Good afternoon, everybody, and welcome to Wärtsilä Capital Markets Day 2021. My name is Hanna-Maria Heikkinen. I'm in charge of investor relations, and I'm super excited to host this event today. We published our financial targets yesterday, and today we will discuss our strategy and Wärtsilä future direction in a more detail level. Our agenda has been divided into two main parts. We will start with Wärtsilä's strategy, which consists of two main themes, transform and perform, and our CEO, Håkan Agnevall, will go that through in a detail level. After that, our CFO, Arjen Berends, will discuss our financial targets and actually our plan to reach those targets. After those presentations, we will host a Q&A session. Then we will have a small break, and after that break, there will be deep dives to two of our segments.
We will start with Marine Power and then continue with Energy Business. After those presentations, there will be another Q&A session and also Håkan and Arjen will join that. Please remember that you can ask questions via the chat already during the presentations. Time to start. Please, Håkan.
It's a privilege to be here with you today, both physically and on the line. As an incoming CEO, I have had the opportunity to start meeting with customers in different parts of the world, on energy side, on the maritime side. I start to meet with our team members, also start to interact with politicians and policymakers, and also with you, our investor community. Some reflections from my side. I mean, first, COVID continues to significantly impact Wärtsilä, both on the maritime and energy side, and it will continue to do so also going forward. If we look, and when I listen to customers, to our employees, we have some pretty exciting opportunities in Wärtsilä going forward. Today we're gonna talk about those opportunities.
If I were to sum up my experience ten months into Wärtsilä, and what I feel and what I see, if I sum it up in one word, it's excitement. What is that we are so excited about in Wärtsilä? This is what we wanna show. Let's look at this. The world is changing, and we are a technology leader in an era where technology is evolving very rapidly, and technology and people will help us to get closer, at least to the Paris Agreement, and will help us to evolve in the decarbonization journey. This will give Wärtsilä a real opportunity to support our customer, and this will give Wärtsilä a real opportunity to create shareholder value. Decarbonization will transform the world.
Electric generation will grow with a factor of three, and renewables by 8, because renewables are clearly the way forward when electricity generation is growing. The need to grow generation is driven by the electrification of new industries. It's driven by the electrification of transport industry. That development will only continue. With increased share of renewables, the balancing power will increase significantly and with a factor above 10x. That's energy. If we look on the maritime side, we will see an unprecedented rate of change in the maritime in the coming decades. It's all driven by the decarbonization journey. There are regulations coming in, but there is also a demand side evolving for the green fuels and for the green transport.
In this environment, the good news is that Wärtsilä, we are a pioneer and a partner for the new technologies that will evolve. We are already today a leader in the traditional, but also in the future fuel, which will evolve a lot about fuel efficiency and fuel flexibility. We are a leader in performance-based and outcome-based services. On the energy side, we have a leading position in balancing, both on the thermal side with our combustion engines and with our battery storage and energy storage business. One word that you will hear a lot today is power system optimization because that is what is gonna be in the future to drive energy efficiency and the lowest cost per megawatt hour.
We are also pioneering for other technologies, like the electric, the hybrid, like fuel cells, like energy-saving devices, and there we are partnering up with different players. Finally, carbon capture is coming, and we are also pioneering that space in the marine sector. Really exciting opportunities. A lot of exciting technology. The other positive news, I think we are set for performance, and we are well-positioned to leverage the growth when the market is coming back and then when the market continues to grow. We have defined our strategy. We've been working now for a number of months to define our focus going forward, our roadmap going forward.
We have been talking and discussing the Wärtsilä Way, which is our strategic framework, and I will come back to that later on, which is basically the roadmap to the future, and I really wanna share it with you. We are evolving our culture around performance. We also gonna be crystal clear on our capital allocation and work actively with portfolio management. Now, we have a roadmap, so where do we wanna go? As you know, we have communicated new financial targets, and if you look on the growth avenue, we are looking at 5% annual organic growth, and I should say that is over the business cycle. We have also communicated our new profitability goals, which is 12% operating margin. The comparable, where are we today? We are around 6%.
We are gonna travel from 6% to 12%, which we think are perfectly manageable. It's forward-leaning targets but clearly achievable targets. I know many of you are gonna ask me, "So Håkan, that's fine, but what about the timing? When will you achieve those 12%?" I'd say it's gonna take us a few years to get there because we are right at 6%, and we wanna go to 12%. Setting targets for a global company like Wärtsilä, it's not only about financials, it's also how we can contribute to the decarbonization journey in a very concrete manner. One is about that, and that is the biggest lever. It's how we can contribute to our customers. This is where we have our biggest carbon footprint, our products.
What we have said is that we really want to have a product portfolio ready for zero carbon fuels by 2030. Of course, we also need to walk our own talk, and we have also set an ambitious target of being carbon neutral in our own operation by 2030, and that will be a stepwise journey in the coming years. Good. We are also moving into next phase with Wärtsilä, and we have a proud history, and if we look at the different phases, we cannot go all the way from where we started, but if we look at the recent history, you could say we had one era where we successfully made acquisition. We grew our service business. We expanded from the engine business into propulsion.
We moved into another area where we very much focused on becoming a total solution provider, so we expanded our product portfolio into environmental solutions, and we made acquisitions in electrical and automation. Coming into 2021, we have gone through a time period with focus on smart marine and 100% renewables, and during this time, strong focus on the digital solutions. We also faced negative deviations, let's be clear about that. There's been action taken. We have created the end-to-end value chain with a very strong ownership of the end-to-end business, and we have also done divestments of the business. Now, when we move into the future, it is about shaping the decarbonization of marine and energy, and it's about customer focus in this era of change. It's about service focus.
It's about technology leadership and technology partnering. It's about organic growth and continuous improvement. Going forward, I will talk briefly about how we see our two major industries evolving, and then I will move into the two strategic themes that we have, transform and perform. If we start with a quick overview of our industries, marine will transform with an unprecedented speed compared to the past. We look at the regulatory environment, IMO set targets for 2050. 2023, new regulations are kicking in that will start to really take bite in the decarbonization journey. If they are sufficient, that we can discuss, they will continue to bite. You're all aware of the Poseidon Principles. It's very important for the financing side.
The cost of carbon will certainly involve. We are all aware of EU ETS for 55 proposal to include maritime in the carbon tax regime. We see there will be regulations evolving continuously going forward. Maybe even stronger than the regulatory context is the business demand for green transport. That will be driven by life cycle or life by high-profile consumer brands and retailers that want to have green transport as their customer offering or commitment to us as consumers. It will also be driven by all of these companies, including Wärtsilä, that are formulating their decarbonization targets, looking through their value chain, and wanting to work with green transport as part of their decarbonization journey. It's both regulatory and business opportunity.
Technology is evolving fast, and it's gonna be about carbon neutral and zero carbon fuels. The carbon fuels will still be there for many years, but it's not only about fuels, it's about electric solutions with hybrid and battery systems. It is about the abatement technologies and the new steps into the abatement technologies. I would say that the couple of general themes, one is fuel efficiency. The new fuels, estimates are, will be two to four times more costly than the current fossil fuels, which will lead to strong focus on efficiency. The other key element is fuel flexibility and upgradeability. You need to be able to use different fuels depending on where you travel in the world. If you invest in an asset, you don't wanna be stuck with stranded assets.
Maybe for a vessel, you want to be able to upgrade and shift in seven, eight, 10 years down the line. Now, the other key element is connectivity and data, and this is evolving in all industries, but certainly in marine as well. Vessels are data pools, and we can really use these data pools for the decarbonization journey in optimizing the whole logistics chain, but also optimizing uptime and reliability. This is where we see some really great opportunities, also to support the performance-based agreement, which is a major theme for Wärtsilä. Cybersecurity, the focus will only continue to grow, and we start to see autonomous operations, supporting vessels also, going forward. Those are some of the general trends on the maritime side.
If we switch to the energy side, it is the shift to 100% renewables. Yes, power systems looks different in different parts of the world. In Scandinavia and Finland, we have a lot of hydropower, nuclear power. If you look generally, if you take a broad global approach, the big shift that will need to happen is the shift to renewables, wind and solar. The electricity demand will continue to grow. There will be a gradual replacement of coal and fossil fuel energy generation for sure. Another theme is that the power systems will continue to be more complex. I mean, the past will be big centralized generation assets. In the future, we'll have smaller assets spread in the power system, also generating power at different levels of the power system.
It will become a more complex power system, which needs that you need to work with power system optimization to have the lowest energy cost, to have the stability. This is where Wärtsilä has a role to play. Policy and regulations. I think we all know the commitments, the pledges that has been put out there. We can discuss if they are, you know, fast enough or forward-leaning enough. We know EU 2050, US also 2035, 2050, China, 2060. Personally, I think that these pledges will evolve, they may accelerate. If we talk about Paris Agreement coming out of COP26, I would, it's alive, but it's clearly on life support.
The technology disruption will be very strong because the shift to renewable solar and wind will be strong, and that will drive the need for balancing power because the sun doesn't always shine and the wind doesn't always blow, and you need that balancing power. Green fuels will also be part of the balancing journey going forward. Digitalization will create opportunities to optimize these complex power systems that will evolve. Cybersecurity, I think if I say Colonial, I think we all realize how important cyber will be going forward, and this is clearly a critical theme for that. Those are how we see our industries evolving. You can see some common themes, new technologies, fuel balancing, digital, cyber going across the two industries. Let's now talk about the two strategic themes.
It's about first transform and then perform. Transform the decarbonization transformation that will create new business opportunity for Wärtsilä. It's accelerating, we should also acknowledge that it will go with different speed in different sectors and different regions in the world. This is, if we start here, a marine industry picture. What we are showing here is some simulations or studies we have done together with DNV. We have a close cooperation together with them. On the y-axis, you see the predictions of carbon neutral zero carbon fuel, and how it is evolving through the years until 2050. Then you see two curves.
The first curve, the steepest one, so to say, that is the curve that we actually need to follow if we're gonna achieve the 1.5 degree Celsius target. The less steeper curve or the dotted curve, that is where the IMO regulations, the current regulations will bring us. Then you can have any scenario in between, which is the yellow space, so to say. Now, the key thing here is that fleet owners, they need to make decisions today or in the close future where they wanna go. Because during that lifetime of that asset that they are ordering now or buying now, this will change. The operators, they need to decide who they're gonna partner up with for the coming lifetime of the vessel.
What will be extremely critical, when I am engaged in dialogue with senior leaders in on the maritime operators, they wanna partner up with somebody that can provide multi-fuel capability, upgrade ability, because it's gonna be a journey with blending of fuels. You also want to partner up with somebody that have conversion capabilities. That's the maritime space. Now, if we look at the renewable side, I think many of you knows this curve. I mean, the growth of renewables will be exponential. This is the EIA numbers and some of the scenarios that they have. You can see the share of renewables. You should also consider that at the same time, 100% is growing threefold. It's gonna be a real growth in renewables.
This is the way forward to create a sustainable future because the energy sector provides 30%-35% of the world's CO2 footprint today. Now, what is the way forward? How do we achieve this? I think one starting point, there will be no silver bullet in our view. There will not be one simple solution. I mean, green is not black or white. We are entering into an era with a number of technologies and a number of fuels. If we start to look on the fuels, they will go both into the maritime space and to the energy space, we can start with the carbon neutral fuels, biofuels, methanol. There's carbon-free fuels, ammonia and hydrogen will evolve.
Fossil will be around for many years, and there will be a gradual conversion. Blends, blending will be a major theme going forward. Also the performance-based agreements will be a major way forward to ensure that you meet carbon requirements and fuel requirements. Now, if we then look on specific technologies for the marine side, it's gonna be battery technologies will certainly be there for certain applications, plug-ins, hybrids. There will be different energy-saving solutions. There will be optimization solutions both for the whole holistic system, but also on the vessel level, and autonomous will evolve. On the energy side, it's the growth of intermittent and therefore balancing. Energy storage, the battery storage, will grow significantly, but so will also the thermal balancing.
The reciprocating engine continues to have some very strong fundamentals because it's a energy generator that is very flexible. It's fast to ramp up and down and can do it frequently. It has leading fuel efficiency. Also one thing that we should recognize, I get a lot of questions on this, is that thermal and batteries are complementing because they cater to different needs of the power systems. Sushil Purohit will talk more about that later on. The power system optimization, that will be very strong because when you have all these different renewables, you have some thermal, you have battery storage. How do you bring it all together to make sure you get the lowest energy cost at all times, and also that you have a system that is reliable and stable?
