Microeconomics of Competitiveness Final Report The Danish Wind Energy Cluster Warsaw School of Economics – 13th January 2010 1. IntroductionPage 2 PART I: DENMARK 2. Country BackgroundPage 2 3. Performance of the Danish EconomyPage 3 2. 1 Trade 2. 2 Budget and Fiscal Policy 2. 3 Gross Domestic Product and Productivity Growth 4. Cluster composition in DenmarkPage 5 3. 1 History of Cluster Policy in Denmark 3. 2 Today’s Context 5. The Business Environment in Denmark – National DiamondPage 8 5. 1 Factor Conditions 5. 2 Demand Conditions 5. Related and Supporting Industries 5. 4 Context for Firm Strategy, Structure and Rivalry 5. 5 Government – the Influence of Macroeconomic Policies 5. 6 Institutions for Collaboration PART II: THE DANISH WIND ENERGY CLUSTER 6. Historical Development of the ClusterPage 13 6. 1 Wind Energy in Denmark before the 1970s 6. 2 The Danish Wind Energy Cluster in the 1970s – The First Hesitant Beginnings 6. 3 The Danish Wind Energy Cluster in the 1980s 6. 4 The Energy Policy of the Danish Government since the 1980s/1990s 6. 5 The Cluster of Modern Wind Turbines since 1990 7.
Description of the Wind Energy ClusterPage 20 7. 1 Vestas: World’s no. 1 Turbine Manufacturer 8. Wind Energy Cluster – Cluster DiamondPage 22 8. 1 Factor Conditions 8. 2 Demand Conditions 8. 3 Context for Firm Strategy, Structure and Rivalry 8. 4 Related and Supporting Industries 9. Strategic Issues Facing Denmark and the Wind Energy ClusterPage 28 10. Policy recommendations for the appropriate constituenciesPage 30 11. ConclusionPage 31 Bibliography Required Disclosures 1. Introduction This paper gives an insight into the Danish economy and business environment.
Furthermore, it describes the cluster composition in Denmark and how the policies towards clusters have changed in recent years. The core of the paper is the comprehensive analysis of the wind energy cluster in Denmark where the cluster is analysed with the use of Porter’s diamond model. Lastly, identification of strategic issues facing Denmark and the wind energy cluster will be presented and policy recommendations given. PART I: DENMARK 2. Country Background Denmark is located in Northern Europe between the Baltic Sea and the North Sea and has Copenhagen as its capital.
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Its population consists of approx. 5. 5 million inhabitants whereof 9. 1% is immigrants and their descendants. The official language is Danish, but the level of English proficiency is very high. The Danish constitution was codified in 1848 and today the country is governed by a parliament consisting of 179 members. The election period is four years but the prime minister can call an election at any time. Furthermore, Denmark has a constitutional monarchy with Queen Margrethe II as the head. The Queen is apolitical and only functions a representative for Denmark.
Denmark joined the EU in 1973 and has always seen it as a good place for economic cooperation, but Danes have been more reluctant towards the political integration resulting in Denmark staying out of the Euro. Denmark is known for its Scandinavian welfare model, which ensures a high level of re-distribution through taxes. The model includes among other things the “flexicurity” system, which will be elaborated later (Ministry of Foreign Affairs of Denmark). 3. Performance of the Danish Economy Danish economy can surely be described as a modern one, oriented primarily at services.
In terms of its resources, the economy depends to the greatest extent on human capital, which translates into a more labor-related approach towards business. With over 5. 5 million citizens, Denmark maintains a record low level of unemployment, roughly 2. 1%. All those indicators contribute to a pretty high standard of living. For this reason Denmark was ranked 16th globally in the Human Development Index, which reflects several aspects, such as live expectancy, knowledge and education standards measured by literacy rate and standard of living. . 1 Trade Denmark has a high social support for free trade. Over 76% of the population perceives globalisation as a positive phenomenon (Time). Danish basic trading partners are the countries from European Union (70%), followed by the United States. Denmark’s high involvement in global trade is reflected in the ranking of trade per capita, placing the country on the 9th place globally, with the result of $17. 5 thousand of trade per capita (World Fact Book). Danish major export markets are illustrated in the table below.
Table 1: Danish major export markets in 2008 (Million DKK) |Germany |Sweden |UK |US |Norway |Netherlands |France |Italy |Finland |Spain | |103. 4 |85. 2 |48. 5 |35. 2 |32. 3 |26. 0 |26. 0 |18. 0 |15. 7 |15. 0 | Source: Danish Exporters As far as exported goods are concerned, the principal products are food, industrial instruments and machinery.
Furthermore, Denmark exports chemical products, furniture and pharmaceuticals. In terms of imports, raw materials and semi-manufacturers, as well as consumer goods prevail. 3. 2 Budget and Fiscal Policy Over several previous years Denmark has been recording budgetary surpluses. However, at the same time the country is facing a debt at the level of 43 billion DKK. Because of extremely low unemployment rate, the government has to be very cautious in increasing their spending, as it may translate into dramatic overheating of the whole Danish economy (due to salaries’ increases).
Under such conditions, the debt is expected to fall by 2015. Budgetary expenditures are financed primarily through high tax burdens. Denmark is by many described and perceived as a welfare state, which ensures many various social aids for its citizens. One of the most famous elements of the welfare safety net is tax-funded healthcare and unemployment insurance. In addition to this, Denmark has a well developed pension system, embracing all citizens from the age 65.
