Onshore assurance

Up until recently, it seemed like the trajectory for the wind industry was all one way. With the extent of the climate crisis becoming ever more apparent, and the push towards renewables gathering ground, wind was a growth industry on the cusp of global dominance. For turbine manufacturers like Vestas and Siemens Gamesa 2019 was a promising time to be in business. 

Unfortunately, the past two years have seen disruptions that few could have envisaged – a global pandemic and a dramatic inflation in commodity prices, capped off with Putin’s invasion of Ukraine. Although long-term growth projections are as robust as ever, the short-term picture looks rockier, at least when it comes to the market for new turbines. 

While this is affecting the whole industry, the onshore sector is struggling most, given that it was dealing with tighter margins even before the crisis. While the big wind turbine manufacturers remain composed in the face of these challenges, they are acknowledging the issues at hand and taking steps to try and address them. 

“The wind industry is experiencing a time of turbulence,” says Alessandro Mancino, head of onshore sales at Siemens Gamesa. “Much of this is clearly outside of our direct control, but we are taking measures to mitigate the impact and increase the resilience of our business.” 

Siemens Gamesa has certainly had a trying couple of years. The company posted an annual net loss of €918m in the year ending September 2020, followed by a net loss of €627m in 2021. Since then, it has incurred further losses, which have been attributed in part to issues with its new 5X onshore platform.

Elsewhere, the picture is much the same. Nordex reported a €103.7m loss in the first nine months of 2021, following a €107.5m loss in the same period the year prior. GE Renewable Energy lost $312m in the final quarter of 2021, compared with $86m in Q4 2020, while Vestas has said that supply chain challenges slashed €87m from its Q3 2021 earnings.

With billions already wiped from their market value, manufacturers are grappling with a perfect storm of challenges. Steel and copper prices are up 50–60% since the start of 2020, while component shortages have worsened. On top of that, lockdowns and border closures in various parts of the world have created bottlenecks in an already labyrinthine supply chain.

“On the one side, commodity prices – the input costs for turbine components – have been increasing ever since our economy started bouncing back from Covid-19,” says Oliver Metcalfe, head of wind research at Bloomberg NEF (BNEF). “But it’s not just materials. Logistics costs have also increased drastically over the past 18 months. Between June 2020 and the end of 2021, the cost of a 40ft shipping container from Shanghai to Los Angeles increased by a factor of five.”

Another factor is the war in Ukraine, which has pushed up oil and gas prices to record levels. While that might sound like a good thing for the wind industry – after all, oil price volatility would typically boost demand for renewables – turbine makers have been feeling the pinch.

“If oil prices are high, that has an impact on all the commodities, whether that be steel, copper, aluminum fibres or resins,” says Shashi Barla, an analyst at Wood Mackenzie. “All the raw materials are already plagued with high inflation, and that has only been exacerbated by the Ukraine crisis.”

Paying the price

So, who should absorb these losses – turbine makers or their customers? On one hand, there is little that can be done from the OEM’s side in terms of the existing contracts they have in place.

“Siemens Gamesa, as an example, has €2bn worth of contracts in their backlog at zero margin because they can’t go back and renegotiate with their customers. That’s the magnitude of impact that the turbine OEMs are facing,” says Barla.

On the other hand, the newer contracts are starting to include a lot more indexation, meaning the final price offer is linked to commodity and logistics costs. The upshot is that turbine prices have been soaring, reversing a trend towards ever-lower costs of construction. Vestas has said its average selling price for turbines rose from €740,000/MW in 2020 to €830,000/MW in 2021.

“According to our data, onshore wind turbine prices have risen by 12%,” says Metcalfe. “While turbine makers have been passing these costs onto their customers, it can take six to eighteen months lead time between when a turbine contract is signed and when the turbines are delivered. So, we’ve seen turbine makers agree cheaper deals for turbines in the past, which they’re now having to deliver without having hedged fully for commodity prices.”

Given the complexities at play, contractual negotiations may end up taking longer than normal, and many turbine makers are recording a lower order intake. Meanwhile, they are experiencing significant delays to the delivery of critical parts and materials, which can set back whole projects.

Reasons for optimism

So, is it all bad news for the wind industry? Well, the short-term hit is undeniable. On the other hand, the long-term outlook for turbine makers – and for onshore wind in general – remains promising.

“We’re beginning to see many countries start to step up and make large net zero commitments,” says Metcalfe. “According to BNEF’s calculations, 89% of global emissions are now covered under some kind of net-zero commitment, and many countries are highlighting that wind is a key technology that can help them realise that commitment. So, the growth projections in the medium to long term are really good.”

To cite just a few examples, China is aiming to have CO2 emissions peak before 2030, and achieve carbon neutrality by 2060. It hopes to have 1.2TW of wind and solar in its energy mix by the end of the decade. The US wants to achieve 80% clean power by 2030, while the EU is aiming to reach net zero by 2050.

Regarding onshore wind specifically, a number of countries recently stepped up their 2030 targets. The UK has drawn up plans for a target of 30GW, while Germany is eyeing an impressive 115GW. The latter is aiming to derive all its energy from renewable sources by 2035. Corporations are making their own decarbonisation commitments too. In the US in particular, this often translates to procuring energy directly from wind developers. Between 2015 and 2020, the private sector accounted for more than 20% of all new US wind installations.

“Renewable energy remains a key solution to the challenge of decarbonising economies, and installations of wind turbines are expected to grow strongly to meet demand,” notes Mancino. “In addition, countries seeking to develop an energy supply independent of geopolitical disruption are increasingly looking to renewable sources of energy such as wind.”

He adds that the onshore sector will remain critical to Siemens Gamesa’s business model and will provide huge growth opportunities globally – after all, it accounts for a large majority of the capacity installations that are forecast for the years ahead.

Increase projects, simplify permitting

That said, he feels the wind industry is facing headwinds that it must overcome in order to create a sustainable industry. These go beyond the present supply chain crisis.

“In Europe, we need to increase market volumes rapidly,” says Mancino. “To meet EU targets for 2030, we need to build 30GW of new wind capacity every year, and yet in 2021 we only built 11GW. Unless we drive up the volume of permitted projects, we will place unsustainable cost pressure on manufacturers and suppliers. And unless we simplify and standardise permitting processes at a national level, we will fail to deliver on renewable energy targets.”

On top of that, Mancino believes the EU needs to redouble its focus on infrastructure and get better at rewarding the value of wind in auction design. “These factors together will help us create a healthy and sustainable wind industry in Europe that is capable of meeting the accelerated ambitions required to meet climate goals,” he says.

For the time being, surviving as a turbine maker may entail a shift in strategic focus. Barla points out that many OEMs are now focusing on geographic expansion, with a view to targeting their services towards the markets with most demand. They are also shutting down factories in high-cost locations, and opening new hubs elsewhere.

“Over the past three or four years, you can clearly see a supply chain migration,” says Barla. “Most of the factories in northern Europe have been shut down – Siemens has closed factories in Denmark, and Nordex is closing a plant in Germany. These are good examples of how companies are trying to shut down manufacturing in high-cost markets, then switching into markets like Mexico, southern Europe or India.”

Metcalfe believes that, while there is every reason for optimism over the longer term, the months ahead will simply be about trying to ride out the current crisis.

“For many wind supply chain companies at the moment, it’s about delivering projects as efficiently as possible and shifting some of that risk onto their customers,” he says. “The potential is there for explosive growth, if countries start making good on their net zero commitments. But there’s short-term pain, and short-term survival is on the agenda.”