Wind turbine manufacturers – reasons for optimism?

Once again, we take a look at the worrying situation of western wind turbine manufacturers to see if the end of the desert crossing is in sight. And, spoiler alert, there are some reasons to be moderately optimistic.

 

Financial developments

What is clear from the third quarter results presentation is that the current situation remains very delicate, with a particular focus on GE which has lost a whopping $1 billion in the quarter, with almost half due to fleet reliability issues. SGRE, on the other hand, has been able to mitigate its results thanks to the sale of its promotion unit, which has brought it no less than €565M in Ebit (not included in the graph below). As I wrote in a LinkedIn post, “the bleeding does not stop”.

 

 

 

In terms of revenues, there is still a slight improvement compared to previous quarters, but still below the levels of a year ago.

 

On the positive side, as usual, are the results of the services business, with record figures in terms of both revenues and profitability. Although still far from being able to compensate for the heavy losses in the sales business, it is already giving all manufacturers a shot in the arm quarter after quarter.

 

Greener pastures?

 

It is clear that the situation is still very complicated, but there are small signs of moderate optimism.

 

In April of this year, we published an article on the WindEurope fair held in Bilbao and in that article we pointed out some possible measures that could alleviate to some extent the bad situation of the manufacturers. So, let’s forget about boomers’ complexes and dive into self-reference to try to guess changes in the sector’s trends.

 

 

1) Auction design

The first point raised was that of auctions. As we have seen in the recent fourth renewable auction in Spain, which was practically unallocated, the sole criterion of price (and also trying to minimise it in an absurd way) is not going to work in an inflationary environment and where renewables contribute much more than being the cheapest sources.

 

However, although we have not yet seen any changes in Spain, in Europe things are already starting to move. In the recent 700MW offshore auction in the Netherlands, 90% of the selection criteria were not based on price, but on qualitative aspects such as grid connection or biodiversity protection. Although there is still much room for improvement as WindEurope comments, it seems that this is a change we will see in more countries. In fact, France already includes 25% of non-price criteria and the EU authorises up to 30% of such criteria in CfD auctions.

 

Incidentally, in Spain we have already seen a similar process, but it was to award the connection capacity at the node of the former thermal power plant in Andorra (Teruel), an auction that was won by Endesa.

 

Verdict: Positive evolution with much room for improvement.

 

2) Avoiding dumping

Although it seems an obvious measure, Western manufacturers have in recent years engaged in a suicidal race to lower prices which is, to a large extent, the main cause of the current situation.

 

And where do we stand on this issue today? Well, once again we see positive signs, such as the evolution of the ASP, which, although very imperfect, helps us to guess sales price trends.

 

 

The increase in recent quarters has been remarkable, with Vestas reporting a record ASP of €1.06M/MW in 3Q22, 30% higher than a year ago. While this is a positive development, it has two side effects of which we need to be aware:

 

– Lower order intake: order intake suffers as prices rise as some developers delay their purchase decision while waiting for better prices. As can be seen below, in 3Q22, 10% fewer contracts have been signed in millions of euros, which, taking into account that prices are significantly higher, means that far fewer MWs are being signed.

 

 

– Entry of Chinese manufacturers: Chinese manufacturers, far from following the trend of raising prices, are lowering them in their own market. And we know that they will try to take advantage of this situation of high prices to try to enter markets and customers that have so far been off-limits to them. As an example, the news of Mingyang as a preferred supplier for Hexicon’s floating offshore project in the UK.

 

Verdict: Positive developments, albeit with risks.

 

3) Sharing developments

Another area where the industry needs to improve is its ability to cooperate on non-strategic or non-differentiating aspects. In this area, little progress has been made in recent months, although the mad race to launch a new model every 18 months seems to have its days numbered. As the CTO of Vestas said in this interview, “manufacturers should focus on optimising existing technology to be able to speed-up and scale-up“. It seems clear that there are years ahead in which we will see fewer new product launches and more improvements to existing products.

 

Verdict: Little evolution in cooperation, but slow-down of developments.

 

 

4) Vertical integration

Another issue that could alleviate the current situation would be the expansion of OEMs into more profitable areas of the value chain such as promotion. But in recent months we are seeing the opposite trend: as a quick way to raise money, manufacturers such as SiemensGamesa or Nordex have sold their project portfolios. In fact, SGRE has recently sold its development portfolio in Southern Europe to SSE. In addition, on the integration side towards component manufacturing, we are also witnessing divestment moves such as Vestas recently selling its control unit manufacturing unit to KK wind or SiemensGamesa considering the sale of its successful gearbox and generator manufacturing units.

 

It is clear that, with the pressing need for extra revenue, manufacturers are forced to sell off some of the most attractive parts of their businesses.

 

Verdict: opposite trend forced by the need for extra income

 

In conclusion, we see some signs that invite us to be cautiously optimistic, such as price increases, new auction designs or the slowdown of new developments. In addition, we should not forget that the medium and long term outlook is better than ever with demand assured thanks to the global decarbonisation plans, but it is clear that short term measures will have to be accelerated in order to reach the promised paradise.