. Additional benefits may be available from Human Resources Development Canada to support job creation and training. The medical package for the employees is provided by the publicly funded health care system. Financing also might be available from private venture capital funds. The government would require 20% equity held by investors, including venture capital or "angels." The Island has about 30 investors who might be interested in an enterprise such as this. In-kind contributions might also be considered. If the project matches the Government's strategic plan, they will work hard to make it happen. Potential exists for partnerships with other local firms. For example, FORTIS, the Newfoundland power utility that recently acquired Maritime Electric, could be approached as a partner. It was described as a good, established company that is not risk-adverse, and it may see wind power either as a cost-cutting advantage for the future or an inevitable development that would be better growing inside than outside the power company. Despite the availability of incentives such as accelerated capital cost depreciation for wind energy installations, however, the company would need to be convinced that this was its best choice for an investment. Other partnering possibilities include the outsourcers in the aerospace industry, that might see wind power as an extension of their business rather than wishing to serve as a component supplier. Partnership may also be attractive to established firms in the wind business in other places. They may be particularly valuable in recruiting staff. Recruiting the initial management team will be the greatest challenge. Other businesses at Slemon Park report that PEI faces a barrier to recruiting knowledge workers in that it is small, remote, and not well known. Advertisements in appropriate journals may reach the wind community largely in the United States. Islanders-away may also be a source of dedicated and talented people, and could be approached through Web-site and government contacts. The wind power industry is at an early critical stage, where the potential market appears unlimited, but the marketing effort is still small. Existing producers still welcome the entry of new competitors because the incremental marketing effort benefits all in an expanding market, and they can be helpful. An early entry by PEI can put it at the forefront of a growing knowledge-based industry with global reach.