In order to finance expenditures, the fiscal system assumes almost a 50% tax rate, which is by far the highest one in the world (OECD Tax Database). 3. 3 Gross Domestic Product and Productivity Growth Denmark has a high level of GDP PPP per capita, which places the country on the 16th place globally. Moreover, according to IMF data, the country holds a strong 5th position in the world in terms of its nominal GDP per capita (World Economic Outlook Database). The difference can be easily explained by a relatively high level of prices in comparison with other benchmarking countries.
Denmark has been facing a gradual GDP growth for several years, which was disturbed by the global economic crisis. The crisis caused mainly an increase in the unemployment rate and drop of private consumption. In addition to this, Denmark suffered under a significant decrease in exports, which naturally translated into problems with trade balance. Although it is clear that such conditions affected GDP growth, economists claim that Denmark has already embarked upon the recovery path. Table 2: Summary of Danish GDP per capita PPP in USD Year |2002 |2003 |2004 |2005 |2006 |2007 |2008 |2009 | |GDP ($) |29637 |30305 |31766 |33528 |35672 |37163 |37304 |36725 | |% change |1. 73 % |2. 26 % |4. 82 % |5. 55 % |6. 39 % |4. 18 % |0. 38 % |-1. 55 % | Sources: Index Mundi report on Danish Economy (2009) In spite of sound economic growth in the preceding years, the country is perceived to have a strong underlying problem with its future development.
It is projected that Denmark will have fourth-lowest productivity growth among OECD countries in the following years (Index Mundi, 2009). As well as this, heavy governmental transfer payments create an unhealthy situation for other parts of the economy. Therefore, they might also translate into an impediment in future growth. 4. Cluster Composition in Denmark Denmark is by far one of the most interesting countries from the perspective of clusters. It was among the first ones to introduce certain clustering policies and since that time it has been quickly developing in terms of the final composition.
The country – due to its success – was also included in Porter’s Ten-Nation study about the connection between international competitiveness and the existence and strength of clusters (Yettin, et al, 1992). 4. 1 History of Cluster Policy in Denmark The history begins in the early 1990s, when the Danish government decided to implement first steps aimed at development of the cluster concept. The analysis, which was carried out at the beginning of the process, indicated several areas for further cluster development. These were: food products, IT, bio-health and construction.
They were firstly defined as so-called Mega Clusters and then narrowed down in the late 1990s. At that time ‘real’ clusters were defined, e. g. industrial design, aluminium processing or biotech. Despite these efforts, the government was still choosing to proceed with an industrial policy, rather than a cluster-oriented one. The situation changed in the 2000s with the introduction of regional initiatives. That assumed strategic decisions being undertaken on the regional level, rather than on the central one. Thus, Denmark nowadays lacks a vivid clustering policy on the national level.
However, at the same time there are numerous regional initiatives that contribute to the process. All in all, the shift from governmental planning to the decentralized system proved to be worth the effort, as it significantly supported the development of a sound clustering structure in the country. 4. 2 Today’s Context Clusters in Denmark emerge exclusively on the regional level. The country is divided into 5 administrative regions and 98 municipalities. Local authorities are the trigger for respective cluster policies.
Their ideas can be implemented independently or be supported by special agencies, namely the National Agency For Enterprise and Construction, The Danish Forest and Nature Agency, the Danish Agency for Science Technology and Innovation and the Danish Council for Technology and Innovation (Cluster Observatory). Apart from that, the policies involve also third parties in the emergence process, which are companies, research- and educational institutions and distributors of technological knowledge. Their cooperation is expected to result in a long-lasting relationship, as well as knowledge creation.
As far as certain clusters are concerned, the 17 regional growth environments were established in 2001. Depending on the geographical location of the region, the main clusters were assigned to specific places. They are illustrated in the table and figure on the next page. Table 3: Summary of Main Danish Clusters |Growth environments commenced in 2001 |Growth environments commenced in 2002 | |Furniture & Wood |Fishing | Wind energy |Foods | |Technology & IT |Sub-suppliers | |Biotechnology |Stainless steel | |Manufacturing |Offshore | |Horticulture |Transportation | |- |Aluminium | |- |Robot technology | |- |Event economy | |- |Finance | |- |Seed-growing | Source: Nordic Innovation Figure 1: Denmark Exports Portfolio by Cluster [pic] As far as challenges ahead are concerned, Denmark still has certain areas for improvement.
First of all, the country has to put a strong emphasis on knowledge creation and development of competence environments. As most initiatives are planned and carried out on the regional level, such environments could serve as knowledge centers enabling cooperation of various players and clusters as a whole. Thus, it creates a huge responsibility for respective authorities to move a step ahead towards building a sound network and cooperation on the higher level. 5. The Business Environment in Denmark – National Diamond Analysis By using Porter’s “Diamond Model” as a framework the competitive strengths and weaknesses of the Danish business environment will be analysed. First it is nalysed how Denmark is performing on the four factors: Factor conditions, demand conditions, related & supporting industries and context for firm strategy, structure and rivalry. Then it will be analysed how the Danish government influences the different factors through macroeconomic policies and institutions. Lastly, it will be described how institutions support collaboration between the business environment, universities and the public sector. 5. 1 Factor Conditions Denmark is ranked no. 6 on infrastructure in the IMD World Competitiveness Yearbook. Especially the basic and technological infrastructure is high whereas the scientific infrastructure in Denmark only reaches a place as no. 15. With regards to education Denmark is ranked as no. 1.
