Energy markets

“The value-added chain will change significantly”

Interviewed by Jörg-Rainer Zimmermann, 15 Feb 17
…says Stephan Reimelt, President GE Germany & Austria. Today, even globally active companies have to appear on the local and regional stage, Reimelt believes.

new energy: The energy transition has become the ‘Great System Transformation’. What effect does this have on Germany’s economy in your opinion?

Stephan Reimelt: The first phase of the energy transition is behind us. The next phase is now the realization of major infrastructure projects, such as the construction of transmission grids and offshore platforms to transfer wind energy to the shore – these are multi-billion euro projects. In addition, the topics of heat and mobility are moving into focus. The ongoing changes are leading to a massive reorganization of Germany’s economy. The effects on the future direction of the key economic aspects are uncertain. An example from the automotive sector can illustrate the massive influence this transformation has on the German economy – the value-added chain will change substantially in this sector. For instance, the Tesla electric engine no longer comes from Germany. And the combustion engine, not the chassis, is the key issue for German carmakers. As a result, companies need a good plan.

ne: How is the global player GE positioned in Germany?

Reimelt: Germany is an energy lab for us. Like in a burning lens, we try to understand what could happen globally in the energy segment in future. Decentralization, renewable energies and now digitization are the buzzwords in this context. GE has understood that the company has to provide more flexible, and consequently, faster responses. In this context, GE has, for instance, sold its financial unit – which was, after all, one of the biggest banks in the US. By now, the focus has shifted towards topics such as digitization and 3D printing. Additive manufacturing is an essential component of GE’s transformation. Just recently, GE announced the acquisition of Concept Laser GmbH headquartered in Lichtenfels, Germany, and of Arcam AB from Mölndal, Sweden. GE intends to become one of the world’s largest software companies by 2020. And, of course, the technology sector – both conventional as well as renewable – has been given a boost. We have expanded this portfolio by segments such as offshore and grid solutions, not least with the acquisition of Alstom. We have significantly diversified in Germany – from four customers that controlled 70% of the energy market to more than 1,000 customers, including municipal utilities. We have created a municipal utilities team and developed our product portfolio accordingly.

ne: Can you specifically tell us your strategy for Germany? What are your priorities with regard to further business development?

Reimelt: Our priorities are certainly renewable energies and decentralized energy supply – in other words, cogeneration plants on the basis of gas-powered engines. That is the general direction. We need gas as an energy source to make the system more flexible. Wind is the major topic when it comes to renewables. This includes all sorts of additional subject matters such as inverters, power quality, transmission, storage technologies and many more. We consider Germany a fragmented, highly-developed market. The question is, when will governmental subsidies of the energy transition lead to an economic return? In other words, when will the investment pay-off economically? In Germany, we are currently committed to the topic of dismantling nuclear power plants. We can offer a lot in this regard, but have to position ourselves locally. The regulations in Germany and Europe are radically different from those in other regions of the world.

ne: Is Germany’s energy transition still a test bed for innovation?

Reimelt: Years ago, I coined the slogan that Germany is this important because it is the world’s largest energy lab. I still stand by that. Germany has the know-how and the necessary engineers. The country also has a high population density, there is much that can still be tried. In addition, there is a strong political will to meet the climate targets by 2050. I do not think this determination is as strong globally as it is in Germany. This is creating pressure in combination with the nuclear phase-out. I find this exciting, and much is being done. As a result, we have doubled the size of our European group research center in Garching near Munich over the last few years. However, the German way as a blueprint for the entire world is unlikely. Here, we have an installed capacity of 200 gigawatts, 100 GW from renewable energies, 100 GW from conventional technologies, and we only need 34 gigawatts in the summer. I expect it will become difficult to transfer this model to other countries. However, GE has to ask itself what the economic model looks like. It should be said that politics are the driving force creating the framework. It is also the driving force of great volatility in this segment, and that is hard to control, particularly given the average duration of our projects.

ne: German utilities are restructuring, but this takes time. The outcome is still unclear. GE is a major company, but this volatility does not seem to overly concern you.

Reimelt: I have been with GE for six years, and I would indeed say that I hardly know another company that can adapt to changing framework conditions with such rapid portfolio adjustments. However, there is no trend that we currently see in Germany and that has already been realized in another country. We have found a different structure in Germany, markets are more fragmented, not least due to more than 1,000 municipal utilities. Global players now have to act as regional companies. A local and regional focus is a decisive factor. And that applies to all of Europe – I see Europe as a Europe of regions, not of countries.

ne: Will the probably inevitable market cleansing not lead to new concentration? Will the market of the future not be dominated by eight, ten or twelve major companies instead of four?

Reimelt: Naturally, there is high volatility in transformation processes. This, in turn, happens on a market that is only growing slowly on a global scale. Consequently, there are many opportunities for small or medium-sized companies. Take the municipal utilities, for example. Out of more than a thousand of them in Germany, there are a few that are extremely innovative and have the necessary financial capacity. Those are our customers, at least 250 of them. We must not neglect them. In addition, we maintain 2,500 cogeneration plants in the business segment of the Jenbacher gas engines, at least 800 of them in the biogas sector.

ne: What share do renewables account for in GE’s German portfolio?

Reimelt: GE supports the energy transition in Germany with more than 2,000 onshore wind turbines and more than 2,500 Jenbacher gas engines. We will also focus on the topic of hybrid power plants in future. There will certainly be some conventional power plants in Southern Germany to ensure grid stabilization. The remainder will be renewable.

ne: What if the feed-in priority in Europe was to be abolished?

