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•Objective of the study: Analysis of the production costs of V82 – 1.65 MW wind turbine, manufactured by the Danish company Vestas, from a reverse costing perspective. •The V82 has a nominal rated power of 1,65 MW and is a 3-blade horizontal axis wind turbine.•Usually used at onshore locations as it is designed for sites with low to medium wind conditions. As can be seen in the Table, the cut-in wind speed is 3,5 m/s and nominal wind speed is 13 m/s, which shows that the turbine is not well suited for very windy locations.

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• Product costing as the process of estimating the value of a cost object in terms of costs has in practice a variety of methods with different levels of accuracy and complexity.

• In the learning units we are introduced to a classification of product costing methods in Job costing and Process costing.

• Job costing systems assign costs to a distinct unit, batch or lot of a product or service whereas Process costing systems assign costs to masses of identical or similar products or services.

• Due to the fact that it is our task to estimate the costs for a single unit of a product, namely the Vestas V82-1.65MW wind turbine, and that job costing can be used for RE/EE-equipment by manufacturers, this method appears to be adequate.

• Certain adaptations were necessary for the cost estimation of our specific product.

• Our approach follows the logic given in a report on trends in wind turbine prices in the first decade of the 21st century which draws heavily from the financial reports of Vestas; the report was written by a group of authors at the Lawrence Berkeley National Laboratory and the work described in the report funded by the U.S Department of Energy’s Wind and Water Power Program.

• As regards the bottom-up approach we identified specific costs that the company incurred and reported in the observation period, namely the year 2010, which are directly/indirectly attributable to the manufacturing of wind turbines and divided each of these amounts with the number of MW the company produced and shipped in the very same year in order to get the costs

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of produced wind turbines per MW; the result was then multiplied by the amount of MW that our V82 has, which is 1,65.

• Where necessary, further assumptions were made (e.g. for material costs, labor costs) which will be explained in detail in the Costs per Unit section.

• All of these costs were in the end summed up to get the total costs per unit.• On the other hand in the top-down approach we identified the company’s

Order Intake in 2010 in terms of both value in EUR and number of MW; by dividing these two figures we got the average Vestas price per MW which we again multiplied by the amount of MW that our V82 has; given that price is the sum of costs and profit, by subtracting the estimated profit from the estimated average price we again calculated the Costs per Unit.

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- The V82 has a typical structure with three main components nacelle, rotor and tower.- This table gives an overview of the weight of the components, and of the materials used for each component.- The whole turbine weighs 230 tons in total a challenge for transportation and installing of turbine at the plant site.- As can be seen in the pie chart on the right, the tower of the turbine is the heaviest component with 60% of the total weight.

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-As can be seen in the chart, steel is the most important material with a share of 70%. Other significant materials are fiber glass and iron (both 13%). -As was shown on previous slide, the tower consists mainly of steel. Due to the fact that the tower is the heaviest component, it is logical that steel is the material with largest share. It can be assumed that changes in steel prices strongly affect the total material costs.-Material costs will be discussed later in the presentation (Cost Types section).

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-As regards the product structure by factor inputs, raw materials are by far the most important component in all principal wind turbine components, ranging between 60 to even 90 percent of Direct Manufacturing Costs (these will be explained in detail in the next section). Labor on the other hand accounts for a rather modest share (between 5% and 30%). Aside from the final assembly process of the full nacelle (i.e. of gearbox, generators, bearings, and other main components inside the nacelle), which is relatively labor-intensive, only blade production entails significant labor costs.

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• Product costing distinguishes between direct and indirect costs. Direct costs can be attributed to the cost object (which is the output of the company in the form of products or services, in our case the wind turbine) and are directly assigned to it. Indirect costs cannot be directly attributed to the product.

• Based on performed research we conclude that the following cost types cover the majority of costs which incur when manufacturing wind turbines.

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• As shown in section 2) Product structure, wind turbines are material-intensive. • Raw materials availability and changing commodity prices of raw materials

used in wind turbines affect production costs. • Wind turbines are manufactured by original equipment manufacturers, or

OEMs, which design, assemble, and brand their products. OEMs are mostly system integrators. Assemblers must bring together an estimated 8,000 precision parts and components to produce a wind turbine. One supplier might roll large plates of steel into the towers that support the turbine. A second company might make the turbine blades from special carbon fibre materials, and a third might manufacture the electronic computerized control systems.