Now, a lot of technologies. The good news, Wärtsilä is very well-positioned in this, the technologies needed for the decarbonization. I mean, already today, we are leader in the carbon neutral and zero carbon fuels. As I said, we are already today ready with methanol and biofuels. We have been in methanol since 2015. We have also earlier communicated our development portfolio and we will come with ammonia concept by 2023 and a hydrogen concept in 2025. We will be ready. We need to recognize we are a player in an ecosystem, fuel needs to become available, and the whole ecosystem needs to move. We also provide energy efficient fossil fuels, and that will still continue.
The important element there is to continuously work fuel efficiency, drive down methane slip, et cetera. The power system optimization. We are leaders in that given our decade-long heritage from operating in power system in, actually in fairly challenging environments. We are pioneers in marine electric drivetrains. I mean, we did some of the first hybrids. We are cooperating on the complete electrics. We are now pioneering, as we speak, marine carbon capture. Carbon capture is at land, but we are bringing it into the marine side. With Voyage, we are also pioneering the marine optimization and route. We had the world's first digital port call, Tangier Med, some months ago, really exciting step.
Clearly we will be partnering for other technologies like fuel cells, like air lubrication systems, et cetera, et cetera. What we provide to those partners is our competence to marinize things, to bring things into the marine space and our, I would say, industry-leading service network. We are very well positioned, so how do we deal with this in a very practical way? I mean, if we wanna lead the decarbonization, we need to have a strong commitment to R&D, and then we will partner up. Because customers are looking to go green, but they want to have a dialogue with somebody that can talk and have knowledge about basically all different solutions.
These are heavy capital-intensive investments, very strategic, 20-30-year lifetime, and there is no solution fits all. This is where we are evolving our competence to basically talk about all solutions and have a balanced discussion about what is the best fit for you. To have that credible discussion, we will have a fairly broad solution. We will offer most solutions. How we then solve that from a practical view is that we will focus on certain of our core technologies, which revolves around the combustion engine, battery, and digital, and then we will partner up. What we get from that is the following.
I mean, one key takeaway, we have been working for decades on many of these new fuel technologies, so the new fuels are not new to us. We can actually do the conversions, and we see this now as we are evolving and testing. We can convert to the new fuels with limited changes of engines. We also see good, strong synergies between the solutions in the marine space and the energy side. We can manage this major transformation on a strong commitment to R&D, but a fairly stable commitment to R&D, around 3% of our sales. Okay. Sum it all up, a lot of exciting technologies coming. There is no silver bullet. Wärtsilä is very well-positioned, and we can manage this transition with a robust but stable commitment to R&D.
Now we're gonna move from the transform to the perform. Here it's two elements. One is to leverage the market recovery and another one is around robust execution. This is how we see some of our growth opportunity. Wärtsilä is very well-positioned as 1-3 in core global markets. We will focus on organic growth and decarbonization and services, and then complement with partnerships. If you see here, this is where we see the growth potential on top line. Energy, very much driven by services, the balancing and both from the thermal side and the energy storage side. It's about the services and the marine power side, the fuel flexibility. On Voyage, it's turning around total Voyage.
60%-70% of Voyage, it's a hardware business. That we are turning around. We have a software business which is growing very rapidly, but that is why if you blend that, the total growth is not as high as in Marine Power and Energy. On the Marine Systems, we had benefited a lot from the scrubber boom, but now it's a more stabilized market, you could say. Carbon capture will come, but that is further down. We have some growth in shaft line solutions. Overall, I would say Marine Systems pretty flat. On the non-core businesses, we will continue with active portfolio management, taking sharp looks on strategic fit and, you know, the value creation potential.
I think we have showed that we are managing actively our portfolio. I mean, in 2020, 2021, we have done six divestments. Now, turning to the real growth opportunities. Here I'm gonna give you three examples from the services business, because service is a major growth generator. This is showing some of the potential that we have on the marine power side and in the transactional space. We can see already today, about 30% of our customers are what we call smaller accounts, 70% are the larger accounts. You can see the spend rates here, spend rate per Kilowatt. You can see the difference between the 70% of the bigger and 30% of the smaller accounts.
Here we see a growth potential. This growth is actually happening right now as we speak, because we are leveraging digital solution, creating more intelligence about those customers to serve them better, and work with automated lead management. We are redefining, tuning our offering to the needs of those customers, and we have improved and are improving our logistics. This is a really exciting opportunity. Another theme is what we call moving up the service value ladder, and this is moving to agreements and performance-based agreements. You can see this is a little bit similar logic. I mean, you could say that 25% of our installed base today is covered in agreements and performance-based, the rest is more transactional. You can see this difference in spend rates.
I mean, if the baseline transactional is one, as we move customers up the service value ladder, it's a factor of two to five . Here we have some really interesting opportunity. Once again, it's about what opportunities digital solutions bring and using data, artificial intelligence, to analyze and then to drive the performance-based business in a value-creating way, and also managing the risk. We have the successful proof points, both on the marine and on the energy side. Third growth theme is that the green transformation will also generate opportunities for retrofits and conversions. Here we made some estimates, EUR 2.5 billion market. This is our own installed base of two-stroke and four-stroke. You see the marine side, you see the energy side.
The marine, it's a conversion from heavy fuel to LNG and into green fuels. Energy, it's in two steps. It's from heavy fuel to gas first, and then later on to green fuels. This we estimate, this market potential to EUR 2.5 billion over a time of five to 10 years. Those were some, what we think, really exciting service opportunities, both in marine and energy. If I now move over to the energy side and balancing power, and how we leverage the growth of energy generation. If we look at our baseload business. We think it will be rather flat, I mean, compared to 2020.
We do see that a lot of customers are moving to renewables, and therefore there is a shift to balancing. Now, the good news is that we see, and it's not only us, we see balancing really taking off during the coming 10 years. Please notice that time period. It's not next quarter, but it's over this time, it will grow. I know that we have had this message in the past, and I know some of you have questioned, you know, why is it not happening. But now, ladies and gentlemen, it is happening. Sushil, the Head of Energy, will talk more about that going forward. I would say this will happen by the laws of physics. It's not that's the market. The reciprocating engine is very well-positioned.
On the energy storage side, and we all see it's growing exponentially. We continue to see very rapid growth, 30%. If we zoom in on the energy storage side, what is the Wärtsilä position? I mean, first of all, we are one of the three biggest players in the world. Where we want to differentiate is in our power system optimization capabilities. We have a complete balancing offering where we can integrate different generating assets, leveraging our background and knowledge of power systems. When we do this, bring the different generating assets together for optimal performance, energy cost, and uptime reliability.
We have a software platform called GEMS, which a customer tells me is the leading in the industry, but of course, a software platform that is just an expression of our knowledge. We combine this with strong execution skills. We do bring a lot of experience from executing projects in the power industry, and we are ramping up our team and execution capabilities, transferring staff, transferring experience from working with power projects. We have a very competitive supply chain, and I would even say partnership for the battery cells. It's currently a loss-making business, so we are clear on that we expect to become profitable in a few years. 2021, we expect the order intake to be above EUR 700 million, which corresponds to six times growth in order intake compared to previous years.
On the services side, we have more than 70% of long-term services agreements. Now switching from leveraging opportunity to robust execution. One of the key things that we have been working with in Wärtsilä during the last months is to define our way forward and how we want to evolve as a company. We sum it up in what we call the Wärtsilä Way. It sets the scene for profitable growth. There are some critical elements of the Wärtsilä Way. First of all, we upgraded our purpose. Our purpose is to enable sustainable societies through innovation and technology and services. We put even stronger focus on innovation and technology, and we added services clearly. Already today, services is like 55%-60% of our business.
We define a new target position and part of that shaping decarbonization for marine and energy is our new financial targets and also our new sustainability targets. We have strategic priorities, and I will come back to them, which really sets how are we gonna achieve this, how are we gonna get where we wanna go. We have also upgraded our values, focusing on customer success, passion and performance. Customer success, we become successful by making our customers successful. The passion, attracting the stellar people, developing and providing an exciting experience for people to evolve with a strong purpose. Also leadership that is focusing, providing direction, and then supporting the teams. Delivering on commitment in the performance side, strong personal commitment to deliver, and then continuous improvement.
Now, focusing on the strategic priorities, how are we gonna make this happen? First is to excel in creating customer value, and that is staying very close to the customer because the customer's needs is evolving in this era of change. The customer is relearning, we need to relearn, we have technologies, we need to train and educate our people to stay close and in this thought leadership dialogue, really interesting avenue. The other is also to provide support and services, and you know it. It's services to be successful. You need a great product supported by great people and with a great culture. If you have that and you get that source in the right way, it's a really strong competitive advantage.
We need to continue to develop our teams, and it's about attracting the high-performing people, building high-performing teams, excelling on continuous learning and collaboration. Leaders being formulated, leaders providing direction and support, and then empowering people to act. The third element is clearly to drive the decarbonization of energy and maritime, and then to do razor-sharp investments in new technology, to partner up for other technologies, to also decarbonize, as we talked about, our own value chain, and then to provide optimization solution and really work as thought leaders. Services is a major way forward, and we are talking transactional agreements, performance-based, there are so many opportunities, and we are really on the roll here on the services side. Finally, continuously improve our end-to-end value chain.
It's about reducing lead time, it's about improving quality, it's about delivering what the customer is requiring while reducing complexity, while improving our competitiveness, and then leverage digital to help us doing that. By that, we can certainly improve our businesses as it is today. We clearly see that we can generate the funds needed to transform our businesses' technology and at the same time, deliver good returns for the shareholder. We will continue the clear focus on capital allocation and portfolio management. Now, this is how we wanna do it, but what about the cultural aspect then? What is so important? Here, developing. How do you develop a performance culture? Well, it's about engaging in a dialogue as leaders, being out there, talking about and showing how we make customers successful.
We are successful by making customers successful. We created a structure, we delegated P&L ownership, and we can really see that people are taking on the ownership when people get P&L. We need to care for people. If we care for people, the people will care for the customer, and we need to develop our people now in the big technology transition. On the risk management side and project execution, and I have the privilege to have served in many project businesses in the past. As one thing I have learned, it's the criticality of risk management, both when you work in the tender phase and the project execution phase, and have the discipline around that.
We are a big organization, and we constantly need to remind ourselves that we need to make the decisions close to where the customer value is created to move with speed. For me, the live stream of it all, continuous improvement every day. This is how we wanna do it. Now, setting targets. The financial targets, I will leave to Arjen to go deeper in. I will then talk briefly about our decarbonization targets, which are really important for us, and we recently launched them. First element, our biggest carbon footprint is actually with our products when the customers use them. The biggest impact we can have is to make sure that we decarbonize our products.
There we have set a very clear target to have a product portfolio that will be ready for zero carbon fuels by 2030. We are on the road with the commitments on ammonia, with the commitments of hydrogen. We are moving there. Then walking the talk, moving ourselves in our own value chain to a carbon neutral own operation. With that, I think that we are ready to go further into the financials and also have Arjen joining us. Arjen, please come up.
Yes, hello to you all. We are set to deliver long-term shareholder value. Why? First of all, we have really good growth opportunities, as Håkan was reflecting already upon, in decarbonization of marine and energy. I'm sure, let's say Roger and Sushil will talk about that even more. Secondly, we have clear financial targets, and we are committed to achieve them. Thirdly, our balance sheet and financing structure support strategy execution. We can do it. Finally, we have clear capital allocation principles with a high focus on R&D and shareholder return. Before continuing, let's move a little bit back and look a little bit back on the past few years and what has happened there.
As you know, and we have seen it for sure as well, we clearly have had our challenges with COVID-19, with project execution, with not meeting all the financial targets, and with cash flow. With an extremely high focus on transformation and performance, today our situation is a lot better. We have made a lot of improvements. We have radically changed our project execution. We have, in 2020 and also in the first half of this year, record operating cash flow, and we are very proud of it. We have made adjustments to our cost structure wherever and whenever it was needed. We have made good progress on divestments, Håkan touched it also. We have also clearly, let's say, improved our P&L and working capital ownership in the whole organization with the organizational changes that we have made also in 2020.
We are moving in the right direction, but COVID is still there. This is something that we as a company cannot transform. I think the whole global world needs to deal with this, find a way how to go through this. If you look at our energy core markets, many of them are in quite red color-ish countries on this map. If you would make the same map as on the left side of this slide for first of January and compare it to this one, it's pretty much the same colors. At the same time, vaccination rates are low in these countries, and this is good to keep in mind. Håkan stressed it also, but I think we all need to be very well aware that COVID will still be around for time, and not only in energy, we also know it for marine.
