Northwest Arkansas Democrat-Gazette
Wind’s promise short on profit
Failure of this business would also fail world, analysts say
Optimism abounds about the future of wind power, with a clean-energy boom powering robust growth in an industry that businesses and governments agree is key to slowing climate change. But a nagging problem could keep the sector from fulfilling that promise: Turbine makers are still struggling to translate soaring demand into profit.
Wind power heavyweights Vestas Wind Systems, General Electric and Siemens Gamesa Renewable Energy are reeling from high raw material and logistics costs, changes in key clean-power subsidies, years of pressure on turbine prices and an expensive arms race to build ever-bigger machines.
“What I’m seeing is a colossal market failure,” said Ben Backwell, chief executive officer of trade group Global Wind Energy Council, noting a mismatch between government targets for new wind power and what’s happening on the ground. “The risk is we’re not on track for net zero [emissions] — and the other risk is the supply chain contracts, instead of expanding.”
A retreat from wind power could have devastating consequences, as it is set to play a pivotal role in global efforts to transition to green energy. To limit warming to as little as 2.7 F, the world would need to start adding about 390 gigawatts of wind farms a year by 2030, according to the International Energy Agency. In 2021, only about a quarter of that amount of wind capacity was added.
There could also be geopolitical implications from the U.S. and European companies’ challenges, as Chinese rivals move to expand outside their home market.
Western turbine manufacturers are now retrenching to
shore up their bottom lines. The companies say they’ll compete for fewer projects in fewer markets, raise prices, streamline their product lineups and cut manufacturing costs. That comes just as surging fossil fuel prices should be making renewables more competitive.
“You absolutely need to see some of these profit pictures turn around for the decarbonization goals to be achievable,” said Aaron Barr, global head of onshore wind at consultancy Wood Mackenzie.
The pandemic roiled the wind industry, leading to supply-chain disruptions and a surge in costs for materials and shipping.
But the troubles started back in the mid-2010s, when governments started to pull back on generous subsidies and make tenders for renewable energy developers more competitive, according to Credit Suisse analyst Mark Freshney. That fueled pressure to reduce turbine prices, squeezing manufacturers’ bottom lines.
It doesn’t help that the wind market is constrained by limited permitting for new projects. The process usually involves federal planning and local approvals, and both can get gummed up by people who don’t want the giant structures dotting their view of a horizon.
Those dynamics have pressured margins just as turbine makers have invested heavily to roll out bigger turbines that can capture more wind. These more powerful machines have helped drive down the cost of electricity from wind, but they’ve been costly for manufacturers to introduce. The industry also faces an unstable pipeline for future work, which does little to incentivize greater investment.
“The risk is that we will not have suppliers ramping up,” said Martin Neubert, chief commercial officer at Orsted, the world’s largest developer of offshore wind farms. “We will have a shortage in terms of supply for meeting global demand.”
A slowdown in U.S. turbine manufacturing risks further weakening the country’s energy independence. Already, it counts on Chinese manufacturers for much of its supply of solar panels — a reliance that has contributed to trade tensions between the countries.
Now, Chinese competitors see opportunity in the wind market. Companies including Xinjiang Goldwind Science & Technology, Envision Group and Ming Yang Smart Energy Group plan to invest in factories abroad to take market share.
Vestas briefly held bragging rights for the world’s biggest turbine when it announced a 15-megawatt structure, but in an example of China’s increasing muscle, it was quickly overtaken when Ming Yang introduced a 16-megawatt machine in August.
A more recent sign of trouble for players outside China came earlier this month, when Siemens scrapped its full-year guidance and said it was tracking toward a profit margin of minus 4%. Orders in its second quarter fell to the lowest level since the company was formed through a merger in 2017.
“The performance is clearly lagging behind our and my expectations,” Chief Executive Officer Jochen Eickholt said. “There are severe doubts around the targets we’ve set as a company.”