University and management education meet the needs of a competitive economy and the business community. Moreover, training of employees is a priority for companies which ensure that labour become more specialised and stay up to date on innovation and developments within their area. Even though, it looks like there is no finger to put on education in Denmark there are several future challenges. In the future Denmark must raise the contribution of human capital to productivity growth (OECD, 2009). With regards to the labour market there has been a slowdown in labour productivity and a strong growth in wages, which makes Danish labour relatively more expensive. The growth in wages has been reinforced by effective exchange rate appreciation.
While the demand for labour is weak during the crisis there is still a need to raise labour supply in the future. A need that the Danes probably cannot fulfil and it may therefore be necessary to attract foreign highly-skilled labour. The current crisis has made it harder to lend money and the credit conditions in Denmark are tight at the moment (OECD, 2009). 5. 2 Demand Conditions An example of how the character of the home demand has helped build competitive advantage is the environmental awareness of Danish consumers. This has led Denmark to be competitive within for example water pollution control equipment, but also many other products related to the environment (Dess, et al. , 2004).
The Danish consumers tend to be relatively demanding and quality-conscious. Furthermore, they like to boycott products if they somehow get bad news about the products (Agri-food Trade Service). This can pressure companies to meet high standards and prod them to innovate and upgrade (Porter, 2008). The challenges for demand conditions at the moment are the diminished household wealth and the rising employment, which decreases the Danes’ purchasing power. It is hard to say whether the demand conditions in Denmark create a good environment for businesses. It will be highly dependent on the specific business area. 5. 3 Related and Supporting Industries
As mentioned, cluster focus on a regional level has increased and several local initiatives have been established (Nordic Innovation, Cluster Observatory). The continuous focus means that cluster development have good conditions and this could also be an indicator for a high level of related and supporting industries. Though, it is hard to give a general picture about related and supporting industries in Denmark. The fact that Denmark geographically is a small country could lead to the thought that the small scale market is not big enough to get suppliers to locate in Denmark. 5. 4 Context for Firm Strategy, Structure and Rivalry One of the main advantages for companies located in Denmark is the co-operative labour-employer relations and the so-called “flexicurity model”.
When rights and forms of governance are developed on the Danish labour market both trade unions and employers’ associations are important players. Trade union density is about 74% and the density of employers’ associations is about 52%. The trade unions and the employers’ association agree that the “flexicurity” model is an advantage for the Danish labour market and the business environment. “Flexicurity” refers to the flexible Danish labour market and the high level of social security. The policy was first introduced in Demark in the 1990s as a response to high unemployment rate. First steps of implementation were undertaken in 1994 and concerned in-depth reforms of labor market, aimed primarily at reduction of structural unemployment, as well as introduction of solid welfare schemes.
Companies can easier adjust to up and down turns in the economy because of easy hiring and firing as well as work time and wage flexibility. Trade unions accept this flexibility because its members are protected by the state, which provides them with high unemployment benefits and access to health services, education, etc. (Jensen, 2008). Owing to the “flexicurity” model, Danish economy cherishes now a low level of unemployment, as well as low social exclusion rates. However, the policy requires a trade-off of high fiscal burdens for citizens. Economic slack, weak exports and reduced investment in R&D means that local rivalry could be on a standstill (OECD, 2009). 5. 5 Government – the Influence of Macroeconomic Policies
Government through its policies must ensure an environment where businesses can gain competitive advantage. In order to ensure a functioning capital market during the crisis the government has given guarantees to banks and its customers as well as capital injections. This has improved the capital market and given better access to capital for businesses. Because of the slow growth the Danish government has launched a “Growth Forum”, which will address the issue of productivity growth and how it can be improved. Another policy which helps creating good factor conditions for the Danish business environment is the strong labour market policies, which offer activation and training for unemployed as well as supplementary training for employees.
In this way unemployed stay in touch with the labour market and it is ensured that their skills are up-to-date when businesses need them. Furthermore, labour market policies try to support international recruitment and to keep people on the job market longer before they retire to boost labour supply, which will be in high demand after the crisis. Fiscal policy has boosted disposable income and demand by a major tax reform, which means tax cuts for households. Moreover, the government has released the funds from a special compulsory pension saving programme, which give households further liquidity (OECD, 2009). Furthermore, the interest rate is now the lowest ever at 1. 15 %, which are good news for the households with a mortgage loan (Guardian, 2010).
In 2006, the Danish government introduced a globalisation strategy for Denmark, which established a lot of new initiatives within education, research and development, entrepreneurship and an innovate society. One of the aims of the strategy is to make Denmark more ready and open for global business (Globalisering, 2006). Furthermore, in 2009 the Danish government has launched several measures to encourage a “green growth” recovery from the financial crisis. The initiatives include among others “green transport”, improved environmental performance of the agricultural sector and a home repair and renovation incentive to save energy (OECD, 2009). These strategies, policies and initiatives create a better environment for companies to compete in. Figure 2 pic]Source: Team analysis 5. 6 Institutions for Collaboration There are several institutions supporting and working together with Danish businesses. Universities like the IT University of Denmark, Technical University of Denmark and Copenhagen Business School work actively with companies, trades and industries (ITU, DTU, CBS). Furthermore, the Confederation of Danish Industries as a representative for many industries also has close ties to different business schools and universities (DI). “Invest in Denmark”, a part of the Danish Ministry for Foreign Affairs, helps foreign companies to locate in Denmark and create joint ventures with Danish companies (Investindk).