When COVID hit us in 2020, we immediately started to adjust our cost structure because we had to, and we wanted to, and that is part of our DNA. Whenever and wherever is needed, Wärtsilä has adjusted the cost structure. You've seen that in the past, you will see it in the future as well. This is not an exhaustive list of examples. In a corporation like Wärtsilä, there's always somewhere at any point of time, big or small, optimization actions ongoing, and we will continue to do so. If I go to cash flow, as I mentioned already, record cash flow, let's say we are very proud of that in last year and also in the first half of this year, really coming from majorly the working capital. What was driving this? First item is the new approach to receivable collection.
I would say that's really the big main item. Where receivable collection in the past was more an activity of, let's say, trade finance, credit management, treasury, environment. Today, it's a much broader involvement of many more in the organization, from frontline sales to sales support, to project management, and even technical people in case of disputes where customers don't pay. This is not monthly, this is weekly and sometimes even daily. We are also making much more use of RPA tools, robotic process automation tools, which improve the efficiency of collection as well. Global inventory management program, really an important one and also an important contribution to our working capital improvement. Move away from local stocks, move more and more to the central global logistic warehouse in Kampen in the Netherlands. Global visibility of stock.
Make sure that you don't buy a part on one end of the world where there is the same part somewhere else available. Also just in time stock for agreements, life cycle agreements. That is, if you know the maintenance schedule of a life cycle agreement, there is no need to have the stock three months in advance. Get it just on time. Also, we have been able to maintain very good payment terms with suppliers, despite the fact that the volume dropped. Finally, let's say our supply chain finance programs have really been, let's say, explored in a much wider context. Much more suppliers have joined that. Actually today, about 40% of our trade receivables is covered by supply chain finance. That's not only good for us, that's also good for the suppliers. They get paid earlier.
The good cash flow enabled us to make significant improvements on our debt situation, on our gearing ratio and our solvency ratio. From 2019 to today, basically, we have been able to reduce net debt with more than EUR 400 million. On the same horizon, we were able to improve the gearing ratio from 0.30 to 0.40. We have been able now to bend the trend on the solvency back up again. This extremely good cash flow and a strong financial position enables us to allocate capital. Then I come to the capital allocation principles. R&D, the first one, extremely important for the future of Wärtsilä. Håkan expressed it also, this is the future. We need to invest and need to keep investing in.
We have been spending about 3% of net sales historically, and we are committed to do so going forward as well. We should not jeopardize this. We have a very strong track record in innovations. We have extremely good portfolio capabilities to serve the market, especially now in this era of decarbonization. Second capital allocation principle, mergers and acquisitions. They of course need to fit the strategy, otherwise you should not do it. We will focus mostly on synergistic, bolt-on acquisitions in relation to decarbonization, services or digital. Finally, let's say the third capital allocation principle, profit distribution. This is basically, as you probably all know already, let's say at least 50% of EPS to be paid as dividend. This is also what we are going to have going forward. We are committed to do so.
We have done so, as you can see, and we are committed to do so going forward. If I then move to the new financial targets that were published yesterday, I will start at the bottom. Capital structure and dividends, actually they didn't change. Let's say the gearing to be below 50% and the earnings dividend, basically at least 50% of earnings, that won't change. We have always met these targets. What has changed is the net sales and the growth target, as well as the profitability target. The growth target we had before, let's say growing more than global GDP, that moved now to 5% annual organic growth. On the profitability target, we moved from 10%-14% over the cycle to 12% operating margin.
If I go a little bit deeper into these two financial targets that have changed. First of all, let's say net sales. We have with our portfolio and capability, a very good opportunity to grow in the decarbonization space and in the new equipment space. At the same time, our massive installed base gives also a lot of opportunity to grow on the service side, on the life cycle side. What this slide shows is basically, let's say, what are the main items that drive our growth opportunity? The pluses indicate, let's say, their share of contribution to that growth. If you look at this slide, the main one is clearly, let's say storage. It's a fast-growing demand for energy storage and power optimization solutions. We can all see it. You've seen it in our order intake as well earlier, and this we believe in will continue.
Secondly, the service, very important also from a profitability point of view. I will touch it later on as well. A lot of opportunities, increased share of wallet of customers, deeper penetration of the installed base. Customers that don't buy from us today. Get them back, let them make sure that they buy the lifecycle solutions from us. Create very important part, let's say, decarbonization retrofits. Opportunities have been discussed, also touched by Håkan and Sushil, and Roger for sure will come back on that as well. Then new business models. Here you can think of software as a service, but also otherwise. Thermal balancing, I would say it's back. It's coming, it's happening. Definitely with the coal phase out being more and more visible everywhere. Thermal balancing is complementing energy storage. We also see that there will be recovery in marine.
In particular, the important segments for us, cruise and ferry, and special vessels, we believe that growth will come. If I move to the profitability target, and this slide is basically with the same structure as I had on the growth target. Where the pluses basically indicate the share of contribution or the size of contribution to the increased or improved, let's say, operating profit margin percentage. The biggest element is service, clearly. In a company like Wärtsilä, and I'm sure you all know this, the service business is the most profitable. That's bringing the biggest margins. We see tremendous opportunity to grow the service. I mentioned already on the previous slide, being it decarbonization retrofits, being it deeper penetration, et cetera. Secondly, the thermal balancing. It will not only contribute to better factory load and cost leverage, but it also will contribute with margin.
Storage, Håkan mentioned already, let's say it's loss-making today. We want to scale it, we want to improve it, and we want to turn it into profit within a few years. Voyage turnaround, you know also from the published numbers that Voyage is quite heavily loss-making today. Things are improving. It has been somewhat the turnaround hampered by the COVID situation, but we are back on a very good track. Also this we will turn into profit, I'm convinced. The bottom three. First of all, cost inflation. Any company is facing cost inflation. What we want to do, and we believe we can do it, is with pricing, continuous improvement, more than offset this cost inflation, as that should contribute to the growth of the profitability. What do I mean with continuous improvement? It's in a way a fairly wide definition.
It varies from temporary layoffs to footprint optimizations, to doing more with the same. For example, growing the sales while at the same time keeping your cost structure low or similar. Our starting point operating margin is low, 6%, and this is after items affecting comparability, just to be clear. We are committed, and we believe we can do it, to make this 12% within a few years. To conclude and finalize, we are set to deliver long-term shareholder value. Thank you very much. Now I would like to ask Håkan and Hanna-Maria to join me here.
Thank you, Arjen. Now we have a great opportunity for questions. We will start the questions from here, Salmisaari.
Thank you, Tom [intelligent guess], DNB . Firstly, question on the financial targets. Why 5%? Where is that number coming from? Why isn't it four, seven? I think on one of the slides you mentioned that the starting point is last 12 months. Should we read that as an indication for 2021 ending some way, 2022 starting some way? Is the 5% like a guidance or average for business cycle? How should we think about that?
Okay. I mean, why 5%? five, we like the figure five, it's a prime number. It's always good with prime numbers. But I mean, apart from that, I think, you know, this is clearly average growth for the business cycle. Some years it might be less, some years it might be more, some years it might be much more. But over the cycle, 5%. I think when we see, you know, the growth avenues that Arjen talked about, we can clearly get those numbers together.
Yeah, I would say that's basically covering it pretty well, actually. In a way, whether you take it, let's say, rolling 12 forward, let's say it's the 5% target doesn't change, right? If you look at the year-end, the target for the year after is still 5%, so it doesn't change.
Maybe to continue on the 12%. Why 12%? I mean, the previous target was 10%- 14%. It's now neatly between those, that level. The other aim is of course to reach sort of your previous peak levels of roughly 12%. When you say in a few years, should we read that as midterm? Is it three to five years? What is the. You must have sort of an internal roadmap or thought process that, okay, I want to Wärtsilä to reach that within three or five years.
I mean, clearly we had 10%-14%. I think we never achieved the higher percentages. From that perspective, because some people is asking is this a lowering of the ambitions, and it's not. It's clearly we think that 12%. I mean, currently we're at 6%. We wanna take it at 12%. It's forward-leaning, but it's definitely achievable.
Yeah, I think it's also one good thing to mention that, okay, we are still in COVID, right? Who can predict the world? Like Håkan said, we believe absolutely and this target is achievable. There are, of course, factors that we cannot fully influence. COVID, the pace of decarbonization on the longer term, will have an impact to the pace.
Maybe one number question on the energy storage. How much sales have you created, let's say, last 12 months or past nine months, for the business? Can you comment in any way how much loss-making is that business? Maybe even going further, what kind of profitability level would you assume that business to be making in a few years' time?
We will not go into the details of the financials for this year, so to say. I mean, if you look at you know what we have delivered and what we have in our order backlog, it's more than 4 GWh. That is an element. It is clearly loss-making. We think that we certainly can turn it around over a few years' time, and that it in a way that it fits into the profitability strategy that we have to 12%.
Yeah. I think that's what it is. Yeah.
Hi, it's Ricky from Inderes. You have quite high expectations in services, but aren't some parts, at least some parts of your installed base, especially in energy, it's becoming obsolete in the coming years with renewables replacing old oil and gas-based power stations? How are you going to kind of fill this void?
First of all, I mean, you know, but that, but to clarify, I mean, the thermal business and if you look at the installed base, this is business that, you know, the services are running over decades. To your point, you know, what about will they become obsolete? No, because right now we are converting to gas. In the future, we will convert them into the new fuels. Of course, to be clear, there are of course engines with different vintages and types, et cetera. It's not as black and white as I described it, but the logic is clearly there. We are upgrading the installed base, and it's the customers, but we are helping them to do that.
we take it in two steps on the energy side. First is to gas, and then it's the green field.
Thanks.
Thank you very much, Andreas from J.P. Morgan. I wanted to talk a bit about mix in your business. That's always been a big driver historically in profitability. I remember in the past, when the business environment was good, the mix wasn't good, and then the business environment wasn't good. You couldn't make the 14% because the business environment wasn't good. How do you think about mix going forward, particularly when the EUR 700 million of storage hits the P&L in the coming 12-18 months, I guess still at losses? Or is that ramp up in margin gonna come quick enough for that not to be a big negative mix driver?
Just to clarify, when you say a few years, obviously it's depending on the language and what people understand under few, this can be quite difficult to interpret. Some people think few means one to two, others or do you mean more three to five? Just to make sure we all understand what you mean when you say few. I don't know what the Finnish word or the Swedish word is for few, but.
I mean, it's a good question. I mean, you know, it is like I put it. You know, part of the equation is COVID and how fast that will phase out or transform. Part of the equation is of course also how quick the decarbonization shift will be. A few years from that perspective is a few years, and it's not entirely clear. Coming back to your questions on battery storage or energy storage, I would say that will also take a few years, and a few years is not next year.
Tom?
Hi, it's Tom Skogman over here. Thank you very much for hosting us in Helsinki. It's great to be here. Got two questions. One goes back to the 5% revenue growth. Two-
I'd love to know what governs that 5%. You've outlined these great revenue growth opportunities, and is it a question of sales or internal capacity and risk control that limits the growth? Or is it the rate of customer adoption or something else? Also if you could explain your framework for deciding what you develop with your own R&D, what you buy in bolt-ons, and how you partner.
Mm-hmm.
That'd be great to understand too. Thanks.
When it comes to what are the constraints to the growth, I would say that it's more related, you know, to the market adoption than to that we have internal resource or competence constraints. I think if COVID evolves in a more positive way, yes, that could be more positive. That's why we say 5% over the cycle. Coming back to your second question, or can you repeat it?
It was when you think about new technologies.
Yeah.
How do you decide what you're gonna develop with your own R&D?
Yep.
What you're gonna buy with a bolt-on, and then what you're gonna partner?
We have clearly defined what is our core technologies, and they revolve around the combustion engine, and they revolve around energy storage and revolve around our digital solutions. These are our core technologies. We have other technologies, take fuel cells, take the lubrication. Those are technologies that we don't have in-depth, you know, development and manufacturing skills with. I think it's fairly clear for us where we are strong and where we are not strong and from a technology perspective. There, for the areas where we feel that is outside of this core, we will partner up.
As I said, what the feedback that we have from our partners, what value do we bring to them is a competence from the marine industry and how you marinize things. I mean, how you adapt, because it's a pretty special environment to help the partners to adapt to that. Then also in many cases, our industry-leading service network, because all those great new devices, they need to be serviced as well.
