Wind turbine manufacturers: Rising costs sweep the European industry

The profitability of the wind turbine sector in Europe remains depressed as the sector continues to be negatively affected by high raw material prices, rising interest rates, supply-side delays and slow permit-granting processes for wind projects. The long-lasting expectation of falling costs for wind power turbines has gone into reverse, putting the whole supply chain in trouble. Fierce competition, mainly coming from China, is adding to the challenge. Last year already, orders for European wind turbines dropped by nearly half compared to 2021 in spite of the urgency to accelerate the deployment of renewable energy in response to the energy crisis and the energy transition.

Recent financial results of major European companies highlight those difficulties

Vestas posted a pre-tax loss of EUR 130 million for the second quarter of this year. Siemens Energy reported a net loss of EUR 2.9 billion for the third quarter due to issues in its wind turbine business Siemens Gamesa, which was hit by technical flaws and quality problems in certain components of installed turbines, including rotor blades and bearings. Large costs were required to fix the defaults. Several companies also reported penalty claims from their customers for late deliveries.

The rise in costs caused the interruption of several projects by developers as they were locked in low fixed price electricity contracts. Vattenfall announced last July that it suspended work on its Norfolk Boreas site, located off the east coast of the UK, after a 40% rise in turbine, labour and financing costs made the project no longer financially viable under the electricity price agreed with the government. Early September, the UK government attracted no bids from developers in its latest round of auction for offshore wind projects. The sector argued that the maximum fixed unit price set for electricity generated was too low. In the USA as well, Avangrid paid USD 49 million in fines to terminate the contract of the 1.2 GW Massachusetts offshore wind project. Several installers are said to be renegotiating their power purchase agreements. On the other hand, this should be kept in perspective, as uncapped auctions with non-fixed unit electricity price from the German state last July attracted bids from oil majors BP and TotalEnergies willing to pay big tickets to gain the right to install wind farms in the North Sea and Baltic Sea.

Slow permitting process reduces further the incentive to invest

According to the sector, the demand for turbines by developers is also dampened by slow approval processes for new projects, and inadequate licensing and permitting rules in Europe, in spite of the adoption of new targets for clean energy set by governments. As a matter of fact, in 2022, European countries invested the lowest amount in new wind farms since 2009 (EUR 17 billion compared to EUR 41 billion in 2021). Last December, the EU Council agreed on a proposal from the European Commission to temporarily simplify and consequently accelerate the permit-granting procedure. The updated EU Renewable Energy Directive includes those measures on a permanent basis, which should thus ease the permitting process when the directive enters into force.

Europe is thus expected to see less offshore wind projects to be developed in the next five years than previously forecast. The Global Wind Energy Council revised down its forecast for new offshore wind capacity installed in Europe between 2023 and 2027 from 40.8 GW in last year’s report to 34.9 GW.

Evolution in new turbine models poses technical risk

In order to increase their efficiency and competitiveness in a highly challenging market, the size of wind turbines has become bigger and bigger. Blades of offshore wind turbines can exceed the length of a football pitch and power a house for more than 24 hours in a single rotation. However, some of those large models have been implemented without historical hindsight, not taking the performance of older ones as a reference, which poses technical risks over the longer term. Those gigantic models also imply the adaptation of all the installation infrastructure, including vessels and cranes.

Analyst: Florence Thiéry – f.thiery@credendo.com