Moreover, several knowledge centers like “Innovation Center Copenhagen”, “Mind Lab” and “Innovation Lab” work together with companies to innovate and upgrade technology and business in Denmark (Innovation Lab). PART II: THE DANISH WIND ENERGY CLUSTER 6. Historical Development of the Cluster 6. 1 Wind Energy in Denmark before the 1970s Due to the Denmark’s large coastline, the climate is characterised by consistent and relatively strong winds. The absence of other natural sources than wind influenced Denmark to take a pioneer’s role in starting an effort to implement wind technology as basis for electrification and to experiment with it (Vestergaard et. al, 2004).
The first windmill in Denmark was mentioned 1259 in Flong. The modern wind energy utilization has a tradition that covers more than 100 years of research in meteorology and wind turbine manufacturing. In 1891 Poul La Cour, a Danish professor in natural science at the Askov Folk High School, and a team of scientist built the first wind turbine funded by the Danish government. La Cour was drawing on the results of two contemporary Danish engineers and scientists. H. C. Vogt and J. Irminger participated together with the American P. S. Langley in formulating modern theory on aerodynamics and lift drag with the purpose to experiment with wind power to product electricity (Vestergaard, et al. , 2004).
In 1918 a fourth of all Danish rural stations (120) used wind turbines to generate power. After the World War I the Danish interest in wind Energy waned, because of the sufficient supply of fossil fuel. The machines were rapidly outdated - in 1920 only 75 turbines were left (Andersen, 1999). By the 1930s Denmark was ahead of many other countries in the wind turbine industry and turbines became traditional in the Danish countryside. La Cour gave courses at the Askov Folk High School so that it became possible to study wind energy for Danish „wind electricians“. Soon La Cour and one of his students became the most prominent manufacturers in Denmark. However at that time there was still no real international competition.
One of the students in wind energy was Johannes Juul who attended La Cour? s courses in 1904 and later worked as chief engineer for a power company, SEAS. Juul started an R&D programme in wind energy utilization. This R&D effort formed the basis for his design of a modern electricity wind turbine built in 1957, which is today well known as the 200kW Gedser machine. The Gedser machine was installed in 1959 and was in operation until 1967 (DWIA, 2008). 6. 2 The Danish Wind Energy Cluster in the 1970s – The First Hesitant Beginning In the 1970 there was an awakening green movement in the Western countries. This was encouraged by the first and second oil crisis in 1973 and 1979.
Denmark which was enormously dependent on imported oil pursued an active policy of energy savings, increasing self sufficiency, and diversification of energy sources until the mid 1980s. Since then, energy policy has increasingly promoted the use of renewable energy to ensure environmentally sustainable economic development (Krohn, 2002). This increasing political focus on environmental protection and sustainable development provided the framework for the development of the Danish wind energy sector. The practical and technical development in the 1970s was first carried out by few entrepreneurs, tradesmen and people with high ideals about renewable energy. Christian Riisager was a carpenter from west Jutland.
In the mid 1970s, he was one of the first who successfully designed a turbine to be marketed and connected to the grid. The turbine was a 15kW turbine which generated more electricity than the household could consume, the excess electricity went into the grid. The Riisager turbine was the basis for modern wind turbines with high towers and three blades. Riisager produced more than 70 turbines and later he established the firm Wind-Matic (DWIA, 2008). Karl Erik Jorgensen also started to make wind turbines in the mid 70s. In 1978, he teamed up with Henrik Stiesdal, a young student and worked on a three-blade turbine. In 1978 they developed a 30 kW turbine with an enhanced safety system.
Vestas, which manufactured agricultural machines at that time, bought the turbine on a license and started in-house production and development of wind turbines (DWIA, 2008). While these innovative designs of small machines appeared politicians began to take interest in the new development. Partly because of the energy supply crisis, partly as a reaction to the popular opposition to nuclear power in Denmark. An incentives programme in the form of capital grants for installation of wind turbines (30% of installation costs) was established in the end of the 1970s and was dropped in 1989. In 1977 the Risoe National Laboratory which was originally established to research in nuclear power formed its entrance to wind turbine R&D.
A measurement programme co-funded by the US department of energy was carried out by the Risoe National Laboratory (Andersen, 1999). Risoe also draw on a tradition on boundary layer meteorology and wind climate studies. The Technical University of Denmark continued the studies of aerodynamics and wind tunnel experiments, so that their research on wind climate, model laws, terrain roughness, and shelter effects formed the scientific platform for Risoe? s work on the Danish and European Wind Atlas which was initiated in the late 1970s. Risoe National Laboratory also occupied the approval job for different types of wind turbines (Andersen, 1999).
In order to ensure that the government supported turbines also had a certain quality and safety, legislation on type approval for wind turbines was established. Today more than 100 scientists and engineers are working for the institution which has an important department in wind energy with considerable interactions with the wind energy community worldwide. Risoe? s work on turbine safety has been important in ensuring the reliability of modern wind turbines (Krohn, 2002). On May 4th 1978 the Association of Wind Turbine Owners was formed, and the first Wind turbine guild or cooperative was established in 1980. 6. 3 The Wind Energy Cluster in the 1980s
The Gedser wind turbine itself was built and financed by the power company SEAS. In the early 1980s Danish power companies took early interest in wind energy and in large wind turbines and built two experimental machines, one pitch regulated and one stall regulated, of 630 kW each. But the cost of energy from the large turbines was so high that series manufacturing was not even envisaged (Krohn, 2002). Riisager's and other manufacturer’s success motivated some manufacturers of agricultural machinery to enter in the growing turbine manufacturing sector which provided promising commercial possibilities. Among these companies were Vestas, Nordtank, Bonus (now Siemens Wind Power), Nordex, and later Micon (Krohn, 2002).