Stick to your core competencies. I think that's critical for
Yeah. The key thing here, there is so much exciting stuff.
Yes.
in our core.
Absolutely.
Manuel Losa, Bank of America. Getting back to the 5% growth target. I would like to challenge you a bit on that then. I mean, you're saying you have a EUR 700 million storage business today, and then you're saying that market is gonna grow 10-15 times over the next 10 years. That means that if you kind of stick to your market share, you should have a EUR 7 billion business in 10 years. That's quite a lot more growth than 5%. I guess you're not assuming that the old Wärtsilä business will decline. Why not a higher growth target? Or are you not targeting the whole energy storage market then? Just in the light of the numbers you give me, it sounds quite low.
Your math is right. I mean, we will not target all geographies on the energy storage side. Clearly. We will focus on some of the core regions like U.S., like Australia, like U.K., like Europe, et cetera, so to say. We're not gonna be all over the place at the same time.
Okay. Are you able to help us to then understand at what rate your end market is growing?
Once again, please.
At what rate will your end markets grow or how much of the total market you're addressing?
We see. I mean, I think we indicated, you know, 30% overall. When we look at our targets, it's, we are looking at, you know, same magnitude amounts.
Okay. Thank you. Then getting more practical. I mean, when you look at your quotation pipeline and what you actually talk with your customers and compare that to the numbers you provided us for the end market, so are you seeing that your end market pipeline in terms of quotation on the storage side and on the terminal combustion market side is kind of agreeing with the numbers you get from your consultants? Are you seeing a massive increase in those pipelines?
If I understand your question, I mean, if you, Bloomberg, DNV, etc., I think we are fairly aligned on the value, so to say.
You see that in your sales funnel. When you talk to your salespeople, they tell you, "Compared to two years ago, we have 10x more quotations.
Well, we see growth. As I said, and I said it, you need to take a perspective over a couple of years, so you cannot look at quarter-by-quarter development. If we look at, you know, the development over a couple of years, you know, yes, we do see a lot of tender activities, both on the energy storage side, but also on the thermal side. I think you've also seen the order intake on the thermal side is building up. I mean, only this morning we announced yet another order, so to say. We are seeing correlation.
Yes.
Okay. Finally on the profitability target. I think you never really achieved the 12% historically, if you look at the reported numbers, pretty close, at least what kinda I can track for the last 10 years. During that time, we've seen the service business growing quite significantly.
It hasn't really contributed to a higher margin, and now you have service business at the 2019 sales level already, and your profitability is very low. Can you just help me to kind of bridge the 6%-12%, because the service is the biggest driver, and at least I'm struggling to understand how that's gonna come from the top-line side.
I don't wanna comment your logic there, your calculation, but I can clearly say that service business is profitable. It's a major driver of profitability.
Absolutely. Yes, service business is good today. We are not exactly for all business lines on the same numbers as we were in 2019 pre-COVID, but things are improving, and that's positive. At the same time, of course, if you look at the total profitability target going forward, there are also negative influences, right? Let's say we have a loss-making storage business today, so that will drag the numbers down. It's also a matter of, let's say, how good is your new build at a point in time versus your service business activity. That is different, and that will be different also going forward.
It's not a one-to-one comparison that, okay, now we should be exactly the same profitability as pre-COVID because service is on the same level. That, that's not how it works. Because on the new build side, we have a lot of businesses or business units actually that are still, let's say, hurt by COVID.
Okay, we will take a couple of questions from the chat. You highlight storage growth with 1+ to reach the 12% margin target. Does this imply that storage is just around the level today, or will it be at that level in the coming five years?
It's a good question. Of course, let's say the pluses in my profit bridge indicate the size of contribution to the operating margin percentage. Okay, the one plus is an indication if you compare it to the service part, that okay, it's less than the service. It's a negative number today, and I think we will not guide, let's say, on margins, but you can do your own calculations here. Of course, the bridge to the zero is smaller than the benefit that we intend to gain from service business.
Thank you. Question regarding Voyage. What would be a reasonable timeline to turn the Voyage Business into profitability?
If I start on that, I mean, I think I have pointed that out before, I mean, Voyage is a turnaround, we have earlier said a couple of years. The turnaround has clearly been delayed by the big pandemic. From that perspective, the timeframe is still a couple of years. However, I would give a lot of credit to Sean and the team. We see a lot of things moving in the right direction. I mean, the business is clearly one big customer segment, cruising. Therefore, Voyage will benefit as the cruising is picking up.
Another question regarding Voyage. Any more specifics around where the growth is expected to come from? Region, new technology, service?
I would say that we see, and I talked about that 60%-70% is more hardware oriented. There we see more moderate growth. The real growth generator is our software business, Force and our whole digital offering. This is where we see significant growth going forward.
Yeah, I would add to that. Let's say in Voyage, as you mentioned already, let's say a big portion is related to, let's say, equipment, and a big portion of that equipment is related to cruise and ferry.
Mm-hmm
... which have been severely, you know, hampered by the pandemic. With that recovering, I think it will accelerate also in the recovery of Voyages on the numbers.
Thank you. Question regarding the decarbonization and our financial targets. You mentioned the pace of decarbonization has an impact on when you can achieve the 12% margin. Can you please explain why? Does that mean that current mix 12% is not achievable? Does the target rely on assumption of higher margin on decarbonization offering?
It's a mixed answer to many questions there. I would say that, you know, the shift, if we look on the energy side, it's very much correlated to how fast renewables are picking up.
Mm.
I think there will be a strong correlation, and we can follow the pickup of the renewables and the need for balancing. On the maritime side, we clearly see that there are piloting for the different green fuels. There are different countries like Norway that are clearly spearheading ammonia. But there are also, for the other fuels, picking up. Yes, I mean, with new technology, we do see potential for price realization. Also, we see a potential avenue that if we look on the four-stroke side, some segments will probably be a bit de-commoditized because, you know, with the green fuels, it's gonna be technically more advanced.
Thank you.
If I can add to that, let's say if you look at energy, for example, yes, today the storage business is loss-making business.
Mm.
The thermal balancing business is not a loss-making business. That's where we also expect quite significant growth. That's part of the whole equation as well.
Very true. Thank you. Question regarding energy storage. Will the energy storage business lifetime profitability ever be in line with the 12% margin target considering the lower need for services?
Energy storage, will it be ever, let's say, on a 12% operating margin? I would say it's difficult to say. Might be. Typically, let's say if you look at, if you compare storage business, for example, to thermal business. In the thermal business you have rotation, combustion, and whatever spare parts. That's typically not in the storage business.
Mm.
There, I think the profitability growth is probably more coming from, let's say, absolute terms rather than, let's say, on the percentage. Of course it contributes positively.
Building on that, I mean, we certainly get a lot of questions, you know, okay, thermal balancing, less running hours on the engines and more electric and less maintenance. What will be your impact on the services business? What we see balancing that is the possibilities to move up the service value ladder that we talked about, to move to performance-based agreements and provide energy or decarbonization as a service, where we, you know, work together with the customers to reduce cost of energy, provide uptime reliability.
Continuing with the storage. I think it's fair to assume that there are different investors interested in a high growing but loss-making energy storage business and a stable marine service business. Given the valuation we see on some energy storage peers, would it not make sense to spin off or separate the energy storage business?
We got a lot of questions on that. I will say what we see, and this is our key message on battery or energy storage. This is where we are, you know, it's a very fundamental part of our value proposition, it's this power system optimization. Sushil will talk more about it later on. This is where you connect the thermal and the battery storage and renewables, et cetera, to drive, you know, an optimal operation, therefore lowest cost. So it's highly integrated for us. Also on the business side, also on the resources side, we actually are building up our execution capabilities by resources and competence from our thermal side, so to say.
For us, it still hangs together.
We can go beyond, let's say, our competitors in storage in our offering.
Going back to financial targets. How much of margin increase the 12% would come to operating leverage on higher growth versus mix, versus self-help actions on the cost base? This is after items affecting comparability. What do you assume is the underlying margin equating to the 12%?
We will not go into the details on all these questions. Let's say we don't guide on margin. I would say, let's say on the items affecting comparability, I would say that, okay, what we assumed in our calculations is normalized level.
Mm.
Mm.
Okay. Another question regarding the margin target. You said it takes a few years, but do you see a steady improvement or back-ended end-loaded achievement to reach the target?
Okay, that's a difficult question. Of course it depends on what we have said earlier as well. Let's say, how quick is the pace of recovery from COVID? What's the pace of decarbonization? Those are two factors that are not fully in our own control.
Mm.
Let's say we can work on the turnaround of Voyage. We can work a lot on, let's say, the installed base and getting up to the service value ladder. Those two factors are not so easy to influence. We have a certain view. We believe it will kick off. Let's say it's happening. Let's say we just recently announced a lot of orders, but the pace going forward is still a bit of an unforeseeable thing.
Mm-hmm. What kind of investment levels are required to hit targets and get back to 12% margins? Will they need to increase CapEx from current levels as a percentage of sales? Do you have an ambition to free cash flow conversion? What is the normalized level of working capital to sales for the group?
If I start with one part, this is the key message on R&D, but it actually goes on the CapEx side as well, that that's really one of the exciting parts. We actually think we can be a leading player in this transformation at fairly stable levels. That's why we say about 3% R&D of net sales, and CapEx will also be stable, so to say.
No, I think that's a correct statement. Let's say the 3% of net sales for R&D, that of course will grow in absolute terms when the volume grows, right? When it comes to, let's say, CapEx in plants and equipment, for example, that will be fairly stable. We don't need massive extra to facilitate the growth. No need for that.
Could you comment on the level of OpEx investment you are making in the storage business annually for the next few years? How much does the cost base need to go up to keep up with the robust demand growth?
I don't think-
I don't know those details.
No.
at this stage.
We don't have any more. Yeah, please. Yeah, please wait until the microphone.
Thank you very much. I wanted to ask about kind of how the business works when you close some of these larger contracts in terms of pricing, securing supply and so on. If you look at something like the LatAm order you recently announced on energy, at what point in time is kind of the price fixed and what happens then until it becomes a firm agreement? Do you have the ability to then make some adjustments again at the end, given the inflationary environment we are in? Particularly if you look at Brazil, things get 10%-20% more expensive every year. How long is the lag where you have to make a price until you then can lock things in?
If you look at battery storage, how does it work actually in terms of when you do some of these larger orders, you lock in the battery supply, the electrical balance of plant supply, and how do you manage these risks in a very inflationary environment?
Basically, if we go to as a general approach in our tendering, is of course that you negotiate with the customer to the very end. Of course you have in your calculation you have your cost, where you also of course include cost escalation and the standard of risk and contingencies, so to say. You know, when you reach the signing point, you sign and you close that, and then you hedge, and that's it for the big businesses.
During the quoting process, we also negotiate of course with critical large-scale suppliers.
Yeah.
to make sure that, let's say we are not facing a surprise, let's say after we signed, certainly the price goes up.
Yeah.
Those have been prefixed.
When we sign and we lock it in, so to say, then we have locked in both the sales side and the cost.
[inaudible]
Yeah.
[inaudible]
Yeah.
[inaudible]
Can you kindly please repeat the question through the microphone?
Can you lock in, like, the very, very large majority of some of these costs? Given that some of these cost items now have ramped up very quickly, much more than you normally budget for.
How-
I was asking in terms of backlog margins versus what to expect for next year when you execute these contracts?
I would say certain things you can lock in, and certain things you take an approach where you bake in expected inflation. That's part of your provisions in the calculation.
Logistics is a good example, as you mentioned.
Yeah.
Thank you.
Okay, some more profitability related questions from the chat. Further on battery storage, why is the business loss-making currently? One would think that Wärtsilä's business in batteries is fairly light costs. Why a loss?
I don't think we comment on that, right?
Yeah.
This is the state of the business. We are in an early stage. Yes.
Mm.
We take a lot of orders in.
Yeah.
We still also need to deliver a lot, right?
Yeah. It's in the scaling phase.
It will improve as we go.
It's scaling. I mean.
Yes.
You invest in a lot of R&D, you set up a structure, and of course then you grow the revenues and you scale.
Yes.
That's-
It's a lot of initial investment at the moment. Yeah.
Yeah.
Exactly. Does the margin uplift from decarbonization mostly come from operating leverage or a shift in the product mix?
I think decarbonization has many positive impacts. Let's say we talked about thermal balancing. We talk about, let's say, the different fuel types of the future, the retrofit capabilities. I think there's a lot of opportunities that link to decarbonization. I would not say, okay, specifically one. It's many.