• Each wind turbine assembler uses different sourcing strategies and levels of vertical integration. Some produce almost all major components internally or through subsidiaries, while others outsource many of their critical components. For instance, some manufacturers produce blades, generators or gear-boxes in-house, while others opt for outside suppliers. Hundreds of smaller companies make specialized parts such as clutches, rotor bearings, fasteners, sensors, and gears for the wind industry. Very high levels of expertise and specialization are required of wind turbine suppliers, with the level of precision similar to that of the aerospace industry. Turbine manufacturers often establish relationships with suppliers in the interest of quality, as a failure in a turbine part can be very expensive to fix.

• One analysis of vertical integration among wind OEMs indicates that Suzlon and Enercon have significant in-house production and high or very high levels of vertical integration; Siemens and Vestas fall in the middle; and GE is less

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vertically integrated than many other manufacturers, relying on outside suppliers for blades, gearboxes, generators, castings and forgings, and towers.

• Vestas‘ towers are mostly bought from sub-suppliers; as regards the nacelle, individual parts are bought from sub-suppliers, however finishing and assembly take place in own factories; the same goes for the rotor hub and the spinner; blades again are completely manufactured in own factories.

• In our analysis Material Costs will include costs for raw materials, consumables and components bought from sub-suppliers.

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• Producing turbine components that match design specifications is the responsibility of manufacturing workers. The wind energy supply chain requires the skills of many different production occupations, including machinists, computer-controlled machine tool operators, assemblers, welders, quality-control inspectors, and industrial production managers. The job duties, skills, and training backgrounds of these workers are similar to those of manufacturing employees in other industries. Because of the relative youth of the wind energy industry, it can be difficult to find workers with a background in wind power; many turbine component manufacturers will hire almost any qualified applicants with a related technical background. Experience in the manufacturing of large machines can be especially helpful. Workers from other backgrounds can be taught on the job how to apply their manufacturing skills to turbine components.

• The U.S. Bureau of Labor Statistics does not have wage data specific to the wind energy industry, provides however median annual wages for selected production occupations in the engine, turbine, and power transmission equipment manufacturing industry group, which includes wind turbine component manufacturing, with wages that should be similar to those earned by workers employed in the wind industry. Of course, wages vary by employer and location.

• Wind turbine equipment and component manufacturing jobs range in pay from about $ 30,000 to around $ 90,000 in the US.

• Average wages for staff working within energy manufacturing in Denmark is

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130,3 DKK/hour + 14% in social costs. Estimation: 1,920 hours work/year. This makes about $47.000/year.

• Labor costs are impacted by labor rates and quantities, and are considered to be endogenous, i.e. largely within the control of the wind industry. Historically they have shown a tendency to rise during times of tight turbine supply.

• In our analysis Labor Costs will include staff costs expensed in cost of sales –wages and salaries, share-based payment, pension schemes, other social security expenses.

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2.1. Energy Input Costs• Wind turbine production is very material-intensive, requiring much energy.• Electricity generated by wind power is regarded sustainable electricity.

However, in a life cycle perspective also wind turbines consume resources and cause emissions to air, water and soil, primarily during the production and disposal stages but also during its use.

• Life-cycle analyses of wind projects find that the amount of electricity generated by the project during its operating phase far outweighs the amount of energy consumed by all other life-cycle phases combined. In most cases, the “energy payback period” is found to be less than a year. Nevertheless, it does take a significant amount of energy to manufacture a wind turbine and transport it.

• In our analysis Energy Input Costs will include electricity, gas and district heating, fuel for transport. Only costs incurred in the manufacturing phase will be included.

2.2. Warranty Repairs• The product warranties, which in the great majority of cases cover component

defects, functional errors and any financial losses suffered by the customer in connection with unplanned suspension of operations, are usually granted for a two-year period from delivery of the turbine. In certain cases, a warranty of up to five years is granted.

• In our analysis Warranty Repairs will include Vestas’ costs for utilized warranty provisions.

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2.3. • OEMs are the major players in the wind industry. These companies conduct

research and development that leads to innovations in wind turbines. New turbines need to be rigorously designed by teams of engineers. Because of the large size of wind turbines, testing the equipment presents many challenges and the design phase is extremely important. OEMs must incorporate new technologies and constantly innovate to stay competitive. After designing a wind turbine, OEMs have to take the turbine schematics off the page and turn them into functioning turbines.

• The cornerstone of Vestas development activities is the wish to increase output per kilogram turbine and to build the turbine using easily accessible materials that can be broken down or recycled.

• In our analysis Research and Development Costs will include development costs reported by Vestas that do not qualify for capitalization as well as amortization and impairment losses on capitalized development costs.