The Danish Wind Industry Association, a non profit association, whose purpose is to promote wind energy at home and abroad, was founded in 1981. Manufacturers soon became members of the association so today there are more than 220 members across Denmark. The condition of receiving the 30% construction subsidy from the government was that the turbine had been approved by the new test station for small turbines set up by the Risoe National Laboratory. The Role of Risoe National Laboratory so changed from being that of a controlling entity to a more technology-mediating unit. In 1982 the test station issued the first combined load paradigm, which established that all wind turbine components had to be dimensioned for twice the load compared to the traditional norm.
The result of this policy was that the Danish wind turbines gained the reputation for being reliable and robust (DWIA, 2008). The Wind Energy Department of Risoe National Laboratory became worldwide known for its expertise with tight connections to the Technical University of Denmark and also increasingly connections with Aalborg University (electricity aspects). Gains of productivity thanks to the European Wind Atlas in the years 1980 – 1985 could be realised by better sitting of wind turbines. The Danish type approval certification scheme has been a very dynamic tool to foster better design procedures in wind turbine manufacturing companies.
It has also been important in winning the confidence of professional investors worldwide (Krohn, 2002). In the early 1980s the State of California began a programme of supporting wind energy development. Danish manufacturers having the longest track record had already developed several generations of successively larger machines in small series. The California market expanded dramatically, allowing an enormous volume of production of wind turbines. The Danish manufacturers supplied thousands of turbines to the USA from 1982. Bonus, Vestas and Nordtank all participated in the wind boom launched in California until the market came to an abrupt halt in 1986. The problem was that manufacturers had become dependent on a single market.
When the California wind programme ended in 1985-1986, a large number of the 20-odd manufacturers went bankrupt because they had few alternative markets for their products (Krohn, 2002). The economic collapse in the industry caused an elimination race in the following years. All the small manufacturers disappeared or were taken over by Vestas, Bonus, Nordtank, Micon and Nordex. Thus began a long haul for the remaining manufacturers, who then tried to broaden their market base to include several countries (DWIA, 2008). 6. 4 The Energy Policy of the Danish Government since the 1980s/1990s In 1985 the Danish government decided that nuclear power should not be an element of future energy supply.
Beside the 30% subsidy of the construction costs for wind turbines which endured until 1989 the government began, since the mid 1980s, to push an active agenda with the aim to implement renewable and diverse energy sources (Meyer, 2007). In a 15 year plan for large scale implementation of wind-generated electricity countrywide the government pronounced the country’s goal of meeting 10 per cent of Danish electricity consumption by wind in the year 2005, implying an installed base of 1,500 MW of installed wind capacity (Sharman, 2005). Danish government had very wide ranging powers for regulation of utilities. These regulations took many forms, including energy efficiency and demand-side management measures.
Integrated Resource Planning was an integral part of the procedure through which the power companies obtained permission to install new generating capacity. Other measures included price and accountancy controls. The government had ordered the utilities to install 400 MW of wind power on land to date. The first two orders of 100 MW each were already issued in 1985 and 1990. The latest onshore order for 200 MW to be completed before the year 2000 was issued in 1996. In 1998 a new order was issued for 750 MW of offshore wind power. The Danish energy plan “Energy21” from 1996 set up a target of even 4000 MW of offshore wind power in 2030 (Krohn1, 2002).
To avoid disagreements between utilities and wind power producers over conditions for grid connections and tariffs, the Danish government introduced in 1992 regulations about the feed-in tariff, which was fixed at 85% of the utility production and distribution costs (Meyer, 2007). 6. 5 The Cluster of Modern Wind Turbines since 1990 In the early 1990s Vestas, Bonus (now Siemens), Nordtank, Micon and Nordex represented the wind turbine manufacturers in the Danish cluster. Most of them had a track record of more than 10 years. The size of the wind turbines grew enormously in a perpetual race to develop renewable energy which was capable to compete with the conventional technologies in terms of electricity output and price. At the beginning of the 90s, the average wind turbine had a capacity of 200-300 kW, which had grown to 1-2 MW in the late 90s.
Successful domestic turbine manufacturers became world leaders in the wind turbine production (DWIA, 2008). A service sector to maintain and repair installed equipment developed. The industry left, after further consolidation, two large manufacturers in Denmark, Siemens Wind Power A/S (owned by German Siemens AG) and Vestas Wind Systems A/S and several businesses which are involved in the industry and organised in the Danish Wind Industry Association. In 1991 the Vindeby offshore wind park opened and in 1995 the wind farm at Tunoe Knob, equipped by Bonus and Vestas. The offshore market played a more and more important role for the cluster and 95% of the offshore installed turbines are of Danish origin (DWIA, 2008).
In 2001 Danish wind turbine companies had a market share of 50% of the world market (Krohn, 2002). The percentage of electricity provided by wind power rose from less then 5% in 1995 to almost 20% in 2003. The total installed base of wind power was some 1,100 MW at the end of 1997. This made Denmark to the third largest wind power country in the world. All turbines were produced domestically. In 1997 there were 10,000 people employed in the wind power sector, a number that grew up to 23,500 in 2007. In 2006 the Danish Wind Industry Association created the Talent Factory to improve the career opportunities among engineering students (DWIA, 2008).