Your biggest growth driver is energy storage, which is loss-making and difficult to say if it will ever reach the group target. This must imply that profitability in Wärtsilä core business will have to reach levels well above the 12% margin target, which have been difficult in the past. Can you elaborate how you plan to take Wärtsilä core profitability to higher levels than in the past?
Yeah, I think you broke it down in the waterfall. Right? I mean...
Yeah, I think that's as far as we go in detailing out, let's say.
Mm.
The margin improvement. Let's say if you calculate like this, of course it's a logical conclusion.
Mm.
Mm.
Do the comments on battery storage profitability imply that energy margins could go down before improving longer term? Or will improvements in thermal business more than offset the negative margin mix from storage?
I would say the trend is up. Of course, again, and I repeat myself here, and also what Håkan said before, the pace of decarbonization is a question mark. Let's say, of course, we see a lot of momentum actually with coal being shut down. That momentum needs to continue. Fortunately, many countries in the world have said, "Okay, by X year I will be off the coal." Many of that is between the period 2025-2030.
Mm.
It's happening. People also realize more and more that, let's say, if you don't do anything, you will face the blackout.
Mm.
We have seen that also happening. I do believe that the pace of thermal balancing power will go up. Okay, if we are good, let's say, with our turnaround and scaling of the storage business, I think the equation might be positive, yes. Pace is a question mark.
Continuing with the battery storage business, could you discuss the value chain in terms of who makes the money? Is the battery developer or the distributors such as Wärtsilä who enjoys the strong spot? Who has the strong position in terms of money-making capability in the value chain, you think?
Yeah, we are not commenting on that. That's quite competition sensitive, so no comments.
I mean, from our side, I mean, if you look at our business and why we think this is an interesting business and we can make money, is this power system optimization capabilities. I mean, integrating these assets in an optimal way, leveraging digital, to really provide the lowest energy cost. Because it's not as simple just to hook up a battery storage. I mean, the storage in itself, it's a fairly complicated device in the sense of how you run it actually affects lifetime. I mean, how you have tuned the chemistries, how you are running the storage, currents, utilization over 10 years, it's actually fairly complicated. And to have the optimal point.
Second, the second level of complexity is, okay, so you're running this together with a thermal generation and a wind farm. Okay, how should you do when the weather changes? Should you then use the batteries? Do you use the thermal to have to make sure you have the lowest cost and prolong, for instance, the lifetime of your batteries? It from that perspective, there are great value creation opportunities in this optimization.
Thank you, Håkan. Thank you, Arjen. Okay, Tom has one more question.
Thank you. Tom [intelligent guess], DNB . I wrote down three more questions if we have time. Orders, you are targeting storage orders over EUR 700 million this year. We know the third quarter number, EUR 180 million. What is the year-to-date numbers, nine months number?
I don't have it off the top of my head.
We have not published that.
We can come back to that.
Yeah. We have not disclosed it.
Okay.
Secondly, what kind of lead times are there in the storage? How much of that EUR 700 million or over of orders are delivered this year? How much next year? Yeah, and maybe a follow-up, just how much sales should we need in order for that business to be making profits?
The one that I will elaborate on is the lead time, and that we will see a lot of these sales happening during next year, because I would say there is a six to 18 months lead time. A lot of the order intake this year will hit next year and also going into 2023.
Okay, last question comes from Erkki, then we will have a break.
Yes, this is the last one. Are you concerned, if at all, of the capacity utilization rates in Vaasa and Trieste in the near future and further down the line? I mean, do you expect that the engine market will be sufficient to keep these factories and their people fully occupied?
If we look right here, right now, with the successful streak that Sushil and the energy team has, I would say we are running Vaasa at a good rate, and in Italy, we are actually bringing in additional resources to help us. Short term, that's the very short-term perspective. If we take a more mid- to long-term perspective, I mean, the general loading situation has been low. It's coming back to Arjen's point. In the past, we have taken actions. In the future, we will take actions. The actions we have taken so far is that we have, you know, slimmed down the cost base, so to say, being low on resources, you know, keeping very careful track of our CapEx.
I would put that in the basket of continuous improvement.
A good example here is you mentioned Trieste factory. In quarter two, we made an adjustment there, temporary layoffs in the Trieste factory. Now we are hiring external people to facilitate the assembly because the load is so high. It fluctuates quite quickly. Again, like Håkan said, the orders now coming in from energy storage, of course, greatly support better factory load, and that's beneficial.
Thank you, Arjen. Thank you, Håkan. Thank you for great questions. Now we will have a break. Please be back here at 3:00 P.M. Finnish time.
Thank you.
Thank you.
Welcome back to Wärtsilä Capital Market Day. I hope that you enjoyed the short break. We still have two exciting presentations. We will continue with Marine Power, which is our biggest segment in terms of comparable operating profit. Roger Holm, who is the President of the segment, will describe how he will deliver profitable growth by focusing on decarbonization and services. As you may have recognized already, also today, energy business and the growth opportunities there have been one of the hottest topics among the investor meetings. We have Sushil Purohit, who is leading the business, describing how he will capture the growth in balancing solutions and services. I hope that all of you have recognized that Sushil and his colleagues have been very busy and successful closing the deals recently, and the latest deal was announced this morning.
After those presentations, there will be another Q&A session and also Håkan and Arjen will join that Q&A session. Thank you.
Good afternoon. If you look at the maritime environment and look at LNG as a fuel, the maritime environment has been transforming during the last 20 years into LNG as a fuel. We are still at a rate of less than 5% of LNG as fuel usage, looking at the whole fleet. Now, looking at the transformation we need to do during the next 30 years, we need to see a transformation of the whole fleet that is 60% or more. This is a change in the maritime environment that we have never, ever seen before. If we look at it's a change of a vessel lifetime. The time we look at, it's the same as a vessel lifetime. It's 25-30 years.
It's a change and a speed that we will see that is totally different than what we have seen so far. The fuel flexible engine will be the technology where the industry can transform in a way that makes sense, both financially and from a decarbonization point of view. We need to keep in mind, this is not about an on/off thing when we talk about decarbonization. If you would go on/off, you can't afford it. As Håkan mentioned already earlier, the new fuels will be 2-4 times more expensive. You need to make this transformation in phases. This is where the engine technology is really suitable because you can look at the transformation where you can combine the financial viability with the decarbonization part that you need to take. This is the key in the transformation for our customers.
You can already see it in the discussion we have with our customers today. It's almost impossible to have a customer meeting today without talking about the decarbonization journey. It's on every agenda for our customers, and the key is, how do you do it on the right path? It's too late already to say that you wait and see, then you will be out of business. You also need to make sure that you do it on the correct path to keep this balance in place. Our service business drives the stability, the profitability, and growth, and we also see, thanks to the decarbonization, definitely more opportunities also from the retrofitting business of the existing fleet.
If we take a look at what we have in the offering portfolio as Marine Power today that supports this, we look at the propulsion equipment, we look at the engines, we look at the energy management systems on board, and the fuel gas handling systems. These are all core technologies to look at the decarbonization path for our customers. It's all about how do you make this transition in a path that makes sense. To support that on the life cycle side with transactional services, is it spare parts? Is it our competent field service engineers? It can be related to agreements or performance-related agreements where we share the pain and the gain together with our customers. Or, as mentioned already, project services where we talk about upgrades of the assets.
Already today, a key question for our customers when you order a new ship needs to be, who is the technology provider that will be there with you during your lifetime of the vessel? Who do you trust that will be there making sure that your asset value is going to stay. And that you can optimize the asset value. Because if you are not on the correct path of that one, it will have an impact of your balance sheet as well as your competitiveness. Let's go into the transformation phase. Håkan already mentioned this about the decarbonization, and let's look at what does this mean for the maritime industry. We have already talked about the regulation framework, which is in place by IMO, coming from regional regulations, coming from EU ETS for 55. That's one part of the change.
More and more, we see other stakeholders pushing for the decarbonization. It's from the financing angle when we look at the Poseidon Principles. Making sure that to finance your ship, you need to stay on the development path for the decarbonization with your assets. It's also from the cargo owners, and the Sea Cargo Charter here is a perfect example where we look at where the cargo owners are demanding that you use ships that are on the right path towards decarbonization. More and more companies like Wärtsilä, like other companies, setting their own targets, how to decarbonize operations. Actually, the logistics chain here might be a good pathway to make sure that you optimize your footprint. If we then look at it from what we call here the CII index, this is the Carbon Intensity Index.
Compare this with when you buy a washing machine at home or a TV, you have the same marking on these ones. This is the same what we will see now in the shipping world. The only difference is that you don't upgrade your washing machine at home during the life cycle, but this is what will be expected by the ship owners. You will need to upgrade your asset constantly if you want to stay competitive. The key here is to make sure you do it in a way where you combine the financial viability with the decarbonization part. How do you make sure that your assets stay competitive on the path of the grouping of this CII index? We already see that this is going to impact the competitiveness of your vessel.
This provides a big framework then for the ship owners to look at how do you stay on this right path in the decarbonization. Let's have a look then, what does this mean for you as a ship owner? If we start from the upper part here and look at what do you need to think about if you are planning to order a new build vessel. We see already today talking to customers that they think about, for example, to say that, "Okay, can I prepare storage space for methanol as a fuel already now?" Methanol is the easiest fuel to prepare for from a fuel perspective. Can I make sure I have the tanks, the space for methanol as a fuel?
Can I prepare a bit of space in the engine room for equipment that is needed when you run on methanol? It's a fairly small investment in a new build phase that you can do to be much more prepared to say that when the first big dry dock comes five years after you have taken the ship into operations, you would convert the engines to run on green methanol. These are the things you need to look at on top of making sure that you are as flexible as possible to bring in energy efficiency devices so that you can constantly improve the way that you operate your vessel.
If you are then looking at your existing fleet, here today, you might look at, "Can I do improvement looking at the propulsion equipment, shaft generators, installing hybrid installation?" You go by wind assistance, you might install air lubrication to improve the resistance of the hull. All of these things, looking at the total fleet to see that, how do I stay on the CII curve that we already mentioned? What makes sense financially, and what makes sense then from a pathway towards decarbonization? Then at some point in time, you will also get into this question that, "Should I convert a future fuel of the vessel?
Does it make sense looking at what's the remaining lifetime of my asset? This is a constant discussion together with our customers today, and it's definitely at the core of the customer strategy that, "How do I stay competitive in the industry by looking at the fleet, optimizing the new build vessels to make sure that I'm going to be there where I need to be five years ahead and 10 years ahead of time?" Let's look at what does this mean then from a fuel perspective. Here you can see that green is not really black and white. It's a mix of many things. We are moving from an environment that has been very much a single fuel environment into a multi-fuel environment, with much more complexity, even regional differences we will probably see.
If you start by looking at the dotted orange line here, this is coming back to what Håkan showed earlier in his presentation. This is the pathway where we look at in this scenario, 1.5 degree scenario, that what speed do we need to take to reach that scenario, and how much uptake do we need to see on the carbon neutral and zero carbon fuels? The challenge on this curve is that in the beginning, you have the chicken and egg thing. The green fuels are not available. You will not invest in equipment that can utilize green fuels if it's not available. The fuel distributors will not invest in green fuels if it's not available. You need to solve this circle.
On the other angle of the time axis, if you look at 2050, it's to make sure that we have started the transformation fast enough, so you can do this in a financially viable way. There will not be enough yard capacity, nor enough retrofit capacity if this is coming too late. That will impact the asset value of the vessels if you cannot make sure that you are on the right path on this transformation. You are pushed from both ends, which means that the industry as such needs to move now. It's already moving, and in a maritime context, it's moving fast, but we still need to remember we talk about decades when we talk about the transition here. When you look at this curve, it looks like small steps, but in a maritime context, this is big.
It needs to constantly move, otherwise, you will have an asset challenge towards the end of the lifespan here. As you see, you will also see, especially in the first part of the timing here, that this is a lot about also looking at the blending. You will blend fossil fuels with bio or synthetic fuels. It can be then either on the diesel side, the liquid fuel, or on the gas side, talking about bio LNG or similar. The reason we will see this is more from a financial perspective. Fuels will be 2-4 times more expensive. How much do you need to blend to be on the right curve?