Reimelt: At GE, all technology-related issues are driven by the aspiration to eventually stop the subsidizing of renewable energies. This will become a reality. Looking at the international situation, it turns out the industry can already build photovoltaic technology working at a scope of 3 cents per kilowatt hour. This is a question of scalability, and a lot of progress has already been made in this regard.

ne: So, this would mean the pricing is partly determined by the declining results in certain divisions of GE?

Reimelt: Why? We are well-positioned in the photovoltaic segment. Our inverter plant in Berlin has pending orders amounting to several gigawatts. It is true that our sales of H-class gas turbines may not remain stable at previous levels in Germany. But this is not part of our plans anyway. Apart from this, our H-class is going very well. Next year, we will have a record delivery volume outside of Germany.

ne: Let us take a look at bioenergy. In many other countries of Europe, this segment has a better standing than in Germany. But many business models will be acutely threatened if the feed-in priority was to be eliminated…

Reimelt: Certainly. But this is market volatility. These questions must be addressed by companies and national economies in view of the systemic shift. This will not be painless. That also applies to Germany.

ne: Digitization is one of the core topics for GE. What will the IT solution ‘Predix’ contribute to the wind energy sector?

Reimelt: Five years ago, we found that GE needs a software platform to cover technology procedures, such as the supply chain, in their entirety. We did not initially intend to develop the platform ourselves, but there was no existing solution to be found on the market. The solutions offered by Silicon Valley were not technology-driven, and they were unable to track business data in real time. But this is needed nowadays. So, we developed our own platform. If we had not done this, GE would likely have lost a number of large service orders.

Predix is an IT platform that can be used to gather and analyze industrial data on a vast scale. This way, companies can detect anomalies while plants are being actively operated, for instance, and study future conditions in a model-based review. This will contribute to enhancing availability, increasing productivity, and reducing maintenance costs. In terms of anticipatory maintenance, we can also predict the failure of certain components. It should be noted that digitization does not mean automated production for GE. It means completely new business models. We can sell turbine availability, which means that a customer will obtain wind power without having to buy the turbine. We can also compare the availability of all wind farms operated by GE across Germany in real time. We know their workload, their downtimes, and the respective reasons.

Ultimately, this type of asset performance management offers a real added value for fields such as the operation of components, in factories and in the provision of services. Furthermore, we can offer to invest in the customer’s power plants. We optimize the returns, and the gains are shared with the customer. That is only possible thanks to digitization. Of course, we also had to find regional solutions, for Germany in particular – for instance, with regard to the question: who owns all the data stored in the cloud?

ne: However, capacity is not likely to be purchased by a citizens' energy company, is it?

Reimelt: Our client base is changing, of course. Our clients in the area of renewable energies used to be farmers and medium-sized businesses. These days, investment funds make up a large number of our clients. They are interested in how we can improve their business models. So this is what we are working on.

ne: Will this market in future be dominated by two platforms – namely ‘Predix’ and Siemens’ ‘Mindsphere’ – similar to the situation of Android and Apple?

Reimelt: I do not think so. There are likely to be many collaborations. In the past few weeks, for instance, we announced partnerships with Schindler, Bosch and SAP, with additional ones to follow. Having granted our global clients access to Predix in February 2016, there are currently already 20,000 developers active on the platform. More than 100 applications have been developed via Predix. Collaborations are the future anyway. Look at Apple, Google, Facebook and Amazon. These four companies compete. Combined, they are larger than the German DAX, even though none of these companies even existed 15 years ago. The way software is developed will change as well. In future, a company will not be able to work on software development by itself, simply because the pace of development is accelerating dramatically.

ne: What is your strategy for the wind energy sector in particular, what market share are you striving for?

Reimelt: Over the past few years, we have been able to significantly increase our market share in Germany, and we will close 2016 with a very positive result. We explored new approaches to service but also in relation to our turbines. We developed a weak-wind version of the GE 2.75 wind turbine specifically for the German market. Again, the keyword is regional focus. We produce in Germany for Germany. Have a guess, how many turbines does a GE wind farm comprise on average in this country?

ne: Five turbines?

Reimelt: The answer is 3.6 turbines. You see, it is a very local business. When I started at GE, we did not want to construct any wind farm with less than ten turbines.

ne: Small wind farms, possibly located far away from the grid: this could prove difficult with the future tendering process. How important will Germany be to you as a sales market in future?

Reimelt: I am absolutely convinced that Germany is one of the most important markets in terms of technology, and the most important market in Europe. Since 2011, we have tripled our revenues in the energy sector. About 2,000 onshore wind turbines have been installed by GE in Germany to date.

ne: If I understand this correctly with regard to the tenders, you are planning to once more cut costs in relation to the wind turbines…

Reimelt: The subject of cost cutting is very familiar to us. Look at how fast this sector has developed: from the onshore wind turbine GE 2.75 to the GE 3.4. These were giant leaps. We take the topics structural streamlining and process simplification very seriously at GE. It is not all about cutting costs, of course, but also about improving performance, there is still more scope for that. We will have to look into larger and higher turbines. Weak-wind turbines will remain an important subject for us in Germany.

ne: Some recent reports said that production at the Mannheim plant could be closed down. What are your growth targets in relation to revenues and the number of employees in Germany?

Reimelt: After GE’s acquisition of Alstom’s energy divisions, various measures have been initiated throughout Europe in the course of their integration into the company as a reaction to the changing market conditions in the energy sector. This also affects the production of gas and steam turbines for conventional power plants at our Mannheim location. Overall, GE as well as Alstom’s energy divisions made significant investments in Germany in the past three years. We will continue investing in technology and product development. This year, for example, we have once more significantly expanded our research center in Garching.

 

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