More than 80% of the 6,300 wind turbines in Denmark were owned by energy co-operatives, or individual farmers. 150,000 Danish families owned wind turbines or shares in wind co-operatives in 2002 (Krohn, 2002). 7. Description of the Wind Energy Cluster Today Denmark hosts some of the world’s largest wind turbine manufacturers. Vestas Wind Systems, a truly Danish company is situated in Denmark (Vestas). Furthermore, German Siemens Wind Power and Indian Suzlon have established their global head quarters in the country (Siemens, Invest in DK1). Also German Nordex (formerly Danish) and Spanish Gamesa have established respectively offices and R centres in Denmark (Nordex, Gamesa).
These are big global players; In 2008 Vestas counted for 19% of the world market, Gamesa for 11% and Nordex and Siemens 7% respectively (EcoSeed). Other smaller manufacturers are Norwin A/S, Wincon A/S and Gaia Wind Energy A/S. There is a strong branch of associations connected with wind energy and among them are the Danish Wind Industry Association (www. windpower. org), Danish Energy Industries Association and Danish Wind Turbine Owners’ Association. In 2007, wind energy in Denmark produced about 7,173 GWh. This corresponded to 19. 7% of domestic energy supply or to the consumption of about 2. 03 million Danish households, compared to 16. 9% in 2006 and only 1. 9% in 1990. In 2007, wind power capacity accounted for 3,124 MW (i. . 24. 1% the total electricity capacity), 424 MW being offshore wind turbines. In 1990 wind power capacity was 343 MW (Energy Statistics, 2007). Projections by the Danish Wind Industry Association estimate an increase of the yearly instalment of new capacity of about 17% by 2011, reaching more than 200,000 MW. As far as offshore turbines are concerned, 7,600 MW are expected to be installed by the same year (EREC). Wind turbine manufacturing, maintenance, installation and consultancy services account for some 16,000 jobs in Denmark, while component supplies and installation of these Danish turbines currently create another 8,000 jobs worldwide.
The global job creation of Danish wind turbine companies are substantially larger than these figures indicate: only about 9 billion DKK (1. 2 billion EUR) is due to turbines manufactured in Denmark. The rest are manufactured in Germany, Spain, India, Italy, and the U. S. , i. e. in countries where there is a substantial home market (Krohn, 2002). 7. 1 VESTAS: World’s no. 1 Turbine Manufacturer As Vestas is the world leader on the global market for wind energy and one of the key drivers of the Danish wind energy cluster a short description of the company will be given. Vestas was founded in 1898 by H. S. Hansen, a blacksmith, in Denmark. He and his son manufactured steel windows for industrial buildings.
In 1945, his son established the company VEstjysk-STalteknik A/S, whose name was shortened to Vestas. In 1979, Vestas delivered the first wind turbines. Vestas have installed over 39,000 wind turbines in 63 countries on 5 continents. In 2008, Vestas installed a new turbine every three hours worldwide, generating more than 60 million MWh a year. Vestas has developed from a pioneer in the industry with a staff of around 60 people in 1987 to a global, hi-tech and market-leading company employing more than 20,000 people. Vestas reached revenues of EUR 6,035 million with operational margin of 11. 1% in 2008 and they got global market share of 19% (5,581 MW).
Vestas’ core business comprises the development, manufacture, sale and maintenance of wind turbines. Their expertise in modern energy covers more than just wind turbines. They specialise in planning, installation, operation and maintenance. Their competencies cover everything from site studies to service and maintenance. Vestas is distinguished by a high degree of vertical integration. At the same time, production and sourcing are carried out as close to the market as possible. In 2008, Vestas opened the world’s largest research and development centre for wind energy in Aarhus (Denmark) which will house more than 900 employees (Vestas). 8. Wind Energy Cluster – Cluster Diamond
Now Porter’s Diamond model will be used to analyse the competitive strengths and weaknesses of the Danish wind energy cluster. 8. 1 Factor Conditions Factor conditions important to the wind energy cluster are the natural resource in form of wind conditions and the scientific base as well as human capital within the field of wind energy. Denmark has relatively modest to good average wind. Onshore wind resources are highest in the Western part of the country, and on the Eastern islands with coastlines facing South or West. The country has very large offshore wind resources and large areas of sea territory with a shallow water depth of 5 to 15 m, where sitting is most feasible. These sites offer higher wind speeds (Krohn1, 2002).
The relatively good wind conditions have been an advantage in the past when the wind energy cluster was growing and still operated primarily in the home market. As the operations have gone global the Danish wind conditions are not so important anymore. In stark contrast to Germany, Sweden, the USA, Canada, and the UK, publicly financed R projects played a relatively minor role in initiating the early development of the Danish wind turbine industry. The early stimulus came in the form of investment grants, supporting market development for small scale privately owned turbines. Later, the Danish Government and the EU have financed a significant number of basic research projects, and given some support to development projects (Krohn, 2002).
One of the reasons for Suzlon to establish its global headquarters in Denmark was exactly the specialised knowledge the country possesses. The chairman of Suzlon declared: “Denmark is global leader in know-how for wind-energy. That is why our global head quarter will be here. ” (Invest in DK1). On the educational front, the universities offer specialized wind engineer educations and the research centres offer various training courses targeted especially at the wind energy industry, for instance the Technical University of Denmark (DTU) – Wind Master Education; Aalborg University – Wind Master. Engineering College of Aarhus (IHA) has developed a specialisation in wind turbine construction with the main focus on mechanical components (DWIA, 2008).