2.4. Selling and Distribution Costs• In our analysis Selling and Distribution Costs comprise expenses incurred for

the sale and distribution of products sold during the year 2010 as well as for sales campaigns, etc. carried out during the year. Also included are, expenses relating to sales staff, advertising and exhibitions.

2.5. Administrative Costs• In our analysis Administrative Costs will comprise expenses incurred during

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2010 for management and administration of the company Vestas, including expenses for administrative staff, management, office premises, office expenses.

2.6. Other Indirect Costs • Other indirect costs refer to machine depreciation, land rent, lease expenses,

property insurance, freight and transportation or any expenses that keep the factory operating.

• In our analysis Other Indirect Costs will include depreciation for plant and machinery and depreciation for other fixtures and fittings, tools and equipment reported in 2010.

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•The slide gives a deeper insight into the bottom-up approach; it shows the link between identified cost types in the previous section and the concrete figures used for the calculations; those were either reported by Vestas in their 2010 Annual Report or obtained from other sources, that is the report on wind turbine prices by the Lawrence Berkeley National Laboratory.•As already mentioned, for certain cost types further assumptions were necessary, which are also pointed out in this slide. •As regards material costs for our V82, we assume that these include Raw Materials and Consumables as well as components bought from other companies, Vestas’ sub-suppliers; in 2010 Vestas reported Raw Materials and Consumables as part of their Inventories worth 800 mEUR; as we learned, no wind turbine manufacturer is 100% vertically integrated, and Vestas is around 50% vertically integrated, which leads to the assumption that the company in addition to the Raw Materials and Consumables in-house had to buy components from suppliers in the same amount; we therefore assume that Raw Materials and Consumables worth 1.600 mEUR are necessary to produce around 4.057 MW of wind turbines. •Vestas reported staff costs of 1.025 mEUR in 2010; these costs are specified as follows: Wages and salaries, Share-based payment, Pension schemes, Other social security expenses; 345 mEUR out of the total staff costs is expensed in cost of sales (34%) and 680 mEUR in research and development costs, selling and distribution expenses and administrative expenses (66%); as further explained in the annual report, Cost of Sales include among other things, direct labor costs; we therefore assume that the majority of these costs are in fact labor costs for manufacturing the 4.057 MW of wind turbines. •It was not possible to derive Energy Input Costs from the annual report; these were obtained from the Lawrence Berkeley National Laboratory report which

uses the Life-cycle analysis of the V82 in order to estimate the energy consumed in the manufacturing stage of the wind turbine and estimates the costs to 51$/kW or 51.000$/MW which we converted into euros by using the IRS yearly average currency exchange rate for 2010 (Internal Revenue Service, U.S. government agency responsible for tax collection and tax law enforcement) •Warranty Repairs refer to the utilized warranty provisions which Vestas reported in 2010; so do Research and Developments Costs, Selling and Distribution Costs, Administrative Costs. •Finally, we learned that many RE ventures are charachterized by very high fixed costs, and thus have to bear high costs for depreciation of assets; we therefore assume that Other Indirect Costs are for the biggest portion attributable to depreciation costs for plants, machinery, tools and equipment used in the manufacturing process.

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• Using the figures from the previous slide we performed the calculations as described in the section on Product Costing Method (each figure divided by 4.057 MW produced in 2010 and multiplied by 1,65MW except for Energy Input Costs which were simply converted into euros); we see that Direct Manufacturing Costs account for around 61% of the total costs, whereas Indirect Manufacturing costs account for 39%.

• Looking at the material costs in more detail, it can be seen that they account for ca. 80% of the Direct Manufacturing Costs. This is consistent with the data presented earlier showing that on average raw materials make about 60-90% of total costs (i.e. turbines are material intensive).

• The calculation details for the top-down approach were already explained in the Product Costing Method section and are again given in this slide with concrete figures obtained from the Vestas Annual Report.

• When comparing the two approaches, we see that total estimated costs per unit are roughly 1,3 mEUR using the bottom-up and 1,4 mEUR using the top-down approach.

• We believe that the difference arises from Other Indirect Costs which were not taken into account, such as land rent, lease expenses, property insurance, freight and transportation – for these costs it was not possible to make similar estimations by relying on reported figures or by obtaining data from other sources.

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• The chart represents a breakdown of wind turbine costs by different components for a 5MW offshore wind turbine which might serve as an orientation point for the cost breakdown for our V82.

• The two most expensive components are obviously the tower and rotor blades, contributing to around half of the total costs. The next largest component is the gearbox.

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