Dear reader,
Brussels describes it as a lightning dash into renewable energy. Wind power is tipped to expand by two-and-a-half times by 2030, under plans set out on Wednesday to reduce dependence on Russia’s fossil fuels. That is a boost for Europe’s wind turbine manufacturing industry. But it may not be enough to shore up its fortunes.
In many respects, Europe’s wind power industry is an extraordinary success story. Half the world’s wind power comes from turbines made by European companies, according to trade body Wind Europe. It is already among the cheapest sources of energy. With about 2 per cent of all energy coming from wind turbines globally, the growth potential is vast.
But fast-growing industries are not necessarily profitable ones. Frustrated investors can draw parallels with Warren Buffett’s 2007 description of investing in US airlines. “Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it,” he said.
The industry is in trouble. All of Europe’s five wind turbine manufacturers are now operating at a loss. Denmark’s Vestas swung from an operating profit of €251mn to a loss of €329mn in the first quarter, it revealed earlier this month. Rivals are worse placed. In February, Germany’s Siemens Gamesa installed a new chief executive for the second time in less than two years after a series of profit warnings. Siemens Energy, which owns 67 per cent of Siemens Gamesa, said on Wednesday it was considering taking the company private.
Worries about profitability weigh on valuations. Although renewable company shares soared initially after Russia’s invasion of Ukraine, they have since given up all those gains.
To be sure, the war-induced urgency of the shift to renewables could benefit the sector — and not just by increasing demand. A big problem for turbine manufacturers arises from delays in approving new wind farms. That creates huge uncertainty in the volume and timing of orders. The EU is prepared to ease this bottleneck by addressing hold-ups caused by local objections. It reportedly wants to make it easier for renewables to get the go-ahead, even if it means “the occasional killing or disturbance of birds and other protected species”.
But delays are not the only problem. Profitability is being squeezed by price rises for steel, nickel, copper and other raw materials. Per kilowatt, there are 10 times more of these for a wind energy installation than a fossil fuel one.
Meanwhile, the competitive auction of permits to construct wind farms has driven down returns to operators, which have in turn squeezed their suppliers. Although manufacturers have reported an upturn in the prices of new orders, they are at risk of being undercut by Chinese competitors. Their turbines are as much as 40 per cent cheaper, according to Jefferies, and though customers are still wary of quality issues, their technology is advancing rapidly. China’s Ming Yang last year unveiled a world-leading 16MW offshore wind turbine.
For the wind turbine industry, this raises the grim possibility that it will suffer the same fate as Europe’s solar industry. Local suppliers were overwhelmed by a wave of cheap Chinese imports.
In a letter to European Commission president Ursula von der Leyen in February, the bosses of Vestas Wind, Siemens Gamesa, General Electric Renewable Energy, Nordex and Enercon warned they were losing ground to Chinese manufacturers. The small size of the European market was a big problem, they said. Last year, the EU added 11 gigawatts of wind farms, less than a quarter of the amount installed in China.
Simplifying the approvals process would help, the industry says. It also wants governments to stop auctioning permits on price alone. Manufacturers say governments should consider factors other than price — such as job creation — in auctions for new wind farms.
The Netherlands’ latest offshore wind auction took account of ecological impacts and how well the wind farm could be integrated into the Dutch energy system.
Wind turbines are arousing all-too-familiar European protectionism. There are two counterbalances. As the cost of living crisis deepens, opting for anything but the lowest cost provider must go against the grain for governments.
However, recent developments have strengthened the case for Europe to be self-sufficient in turbine capacity. The war in Ukraine has highlighted the dangers of dependence on authoritarian regimes for any element of energy supply. Europe’s wider energy plan needs to include provision for sustainable local supplies of turbines at competitive cost.
Enjoy the rest of the week,
Vanessa Houlder
Lex writer
The Lex team is interested in hearing more from readers. Please tell us what you think of European wind power and energy security in the comments section below