Risoe Wind Energy Department, University of Aalborg and University of Aarhus have jointly established a knowledge centre - Danish University Wind Energy Training (DUWET) which offers a research based supplementary education for employees in the wind industry. DUWET collects wind energy knowledge and research and offers courses and specialist training for anyone in the industry. A consortium consisting of the research centres Risoe National Laboratory, Danish Hydraulic Institute (DHI), The Technical University of Denmark (DTU), and Aalborg University form a national power centre within wind energy research and thus a vital part of the wind energy cluster. Therefore, the scientific base for the wind energy cluster is highly developed and provides the cluster with highly skilled labour. 8. 2 Demand Conditions
Denmark is somewhat unique among wind turbine markets, since the market really grew out of a popular interest in alternative generating technologies, partly in opposition to the use of nuclear power, partly as a result of the energy supply crisis in the late 1970s, when oil prices skyrocketed due to OPEC action and political and military unrest in the Middle East. The well-organised Danish wind turbine owners have been a very important driving force for debugging and improving Danish wind technology in its earlier years (Krohn, 2002). Private individuals, either as members of wind energy co-operatives, or as owners of a wind turbine (farmers) account for more than 80% of the 5024 wind turbines in Denmark (DWIA, 2009). This number shows the strong interest of Danes in wind energy and their support for building new wind farms.
The Danish home market is what created the modern Danish wind industry originally, and gave it the testing ground to sort out both wind technology and manufacturing technology. The openness and interest of the Danish consumers have definitely supported the demand in the early years of the cluster and pushed its development. Today few wind turbines are set up in Denmark compared to the world market and the local demand has lost some of its importance. 8. 3 Context for Firm Strategy, Structure and Rivalry Danish energy policy has indirectly played an important role in fostering the commercial success of the Danish wind industry. The Danish energy policy for renewable energy has been a model for many markets in the world.
In countries as close as Germany, France or Spain and as remote as China or Argentina Danish support schemes for renewable energy have been copied and/or adapted to local circumstances. Danish long-term energy planning such as “Energy 21” has been widely quoted throughout the world. One of the basic reasons why wind energy has such a prominent place in Danish energy planning is the need to reduce greenhouse gas emissions. According to the Kyoto Protocol Denmark has to reduce emissions of greenhouse gases by 21% in relation to 1990. The targets apply from 2008 to 2012 (COP15). More than one third of that target is being met using wind energy to replace coal-fired power generation (Krohn3, 2002). Thus, the Danish policies give good conditions for renewable energy companies.
Denmark has introduced feed-in tariffs for renewable energy plants connected prior to 21 April 2004. Renewable energy plants receive the spot market price plus a subsidy to provide a guaranteed price of 8. 1 eurocents/kWh, applicable for 20 years from date of connection. Renewable energy facilities connected after 21 April 2004 are getting production incentives. Wind plants receive the spot market price plus a 1. 3 eurocents/kWh production incentive which will be applicable for 20 years from the date of connection. Moreover, additional subsidies of 1. 6 eurocents/kWh are provided for new facilities that replace decommissioned wind turbines 450 kW and smaller (Porter, 2006).
The Energy Agreement of 21 February 2008 contains an objective of increasing the percentage of renewable energy to 20% of the gross energy consumption by 2011. In the projection, the renewable energy share in 2011 is 20. 5% (Energy Statistics 2007). Improvement of incentives to encourage the installation of wind turbines is among the initiatives which will follow up the political accord of 21 February 2008. The new act comprises the framework for overall local government planning for wind turbines and a guarantee fund of DKK 10 million to subsidise the funding of local wind turbine guild preliminary investigations etc. and a model for local co-ownership.
In connection with onshore wind turbine planning, the government will enter into an agreement with the National Association of Local Authorities in Denmark on municipal planning for 75 MW each in 2010 and in 2011. In addition, work is being done on establishing a payment scheme which will cover neighbours to onshore wind turbines for losses in property values as a result of wind turbine installations. The continued expansion of offshore wind turbine facilities will make an important contribution to achieving renewable energy targets. The work of offering two offshore wind turbine farms of 200 MW each or possibly one farm of 400 MW started in 2008 with a view to commissioning in 2012.
In addition, work started on the updating of the offshore wind turbine action plan, which examines the location of new farms, the possible adjustment of the tender model, considerations of previous building maturity and open doors with payment as onshore turbines. Subsidies for new wind turbines will be increased to 25 oere/kWh for 22,000 peak load hours and 2. 3 oere/kWh in balancing costs and 0. 4 oere/kWh for the “green fund” (Energy Policy Statement, 2008). Rivalry can hardly be explained on a local level anymore as the wind turbine manufacturers have gone global and are operating all over the world today. In the earlier stage of the cluster, rivalry on the Danish market was tense – resulting in many take-overs and mergers and ending with one single true Danish company, Vestas. 8. 4 Related and Supporting Industries
The background of the Danish turbine manufacturers was different from wind power companies in the U. S. , Sweden, or Germany. Names like Boeing, Lockheed, Westinghouse, MBB, and Siemens indicate a strong background in aircraft and generator manufacturing. Interestingly, however, practically all of today's remaining larger wind turbine manufacturers have a machinery manufacturing background rather than an aircraft background. Although modern wind turbine technology resembles helicopter technology, the operating requirements are very different (Krohn, 2002). A number of industrial enterprises have developed important businesses as suppliers of major components for wind turbines.
