In the current troubled times in the wind sector, when the main OEMs are announcing losses and cancelling their forecasts for 2020 due to the effects of covid-19, the O&M services business is the only one that is maintaining its revenue levels and above all, its high profitability. What is the secret? Are these profitability levels sustainable? Is O&M the future of the sector? Let’s try to answer these and other questions by taking a closer look at the sector
The weight of services in the total revenues of the main OEMs is growing year after year. In 2019, Vestas led this aspect with 15.4% of its revenues coming from O&M. With the current trend, and taking into account that every year the fleet maintained is increased with approximately 80% of what is installed, it can be anticipated that in 10 years, services will already represent 30% of the total revenue
But if revenues are already attracting attention, the key is profitability. As seen above, service yields in 2019 are around 20%, with Vestas again leading with an impressive 25.8%. These figures, in a sector with single-digit margins, mean that services, even though they only contribute 15% of revenues, account for around 50% of profits for Vestas and SGRE and over 100% for Nordex (offsetting losses).
One data to analyse is that SGRE leads the income per MW maintained, but not the profitability. It can be deduced that Vestas has very optimised costs and that SGRE has a great opportunity to increase profitability.
This is one of the keys to the sector: its growth is assured. With about 70GW/year to be installed in the next decade, the market of turbines to be maintained will go from the current 650GW to more than 1,300GW, that is, it is a market that will at least double its size in the next 10 years. And it is expected that the increase in revenue will be even greater as new services will be developed that will increase the revenue per MW maintained.
In a sector with ever decreasing prices, how do you explain this profitability?
At first glance it seems impossible but let’s look more closely at the reasons
As you can see in the graph above, prices are decreasing year by year. But this has a trick because prices are given per MW and the size of the turbines does not stop growing, so the reality is that the price per turbine does not decrease, but stays the same or even goes up a little as you can see below.
– Duration of contracts
As can be seen in SGRE or Vestas news, 20- or even 30-year contracts are here to stay. Not many years ago, the average duration of contracts did not exceed 5 years. The longer duration of the contract means assured income (and in most cases scaled up) and a customer captured to offer additional services in the future. As an example, Vestas reported in its annual report that the average duration of contracts signed in 2019 was 18 years!
– Reduction of O&M costs
As WPM explains very well in this article, large turbines have reduced their O&M costs significantly for 2 reasons:
- Economies of scale: as an example, the technicians servicing a 3 MW and a 5 MW turbine will be the same, thus significantly reducing the cost per MW
- Greater reliability: the following graph shows the great reliability of the latest generation of turbines even over 10 years of life
- New technologies: this is one of the hottest areas in the wind industry. There are many promising new technologies that are sure to reduce O&M costs even further. Let’s look at some examples:
- CMS: traditional predictive maintenance continues to improve, increasing sensorics and, above all, analysis capacity with systems that incorporate AI and ML
- Digital twin: very related to the previous one but taking it to a higher level. GE with Predix, SGRE with NEM and Vestas with Otupus are the leaders.
- Drones: for inspection and cleaning of blades
- Self-erecting cranes: many concepts on the market. They will be increasingly necessary due to the growth of turbines.
If it’s so profitable, why isn’t there more competition?
Obviously it is a market where many would like to be but it is taken over by the OEMs because there are barriers to entry that prevent ISPs (Independent Service Providers) and other companies from being competitive:
- Access to technology: this is an advantage when offering value-added services such as SW upgrades or control improvements. In addition, OEMs are very sensitive to their IP and ISPs do not have easy access to the core technology
- Economies of scale: the more fleet maintained, the greater the volume and the better the costs and efficiency. With today’s retention rates, OEMs are ensuring that this barrier to entry is maintained.
- Long contracts: there are fewer exchange options. A few years ago, with 5-year contracts, the customer was considering other options but now, signing 15 or 20 years, ISPs have few options to steal market from the OEMs
- Multi-technology: large OEMs such as SGRE and Vestas are pushing their multi-technology division very hard and are thus cancelling out one of the advantages of ISPs that could maintain fleets of diverse technologies. SGRE, especially with the purchase of Senvion, has taken a giant step in this direction.
After what we have seen, it seems clear that the crown jewel of the OEMs is their service division. Let’s look at some probable trends for the future:
- Value-added services: it’s going to be one of the key trends in the next few years. The market will tend to shift all profitability from the sale and installation of the turbine to the O&M period. To do this, it is key that OEMs are able to offer additional services that improve the performance of the asset.
- Multibrand: Vestas with the purchase of the ISPs Avalon and UpWind a few years ago began the trend to diversify the O&M offer to capture market to ISPs and other OEMs. SGRE with the recent purchase of Senvion O&M has made the master move to increase its fleet and multi-technology capacity. We are sure to see more moves of this kind in the future
- Artificial Intelligence: companies like Sentient Science have pioneered the combination of CMS sensorics with the analysis capabilities of AI and ML. Digital twins and advanced analysis will grow a lot in the next few years as there is a lot of room for progress.
Are we witnessing a change in the industry?
Many years ago, I remember that a visionary director at Gamesa was already of the opinion that wind power would evolve into a model similar to gas turbines where profitability is in long-term maintenance. At that time, with 5-year contracts and returns similar to those of the turbine sales, it seemed a very unlikely and distant scenario, but today, everything indicates that we are moving towards that model. The OEMs will try to sell the turbines even if it is without margin as long as they ensure 20 or 30 years of revenue and the possibility of selling additional services.
Growing market, revenue secured for 20 or 30 years, cost reduction assured…we will see if any disruptive element appears in the market (ISP with revolutionary technology) or on the contrary, the OEMs continue to command the O&M market with a firm hand…I bet on the latter.