To look at it also from another angle then, the fuel and the fuel conversion, and when you look at the fuels, it's not just about the fuels itself, it's also about the characteristics of the fuel. We need to remember when we look at this, in shipping, the space is precious. You need the space for cargo or passengers. Every corner of the ship is something that you will try to optimize. When you then look at the future fuels, on the left-hand side here, we have the existing fuels. Then you can start to compare. If you look at the bottom line here, there we talk about the gross tank size factor. This is not just about the fuel volumes itself, but also the tank structure that you need for this specific fuel.
If we start from the right-hand side of this picture, and you look at the battery, you see today it's around 40x more space than if you go with traditional fuels. We might get in the future to something close to 20x. It's still a lot of more space that you need, which means that for this to happen, you need to go short routes only. You cannot have a vessel that is full of batteries only and no space for cargo or passengers. You need to optimize the space and, of course, depending on the turnaround time, the charging time that you need to do in the port.
On short routes, this will work well with the additional note to remember, 25, 30 years life cycle of the vessel. You are not going to move this vessel to a longer route during the lifetime of this vessel without doing significant changes. You are locking in the vessel for a short route for the lifetime of the vessel. This is also good to remember. If that works, this is a good solution. If we go to the fuels and looking at, you hear discussions today talking about hydrogen-fueled vessels. Most of that today is compressed hydrogen. We talk about close to 20x the space again and all the complexity that comes with hydrogen.
If you go cryogenic, you go to liquid hydrogen, where you need to have it then to -253 degrees, then you get clearly less space, but a lot more complexity due to the cryogenic setup of this one. For sure, we will see some hydrogen vessels also in the future, but it's not going to be a mainstream fuel in maritime. In energy, it might be different, and that's a different story. Remember, space is precious in maritime, which then leaves us with two mainstream fuels looking about future fuels in maritime. Methanol, which is fairly easy to handle. It's a fairly straightforward fuel. We have been running methanol since 2015 together with Stena and Stena Germanica. We know how this works. Tank construction-wise also, this is fairly simple.
Ammonia is a newer fuel and that's also clearly much easier to handle. You might say it's toxic. At the same time, ammonia is used today in many applications, and it's transported also already by sea in big quantities. This is nothing new. It can be handled. Storage need-wise, it's also okay. These are the direction we will see this going. Then coming back to why is then the engine the key technology here? Because when we talk to the customer on what we can do already today, it's. We can start with drop-in fuels. You can already blend biofuel, either in liquid or gas forms, already in the tank today. You can start transforming with existing technology. It works today.
You can move in the future to something what we call also blending. This is where you inject two fuels into the combustion, which you can do, as an example, you can blend ammonia with marine diesel oil, as an example. Again, you are moving in the right direction on the decarbonization. Towards then, in the future, depending on price and depending on where you want to be from a decarbonization perspective, you are mixing this in the right order. This is not going to be an on/off thing. It's going to be a gradual transformation. The reason for this is that here you can bring in the best total cost of ownership, both from change needs on the engine and the vessel structure, as well as then from a fuel cost perspective. We know these fuels.
We have been working on gas and liquid fuels for decades already, dual fuel applications. We know how to run on biofuels. We know how to run on LNG. We know how to handle methanol. We have also run on hydrogen blends, and we have tested actually better than we expected this summer on ammonia, where we have run an engine on 70% ammonia, 30% marine diesel oil with really good results so far. This is the way we also believe it will go where you start the mixing percentages. Same we have done on hydrogen to test the engines on pure hydrogen. Combining that with the electric side where we see here, we will see more hybrid installations where you use batteries to take out peak shavings to optimize how you run the engines.
You can also then on top, of course, add the energy saving devices that was mentioned earlier. All in all, if you summarize the decarbonization journey, we sit on the technology, the know-how, where we can be part of the customer's journey on this decarbonization pathway, where you combine the financial viability with the greenhouse gas reductions in the most optimal way as you look at your total fleet. Let's quickly look also on the perform part and how we are going to drive this from a service and connecting service to the decarbonization part. We have four clear growth drivers. One is what I earlier said, that our customers needs to be really careful looking at the technology choices today. Who is your partner for the lifetime of your vessel?
Who will be there upgrading your vessel in the best potential way? Increase transactional sale, look at fuel conversions, combining that with the energy saving devices. Going back to the CII curve, how do you optimize your vessels to stay on that one? Agreements where we already see today the increased interest in agreements, thanks to more complexity on one hand, but also the more value we can provide to the customers on the agreement side. If I start with the transactional side, this is going back to what Håkan already mentioned in his presentation. The key here is this is already ongoing. What we are doing is looking at how do we optimize the know-how and the data we have well in advance for when a customer is doing a dry docking.
A dry dock is happening around every fifth year, and usually the customers try to optimize most part of the maintenance to this dry dock because it's more efficient, not all of it, but as much as possible. If we are proactive on being there, providing them the value for these dry docks, we can also optimize the way we do business on these smaller accounts. We have seen good results so far, 12% compared to 2020 and okay, 4% compared to pre-COVID. Here we have clear growth to target going forward as well. Retrofits. Going back again to the CII curve, remembering the washing machine or the TV. Here we upgrade the equipment as we go.
The easy thing now for 2023 target for the customers might be to bring down and put in engine speed limitation. That's the easy first step to reduce your carbon footprint. After that, it will be to look at energy efficiency devices. How do you keep the vessel on track for that curve? Going into fuel conversions later on when it makes financial sense. This is what we have for our four-stroke engines. As we already announced earlier this week, we are also going to do this for two-stroke engines, where we have launched the concept where we can go from liquid fuel to gas conversions with very limited methane slip. That will also be a base for us to develop future green fuel developments on the two-stroke side. This is really exciting.
Looking at agreements. We have proof from existing agreements that we can optimize the fuel consumption. This is a case referring to 2.5% fuel consumption. Remembering now, fuel bill will go up two to four times in maritime with the green fuel. The value of this 2.5% will just increase. Payback for doing this will just improve for our customers. It will not only be about the fuel itself, it will also be about reducing emissions. Combining again the financial with the reduction of emissions. We do this by having the best know-how about our hardware, our equipment, combining that with data, understanding how to best operate the equipment and do then dynamic maintenance planning.
When we look at the agreements we have in place, our target is to double the number of vessels that are covered by agreements. That's one thing. The other target is to push them up the value ladder also from a content point of view and a value creation point of view. On the left-hand side, we start more with maintenance planning combined with transactional services. In the other end, you go up when we talk about full performance-based agreements where we share the pain and the gain with the customers. It might be then related to uptime, it might be related to fuel consumption. It's what is important for their installations, and I'm sure we will see more in the future as well related to emissions. How do we optimize the agreements that we have together with our customers?
We today have a 94% renewal rate of our agreements, which shows already the value we can provide to our customers and why they come back again and again to make sure that we are working in a partnership together with our customers. To take a few concrete examples, I mentioned already 2.5%. This is a lot for the customer, for a fleet of cruise vessels. Second example in the middle, reduction of unscheduled maintenance cost over a two-year period, -69% for a fleet of LNG carriers. Savings by increasing time between overhauls and minimizing interruptions, EUR 40 million for the customer for a fleet of LNG carriers. All these of course depends on what operation they have, how critical it is.
The more critical vessel, the more critical operation, the more higher asset value they have, the more value we can provide to our customers by bringing together our competence that we can provide together with the customer's operations. To sum it up, we are on a path and a change journey that maritime has never seen before. The key will be here to combine the financial viability for our customers together with the decarbonization journey. We provide the know-how, not only the engine technology where you can do the transition in a phased way, but it's also with the total know-how as we as Wärtsilä can bring in to look at how do we optimize your fleet, how do we optimize your installations to be on this path? We are well-positioned to be part and take a leading role on this decarbonization transformation.
Thank you for listening. Now I'll welcome my friend Sushil then to talk about energy. Based on the questions, I'm sure there will be a lot of interest to listen to Sushil as well. Please.
Thank you, Roger, for taking us through the decarbonization of marine sector. Decarbonization of energy sector, we all know, is a global imperative. Let me start with a small reflection. Imagine yourself in Helsinki. It is February, peak of the winter. Outside temperature is -20 degrees. Your power and heating goes off for 48 hours. This happened to me, not in Helsinki, but in Houston, where I live, February this year. The Texas freeze event caused a massive blackout, leaving 4.5 million homes and businesses without power, heat, and even water. For some, it lasted several days. The event caused economic losses of $130 billion. Almost everything in the power system actually failed, except Wärtsilä-based, Wärtsilä engine-based power plant, which kept on running throughout the blackout to do what it was supposed to do, provide electricity.
What we need is flexible, firm balancing capacity to support renewable in our power systems. Our growth strategy is simple. The transition to net zero will require right technology, software, services, and skills. Wärtsilä is in the right position. We are well-positioned to provide that support to our customers in their journey. Now, today, my presentation is structured in two parts. Transform, where I'm gonna talk about how the energy system is changing, and perform, how we're going to capture growth in balancing and services. Now, our vision is to lead the transition towards 100% renewable energy, and I'm gonna talk about how decarbonization and increased amount of renewable in the power system is creating immense growth for our business.
I'm also gonna talk about how we are going to grow in power system optimization through our leading position in thermal balancing and energy storage. Finally, I'm gonna talk about how we're going to improve our business performance through growth in services and project excellence. What is going to be different today in my presentation compared to the last CMD is we have proof points to demonstrate that the transition is happening. We all know that the energy sector is undergoing a massive transformation, and the future is renewables. Decarbonization and renewables are fundamentally gonna change the way energy is generated. As Håkan already shown, 88% of world's energy is gonna be coming from renewables by 2050. Wärtsilä's role here is to provide balancing power to support the maximum utilization of renewables.
We all know that the sun does not shine always and wind does not blow all the time. Also what we have seen this year in Nordics and in Brazil, that big hydro countries can also have dry periods. This is where Wärtsilä balancing capacity will provide needed power. Now, many people in the energy sector is asking this question: how do we make the transition happen, and what steps do we need to make to net zero? I think the path is similar everywhere. The pace may be different. What we need to do is add a lot of renewables as quickly as possible. We need to create conditions for investment in thermal balancing and energy storage. Once we have adequate amount of renewables, we need to start phasing out the inflexible thermal capacities like coal.
To make the final push to 100% renewable, we need to invest in Power-to-X to create carbon neutral and zero carbon fuel, and then convert the thermal balancing capacity to run on those fuel. At that point, we can phase out the balance fossil fuel capacity if it is already not done. Wärtsilä's technology, both thermal balancing and energy storage, will be a key part in this transition and be a part of the future energy system. When we talk about power systems, let me show you how the power system work in practice and what our technology what role they play in that power system. You know that optimal power system is the best solution at hand at this point of time.
In a day when you have adequate sun and wind, you can produce enough power to meet the demand, and you can store excess energy in energy storage. As we approach sunset, the solar capacity comes down. The demand peaks because people come home and switch on their home, you know, their appliances and lights. At that point of time, you need the energy storage to take part of that peak. The thermal balancing needs to follow and ramp up quickly to take the rest of the power. As we go into the evening, you don't have any solar anymore. Your battery is discharged. Of course, you have low demand, and that should be able to be catered with wind. But you may not have wind. The wind sometimes comes, you know, comes down, and that halts the power generation.
At that point of time, you need to quickly ramp up the thermal balancing to provide power for the demand and also for system resiliency. Further into the night, you may have the wind coming back again. At that point of time, you need the thermal balancing to ramp down quickly to provide a path for the wind to take over. Now, it is really important to understand that inflexible capacity cannot ramp up and down to provide this path for the renewables to take over. On the left-hand side, you see an optimal power system, which will always be coupled, you know, the renewables will always be coupled with energy storage and thermal balancing capacity. This is gonna provide us the cost optimal path or cost optimal power system.
On the right-hand side, inflexible power system will have inflexible thermal capacity, which will mean that we will have to build out or overbuild the power system. Even then, because you cannot efficiently use the renewables, you have to curtail a lot of power. Remember three Cs. Our balancing solutions, both thermal balancing and energy storages, are complementary, and they provide reduction in CO₂, reduction in curtailment, and reduction in CapEx, making it the cost optimal power system. Now, when we talk about power system, I think planning is extremely important. When we plan well, when we carefully plan, we can save billions of dollars and achieve rapid decarbonization. Wärtsilä has systematically developed power system modeling capability over last decade. We have modeled 150 countries and regions around the world. Many of them actually are with our customers.