LM Glasfiber A/S is the world's largest producer of fibre glass rotor blades for wind turbines, with an employment of more than 1,000 people. Danish manufacturers of electronic wind turbine controllers likewise have a very large market share worldwide. DanControl Engineering A/S, Mita Teknik A/S and DWC A/S produce controller and communication systems. Svendborg Brakes A/S is a leading vendor of mechanical braking systems. Also Danish subsidiaries of large international industries such as Siemens, ABB, SKF, FAG, etc. have developed businesses in the wind power industry (Danish Energy Authority, 2002). Other industrial service enterprises have created important businesses in servicing the wind power industry.
For example companies are specialised in providing cranes for installations of wind turbines; providing transport of turbines, towers and blades domestically and for export. Service and maintenance of the more than 6000 wind turbines in Denmark is carried out by the manufacturers’ own service departments. But also a handful of independent service companies have been established for instance DWP Molleservice A/S and DanService A/S. Moreover, there are also specialised service providers like banks (Ringkoebing Bank has specialized in financing wind power projects), insurance companies, engineering and management consultancies (Andersen, 2003). The major Danish consultancies in wind energy utilisation are BTM
Consult Aps, E Data, Tech-wise A/S, SEAS Wind Energy Centre, WEA ApS and Tripod ApS (Danish Energy Authority, 2002). Figure 3: Cluster Diamond [pic] Source: Team Analysis 9. Strategic Issues Facing Denmark and the Wind Energy Cluster Denmark is at the moment the leading centre within the field of wind power. However during the recent years a significant change in technology and markets has taken place. Denmark is faced with the challenge to maintain its leading position in spite of growing competition from firms operating in lower cost countries, especially China. The wind energy cluster and the political system must assume a proactive position towards this change to ensure that Denmark will strengthen its position as unique value creator.
Denmark must provide the most effective wind power that ensures its best integration in the accumulated energy system, so that Denmark in the future can still provide wind power technology to energy systems with a large proportion of wind power. The industrial environment is built on a foundation which consists of a significant effort in research and education as well as innovative development focused on environmentally sustainability. This field of wind power is influenced by cooperation and knowledge-sharing to find technological development tracks. Nevertheless this foundation has been weakened regarding the cooperation within the industry, new technological tracks within the industry and education and recruitment.
The Danish research-environment has a leading position within a number of areas, but great challenges in step with the rapid development of international markets put a lot of pressure of the Danish knowledge centre to hold on the talented researchers and students. In order to maintain the unique Danish position, an extraordinary effort must be put in. The strategic issues are focusing on both, development of the wind power industry by improving wind turbines and effectiveness of wind power, and the improvement of the knowledge centre regarding research and education. As innovation and demonstration focusing on the testing of windmills has previously been one-dimensional there are strategic issues to mentioned, that recommend an accumulated strategy for esting and demonstration of components and turbine parts, wind turbines and wind farms and wind power plants in the energy system, so that the facilities cover the whole value chain. Creating one strategy for the whole value chain with sub-strategies for each of the three dimensions would strengthen the integration and the competitiveness of the wind power industry. Another important issue regards the research effort. The long-term university research and education should be strengthened by prioritisation of fundamental or generic technologies that are part of the development of wind turbines and power plants. This also considers the whole value chain, so from turbine part until integration of the wind power into the electricity supply system (e. g. urbine design, blades, wind loads and sitting, integration into electricity supply system and offshore technology). Including a roadmap and measurable criteria for every area, this strategy could be developed by using the existing research environment as a basis and build on the efforts from previous research. Especially offshore technology research should be strengthened and framework conditions for cooperation between research institutions and industry. This could be provided through common guidelines for the frames of cooperation. Following these recommendations, Denmark will be prepared to face the current challenges. 10. Policy recommendations for the appropriate constituencies National and regional authorities
As Denmark faces now serious challenges in terms of the development of their cluster structure, it is essential that respective authorities undertake significant steps in order to prepare the environment for sustainable growth. First of all, it is worth mentioning that authorities have to actively participate in funding of regional growth environments. As well as this, they should encourage and support the emergence of appropriate initiatives, especially in those regions, where other constituencies have already been mobilized. Clusters in Denmark have proven to be a sufficient and effective tool in innovation policy and therefore it is necessary to sustain and improve their presence.
Next, authorities have to focus on building sound economic framework, in order to create investment-friendly environment. As inflow of capital is inextricably connected with Denmark clustering strategy, it is necessary to maintain an incentive-oriented structure of attracting new investors. That step is also crucial in case the authorities are unable to further finance certain projects. Therefore, respective responsibilities have to be shifted to private sector. Companies and trade associations With the emergence of clusters, companies are starting to play increasingly more important role. They should – along with trade associations – be able to clearly formulate their needs and be able to influence the authorities to implement them.
As well as this, it becomes their responsibility to focus more on investments in innovation. That is why it is necessary for respective companies and supporting associations to work together in creation of competence and knowledge centers. Universities As far as academic involvement is concerned, universities specializing in certain arts should play a supportive role in development of clusters. It has proven to work in the past, as Copenhagen Business School provided companies with field research and required theoretical frameworks. Therefore, the ties between academic and business world have to be tightened, so as to achieve a 360-degree cooperation of all the constituencies involved in projects. 11.
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