Now, when we talk about planning, when we talk about power system modeling, we just released last month our Front-Loading Net Zero report. I'm gonna take a couple of examples from that. Germany can achieve net zero five years ahead of their national target and save EUR 55 billion. India, on the other hand, can achieve net zero by investing in renewables, thermal balancing, energy storage, and reduce their power tariff by up to 48% from what it is today. At the same time, they can save billions of dollars from fuel import. If you have not read this report, I recommend you to do so. There are very interesting findings there. Now, Wärtsilä's thermal balancing energy storage are gonna play an absolutely key role in the power system.
Let us now talk about in the perform section, demonstrate how we're gonna capture growth in balancing and services. Balancing market is gonna grow tenfold, and we will capture opportunity in thermal balancing, energy storage, and services. We will tap into the growth in thermal balancing and energy storage and maintain our top three market position. We will create value through our strong power system knowledge and experience in integrating different generating assets. We will grow in our services business by increasing agreement coverage through performance-based agreements. Last but not the least, we will also tap into 10 GW of conversion opportunities. Now, let's take a closer look at the thermal balancing market. The thermal balancing market is growing by 30%. Over next decade, it's gonna grow tenfold.
Now, you know, we are one of the top three players in the thermal balancing market, and we are a top five player in the balancing market. The base load market is moving towards balancing, and that is making our technology more competitive in the near future. Gas is going to remain a critical transition fuel and to replace coal and provide system balancing. 40 countries, if you have read recently the report from COP26, 40 countries have already committed phase out of coal, and we think more will follow. Now, 90 GW of coal capacity alone is gonna be phased out this year. Hydrogen and other carbon neutral fuel will be gradually available.
As Roger mentioned, we're working on our hydrogen concept, and we will be ready with the concept by 2025. Ammonia will be earlier. Now, let's talk about some exciting thing. We have increased market activities. 17 states in the U.S. have set their target for 100% renewable energy and included thermal balancing as a part of their plan. Brazil is going to procure 12 GW of balancing capacity. They already had a reserve auction, and they will have another capacity auction at the end of the year. South Africa has already awarded 1.2 GW of ICE of internal combustion engine to IPPs. Germany will replace 25 GW of coal with renewables and CHP. We have done a study with EPPEI of China, which demonstrates that the internal combustion engine market in China, in Jiangsu Province alone, will be 8 GW.
Now, what does it mean for us as a business and as a company? The market is picking up, and as Arjen mentioned, thermal is back. We announced more orders this morning, and this time the winds are from Brazil, where we got three contracts, altogether 150 MW, 16 engines from our Wärtsilä factory. Last week, we announced two major deals from Latin America totaling EUR 480 million. A couple of months back, we announced a 156 MW contract from United States, from Omaha. We are currently building 6 power plants in Italy for thermal balancing, totaling 380 MW. This gigawatt plus capacity takes our thermal balancing install base by 20% up to 8 GW.
All these thermal capacities, thermal balancing capacities are providing balancing support for renewables and also for weather variability. Let me show you how. You remember we commissioned a 211 MW project just last year in South Australia. South Australia is a market where they have already reached 50% renewables. We did a study of South Australian market by taking real-time operational data, not only from the Barker Inlet plant, but also other plants in the system. What that study shows is the Barker Inlet plant, which is actually powered by Wärtsilä internal combustion engine, is by far superior than open cycle and combined cycle turbines. Why is it so? It does...
Because of its modularity and fast ramp and ramp up and ramp down capabilities and efficiency, it is able to follow, it is able to balance the renewables and follow the demand continuously. By doing so, it is able to capture 30% more price spikes in the market. Australia is an open market, so it is able to capture 30% more price spikes, resulting in millions of dollars of increased revenue. What is really important is it is able to avoid negative prices by which results in millions of dollars of savings. Now, we have had a lot of discussions about the market of engines, thermal balancing versus gas turbines.
The scenarios that I have presented, the winds that we have, which are quite a few of them are against gas turbine, and the real case that we have demonstrated, and actually this is now we are able to do. We have been talking about power system modeling, these in power system modeling, but now we can actually demonstrate this with real-time data. All of these demonstrates that ICE engines are very competitive compared to other technology. Now, when we talk about balancing capacity, what is, what makes our balancing portfolio incredibly strong is our other balancing solution, and that is energy storage. Let's talk about it. Energy storage market will continue to grow at 30% for next 10 years and beyond. We have been growing quite rapidly in past year by leveraging power system competence and integration capabilities. Our order intake has grown sixfold.
We have already delivered. We have a portfolio of delivered and contracted capacity of 4 GWh. Now, the orders, as Håkan mentioned, this year will be over EUR 700 million. Now, the business is expected to be profitable in a few years' time, and that is the focus of my organization. Let's talk how we can do it. We have deep know-how in power systems, and we will combine deep understanding of different technology and software, integrating generating assets and maximizing the revenue for our customers over the lifetime. We will continuously invest in to maintain our leading position in power system optimization and explore also different revenue models with performance-based incentive. Now on the execution side, we will continue to have a competitive supply chain with partnerships with world-leading battery cell providers.
We will grow by combining strong customer base that we have with our Wärtsilä global network, which provides us enormous strength to grow. To provide for that growth, we will systematically grow our energy storage organization and leverage our project management capabilities. Now, when we talk about revenue models and, you know, I would also like to talk about how our intelligent energy management system is creating value and capturing it also for us. We signed a frame agreement with AGL, and AGL really values our critical expertise in power system and also our technology. The Wärtsilä IntelliBidder auto-bidding software is able to improve the day-ahead forecasting and predictability of the intermittent generation for RWE in Texas, and it is also able to optimize their dispatch under the PPA. AbleGrid, among other things, value our critical safety and cybersecurity features.
Now, when we talk about smaller grids and island grids, we have a lot of use cases on how we integrate different assets and provide CO₂ reduction, lower generation cost, and provide reliability for our customers' power systems. B2Gold, where we have delivered a 15 MWh capacity in GEMS, they have been able to save 7% in their gold processing cost, not energy cost, gold processing cost. Which is enabled by GEMS, because GEMS is able to optimize their solar, thermal and batteries. I'm really fond of this statement by Dennis Stansbury of B2Gold. He says, "GEMS is basically the quarterback of the team." This is what our customers are talking about our energy management system. Now, when we talk about customers, I also like to talk about services, as our service business is strongly growing.
We had 11% growth in our service business. We have an extremely strong operating installed base right now of 57 GW of thermal capacity and 2.5 GW of energy storage. We are focused. Our strategy is focused on increasing agreement coverage. We saw that there are untapped potential, and now we are converting customers to have agreements through performance-based agreements. That is gonna increase or there is a potential to increase the EUR per kW price on the installed base. We are also pursuing heavily on gas conversion opportunities currently. Now let's take a deeper look at that.
Now, power systems are getting complex, and our customers are coming to us because we provide them support on integrating different generating assets, providing them lower CO₂ emissions, providing them with lower energy cost, and at the same time also providing them with reliability and resiliency that their power systems need. This is driving the need for performance-based agreement. What is really exciting is the conversion possibilities that we have, which is also enabled by decarbonization. The customers are setting up their decarbonization goals, and they want to convert their assets. We have a 10 GW conversion opportunity within our own install base. We have already converted or secured deals for 1.5 GW already. When the sustainable fuels will be available, we will also have opportunity to convert them going forward in the future.
Now we have a great service business that is supporting our customers in this time when they are, you know, transitioning to a new world. At the same time, we are also able to capture growth through decarbonization services, performance-based agreements, and conversion. Now, we have also taken steps in our business and in our organization to deliver robust performance. We have implemented rigorous program to improve risk and requirement management, both in tendering phase and in execution. We have strengthened project management and resource planning, strengthened sales and operation planning, and above all, strengthened leadership and performance management with continuous improvement mindset. We know that project business will always have some risk, but with this, we are moving into the future with a healthy portfolio, which will improve our profitability. Now to summarize, we are witnessing a massive energy transition.
We are well-positioned when the decarbonization and an increase of renewable will happen, we are well-positioned to grow in our business. We will continue to maintain our lead in energy storage and thermal balancing, and we will also improve our performance through service growth and project excellence. Now, we will lead the transition to 100% renewable energy future. We have the best technology on thermal balancing and energy storage to provide reliability, flexibility to power systems of today so that neither Texas nor any part of the world will have to see blackout in the future. Thank you.
Thank you, Sushil, and still congratulations for the deals.
Thank you.
Now I kindly ask Håkan, Arjen, and Roger to join for the Q&A. We will start the Q&A here in Salmisaari.
Manuel Losa, Bank of America. You were right, Sushil, that the questions will probably come to you. On the storage side, how big is the addressable market for Wärtsilä? I mean, if it's 55 GW in 2030, but how much actually is something that you're gonna target?
Yeah, thanks a lot for that question. Look, we are focusing on some focused market like Håkan already mentioned, you know, United States, U.K., Australia, and South Africa. These are some of the focused market that we have. Of course, the addressable market is. The entire market is 55 GW, but we're not present in some countries knowing that we will not be competitive, and our values will not be valued. We are only focusing on a certain market, but we will keep our. As we said, the market will grow at 30%, and we will keep our top three position. We will maintain our top three position going forward.
Okay. Within, I mean, say USA, what is it the whole market you're targeting there, or is there some specific markets that is not relevant for you?
We are focusing on certain markets which are big. We are not going to focus on markets where our technology will not be valued yet.
I mean, you know, the battery or energy storage and thermal balancing market is not one market. It's like when you go back to the school book, you segment the market, and there are different players in the market. We have the utilities, the IPPs, the developers, et cetera. Maybe you should-
Yeah.
Develop that.
I think, you know, when we talk about the energy market, it's. There are different types of players. You have utilities, which are then, you know, buying their own assets, and they're utilizing it. There's a different way they value assets. We can look at some business models. That is an attractive market for us. IPPs and developers. IPPs also, I mean, there's a lot of projects being done by IPPs nowadays and developers are also jumping in. That's where we see quite a lot of value for our technology. I mean, when I talk about our technology, it's the overall technology, including the software, and how it creates value for them.
For example, the example that I gave on the RWE side, that's where the IntelliBidder auto bidding system is actually optimizing their PPA and also optimizing, giving them a day-ahead forecasting and predictability. We are looking at certain markets where we know that we are gonna be extremely competitive with our technology and also certain customer segment. Then finally, the small customer segment with not a small customer, it's a large customer segment, but with smaller island and industry. That is where we see tremendous value with our solutions, which can integrate and optimize all kinds of assets and create value for our customers. We are looking at revenue models which can also.
We can, you know, gain some from that.
Okay, thank you. The follow-up. If I understood it correctly, you have 70% service agreements to that EUR 700 million order intake. Can you walk us through what it is actually that you do? Do you have uptime guarantees? If you do, how does an uptime guarantee work? Obviously, what's the risk for you in it?
Thanks a lot. We have 70% long-term service agreements where, of course, the software is a component in that, the warranty is a component in that. Then, of course, you know, reactive maintenance and keeping the uptime. We have. Of course, I can't talk about what level of guarantees we commit in a certain project, because that's also a bit competition sensitive, and I would not like to go back. We have back-to-back guarantees with our suppliers on that. From a risk point of view, I think we mitigate it quite well.
Okay, the final question from me, I mean, if you're able to save 7% of the operating cost for a gold miner. I guess you should be getting a pretty good share of that if you are able to price your product.
You can reach your own conclusion in that one.
Are you able to price your product?
Of course. I mean, you know, this is still a nascent market and there is, you know, all kinds of business models are coming in. Right now, for us, I mean, what we are trying to understand is how do we create value for our customers? We are confident that once we can do that, I think we should be able to make money.
As we said, we are moving up the service value ladder.
Yeah.
Also a question on the energy side. If you look at the fossil balancing plant, engines versus turbines, you highlighted the benefits and the advantages of engines. The last five years, we have seen the market share fall. Can you maybe explain a bit what drove that and what should change that? Obviously, the ramp-up speed is the key highlight of the engine that's always get put first as the advantage. Is that as important going forward, where you may use batteries for that rather than an engine or a turbine? Is it gonna matter in the future, whether you're two minutes or 15 minutes, if that role is taken by batteries anyway? If you lose that advantage, what is then the remaining advantage of an engine?
Right. Thank you. You have two questions, so let me address the first one where you said the market share. I think the market, you know, this is, of course, a market where one big order can change the market share for one player. I mean, if you look at the market share now, after we have received orders, our market share will grow. I think it is important to note that last couple of years, we have struggled in our core markets. Those markets, not even the gas turbines got deals because they were not awarding any contracts to anyone. They were just coping with the health crisis that they had. That is where we have been strong, and that probably has impacted our market share.
That doesn't say that the, you know, underlying, you know, why should engines be used for balancing? I think leading to your next question. Look, the engines can ramp up quickly and ramp down quickly. That is one of the advantages why they are able to balance the renewables continuously. I think if you saw the Barker Inlet plant example. I mean, it's the modularity. So in 211 MW plant, we have delivered 12 pieces of 18 MW engine. Now, with that kind of a size, you can minutely follow the load, because if you have turbines of a 100 MW of two pieces, you will have to run on part load.
You know, you can't even go below 50% load in those turbines because the technical minimum is 50%. You can't really start to. I mean, in some days, we saw that this plant was actually generating 4 MW, and then in some days it was doing 200 MW. That's another advantage. The third one is if you stop a gas turbine, and if you have to start one hour later, you can't do that. It's just not possible because the technology is not meant for that. With engines, you can do that. You can start and stop as many times whenever. When you are starting and stopping a turbine, forget about starting after you stop because you can't do that. But if you still start, stop many times a day, you incur a lot of cost.
With engines, you don't. The efficiency, because the combined cycles will not play a part in the future thermal future energy system because they will do balancing duty. The efficiency of engines are several percentage higher than turbines. So even if you run for 1,000 hours or 2,000 hours, it has economic cost. Look, I can count a lot of other advantages, but what is really important to understand here is you need to plan the power system with sophisticated power system modeling tools, and that will give you the optimal path for the future. That is important. This is no guessing game anymore. This is about really systematically plan the power systems.
Also on the battery, why? I think this is a good question we often face it.
On the battery. I think that's a good question. If it is 15 minutes or if it is one hour, it still requires capacity in the battery that you need to have, you know, overbuild the system. Then the same thing is once you have a turbine, for example, the turbine stops. You stop the turbine because you have enough solar and wind capacity. Now, suddenly you see that the wind has disappeared. You have to start up the turbine. You can't. What do you do? You have to have the energy stored in batteries to provide that peak. You have to overbuild the system. You have to have more capacity in the energy storage.
Similarly, because you cannot cycle the turbines that well, your solar and wind capacity will not be utilized as well as you can do in an optimal power system. You know, just imagine, think about Germany. I mean, during the COVID time last year, the power demand came down crashing because everybody stopped everything, right? In the first month, first couple of months. They were producing most of their power, or actually the share of renewable increased. What did Germany do? They actually dispatched power to Norway and paid them. At the same time, Norway, because they had flexible capacity because of hydro, they bought that power and earned money. That's really what will happen if you have an inflexible turbine in the system.
You will have to overbuild the solar and wind, and then you have to overbuild the energy storage because you need to overbuild storage, and you need to save a lot of excess energy. You have to overbuild also the solar and wind. Again, I think it's about building a power system with proper planning that will demonstrate what is needed in the future power system.
Just to build a substream on that. I mean, one very simple, if you have rainy days for three days, you're gonna need a lot of batteries.
Yeah. Exactly. I mean, Texas, I was there. It's a place that I live. We were without power for 48 hours. I mean, we were just close to our fireplace just to pass by that time, I can tell you with a little daughter. It's not fun. I think that's why it's important to build systems that will work in the future.
I mean, my main focus was, I guess, the way you explain it. You need to overbuild the battery system by less if you combine it with engines than with gas turbines.
Mm-hmm.
It's clear that you need that. I'm not debating whether.
Yeah.
You need some form of backup for renewable, but you think the capital cost of the system is lower if you combine it with-
Absolutely.
engines than with turbines because you need more batteries because of the longer cycle time.
Absolutely.
Yeah. It's not only that we think it. I mean, with the proof points that we are starting to have, I mean, that view is shared by our customers.
Second question, can you give any indication what share in a typical contract the GEMS system is relative to the overall revenues? Just big ballpark in terms of the core value add versus the pass-through.
Yeah, look, we can't, of course, go into the detail of the calculations. But of course, battery forms the biggest part, right? You know, that's what we procure from outside. I don't think I can give you a percentage number, but GEMS is smaller at this point of time.
The big value creation potentially is as we move up the service value ladder and we can provide energy as a service.
Yeah.
I mean, there is a software as a solution, but even more interesting is to move up the service value ladder.
GEMS is very important. It's the quarterback, right?
Yeah. It's the quarterback of the team.
Next, we will take a couple of marine-related questions. Chad.
Yeah.
You say customers may retrofit existing fleet to decarbonize. What's stopping cannibalization of new build whereby customers delay new builds until a zero carbon ship is ready and simply retrofit in the meantime?
It's a good question, but I think as I mentioned during my presentation, the fact to not do anything will not work because you will be out of business if you are not on this. You remember the CII curve and going back to the washing machine at home. You need to upgrade, and of course, you need to upgrade your existing vessel, but you will also need to get fresh vessels that are more efficient. The newer ones will be upgraded, but there will also be older ones that goes out of the system. You still need to continue to feed fresh things into the system.
Thank you. Order levels are at quite low levels on the marine side in segments where Wärtsilä has strong position. How is this affecting pricing levels on equipment?
Pricing on new build continue to be tough. It has been tough already for quite several years due to the lower volumes, and that continue. Having said that, of course, our target is with the fuel flexibility to step by step improve that situation, but we are still in a tough pricing environment.
What is the portion of cruise today for your equipment revenues and backlog? Cruises are now starting to recover, which is driving your service revenues, but when would you expect your cruise new build revenue to bottom out?
We still have, as part of our new build order book, quite a lot of cruise ships deliveries in the order book. If we look at when we expect to see new cruise orders coming in, I think we'll first start to see smaller cruise ships. That's the first segment where we'll start to move. Bigger ones will take some years before we will start to see orders coming in. If you look at the big yards, they have their order books until 2025 around filled. It would be then probably for ship deliveries after 2026. Looking then at the service business, we start to be at a level where 60% of the fleet is in operation and continuing to ramp up gradually during the rest of the year.
It looks good.
If green fuels are only ready closer to 2030, and vessels are supposed to last for 25, 30 years, is there a risk that marine orders will be very limited until 2026, 2027? How easy it is just to modify or retrofit in existing vessels for 2030 IMO targets to be met?
Yeah, it's a bit going back to what was asked before because we need to remember the older the vessel, the less efficient it is. Going back to the CII and the washing machine example, you will not necessarily upgrade, retrofit an old vessel. Meaning that you will now start to look at how to phase it out, and we will then need, on the other hand, a new capacity coming in. The demand will be there, it will not be possible just to look at retrofitting. There will be a continuous demand for new build as well to feed with newer, more efficient vessels that are as flexible as possible.
I would add to that. I mean, please note, I don't know if you noted that we said that there is gonna be big regional variances.
Mm.
I mean, if we take Norway, a new government. In the governmental program, it stated that one wants to take Norwegian shipping green. Do you think that is a business potential for Wärtsilä? We should not be caught in averages. We should look at where some of the action will take place, and that will create significant opportunities.
Moving back to storage. Could you be more specific when you say Wärtsilä is top three in batteries? Does third mean Wärtsilä is top three battery distributor, installer, or system optimizer? Or what is the role exactly behind the expression in top three? And can you say who are number one and two? Thanks.
Thanks a lot for that question. Wärtsilä is one of the top three energy system integrator, alongside Tesla and Fluence. I think that answers the question, right?
Yeah.
There is Bloomberg statistics too.
This is identified by Bloomberg.
What is the lifetime aftermarket revenue opportunity in a battery storage project relative to the initial project order value? How do performance guarantees, software licenses, and maintenance agreement work in monetary terms?
I think I touched upon that already. Look, I mean, of course, we are at this point of time in a state of growth. The market is nascent, it's growing rapidly. We are installing a large amount of capacity. Of course, all of these projects are tied with a, or most of the projects are tied with a long-term service agreement, as we saw 70% so far. We provide guarantees and warranties which are backed up with suppliers' guarantee, you know, when we procure stuff. We charge a fee at this point of time. I mean, that is what I can say. Going forward, of course, we are looking at different revenue models through our performance, you know, through performance-based incentive, which is gonna come into play.
As the volume grows and then we have the fleet to work on, I think there are possibilities.
What is Wärtsilä's current exposure towards offshore vessels, both within oil and gas and wind?
Yeah. Offshore vessels for quite some time has been a bit more silent, and there have been quite big layup percentages. That has also improved lately. The growing segment in offshore is definitely on the wind side, especially talking about wind turbine installation vessels. There we have a strong offering, so there we are for sure part of that business opportunity.
Marine upgrade, it seems like that these upgrades are now one of the hot topics. It sounds like the biggest investments will be for the tank system rather than the engine upgrade. Is that right? And does Wärtsilä have any revenues from a potential tank upgrade from HFO to gas or from HFO to methanol or ammonia?
Yeah. It can be depending on the vessel structure. It might be actually the bigger part of the cost is related to finding the space and putting the tank in for the future fuel. That's correct. The engine part is smaller. We also, for example, today already we provide the storage and the tank for LNG fuel. If you do an upgrade from liquid fuel to LNG as a fuel, we provide also the tank for that installation.
How much of the equipment sales in Marine Power today is for new build and how much for existing vessels, meaning retrofits or replacements? What has this split been historically?
It's roughly one third and two thirds, you can say. The big share is on the service side. The big opportunity, of course, coming back to my comments earlier, is related to how we support our customers with retrofit upgrades. It can be energy efficiency devices or later on fuel conversions.
Is Wärtsilä financially well in a position for a major acquisition during the period of 2022-2024 if such a strategic measure should be needed?
Yes.
Thank you for very clear answer.
Finally.
Short answer.
Yeah, exactly. As we said, our strategy is much more focused on bolt-on acquisitions, making acquisitions of critical competence that is aligned to our core technologies.
Moving back to storage. In the battery projects, there's lots of pass-through revenues included. Can you comment how you mitigate risks regarding costs and EPC execution?
Yeah. Thanks a lot. I think, Håkan, you touched upon that question already, upfront. I mean, we have frame agreements with major suppliers, and then that's how we sort of, you know, make sure that we don't have cost overruns, first of all, in the supply side. Now, on many of the storage projects we are on the... Because transportation and logistics are a big thing. So there we are either passing it through to the customers or taking measures to make sure that we are not gonna get into a cost overrun on that side, either taking more contingency or taking a higher cost base on projects.
I must say, I mean, we also have strong project management experience for such a long time. I think that is probably unique for Wärtsilä compared to other system integrators that you see in the market. Through that and then through all the actions that we have taken in past couple of years, we are really ready to make good projects and not get into cost overrun. Of course, project business is still gonna have some risk and that is fine, but we are pretty confident in, you know, with our portfolio right now.
Thank you. I think we are running out of time for the Q&A, so handing over to Håkan for the closing remarks.
Yeah. Thank you.
Thank you.
Wrapping up the day, I hope you enjoyed it. I think if we start with the markets on the energy side and the marine side, decarbonization will transform the world, will transform our two industries. It's about regulatory changes, but it's also a demand that is coming for green transport and also for balancing. The good message is that Wärtsilä is a technology player in a rapidly evolving technology space. We have been in many of our core technologies for decades, and those core technologies are part of the future and will actually make a significant contribution to the future and, of course, then also represents growth opportunities for the future. On the execution side, we are set for performance.
We can leverage the markets that are coming back and that will continue to grow. Yes, we are still heavily impacted by COVID, but we do see very interesting opportunities going forward. We have a strategy in place. We have Wärtsilä Way. That is the foundation of how we want to work together as a team, where we are going, very clear direction, and how we wanna achieve the targets. The targets, we talked about them. We have new targets. The 5% organic annual growth over the cycle, but we definitely think it's achievable with the significant opportunities we see in services, on the energy side, both on the balancing and the storage. On the profitability, the 12%, we are currently at 6%.
We really believe we can take it to 12 over a few years, driven by growth, but also by continuous improvement. Then we have set ourselves some ambitious decarbonization targets and both for our portfolio and for our own operation. I will say one of the most important thing is of course our team and the culture that we are building. Performance culture, making our customers successful, staying close now in the big transition. It's a great opportunity, but customers are evolving. It's about delegated P&L responsibilities with ownership, accountability. It's about caring for people, so people care for customers. It's about moving in the right pace with the leadership, providing direction and support, and it's about continuously improving our performance.
If I sum up the mood with one word, which I started with this morning, and that is to say we are all really excited about the future. Thanks a lot for today.