Wind

Are the West's 'big three' in fit shape to meet massive offshore wind growth?

Recharge runs the rule over turbine giants Vestas, Siemens Gamesa and GE as they gear up to meet booming demand amid ongoing pressures and potential Chinese competition

Shashi Barla of Brinckmann.
Shashi Barla of Brinckmann.Foto: Brinckmann
As COP28 gets into full swing, governments are betting on offshore wind to provide a major contribution to achieving their climate goals. The EU aims to hit 60GW at the end of this decade and 300GW by mid-century, while Britain pitches for 50GW by 2030 and the US aims for 30GW.
That is up from around 17.7GW in the EU in mid-2023 (the UK has another 14.7GW installed), and a mere 42MW in America.
But are the West's big OEMs financially and structurally fit to provide enough turbines needed for the massive build-out demanded by governments – especially considering recent setbacks through high-profile cancellations of gigascale wind projects off the US East Coast by offshore wind pace-setter Orsted and massive financial woes at leading Western offshore wind manufacturer Siemens Gamesa?

Loss-making OEMs

Hit by a toxic mix of supply chain difficulties, logistics problems, soaring costs for raw materials such as steel and challenges in ramping up production at factories, all Western OEMs have been in the red this year, with only Vestas returning to a small net profit during the third quarter of 2023. Project cancellations by customers in the US and the UK pose additional threats for the future.

But those challenges “should be mitigated in the coming quarters, and then we would see a significant ramp-up in the activity for these companies,” said Shashi Barla, head of renewables research at Danish analyst company Brinkmann.

“All the Western OEMs are fit financially, strategically and operationally, to take advantage of the growing offshore demand.”

Among the top offshore wind OEMs, Barla expects Vestas “to come out of the woods” next year, GE in 2025, and finally Siemens Gamesa in 2026 – in line with parent Siemens Energy’s outlook for its wind turbine unit to be profitable again.

“I definitely expect that this industry will survive,” Sydbank chief analyst Jacob Pedersen agreed. “It's also fair to say that the problems in Europe are not nearly as profound as they are in the US at the moment.”

Siemens Gamesa

The manufacturer during parent Siemens Energy’s capital market day has pledged to cut costs by €400m ($439m) through 2026 by simplifying its organisation and optimising overhead costs, without detailing what that means exactly. Earlier in November, Siemens Gamesa had scrapped plans for a $200m turbine blade factory in Virginia.

But the OEM at the CMD pledged to do everything it can to speed up the ramp-up of offshore facilities elsewhere to meet customer demand and work through its order backlog. Cross-functional teams at each plant are meant to help the ramp-up. At its flagship factory in Cuxhaven, Germany, such a team has identified over 500 improvement measures for its main SG 14 offshore turbine platform.

The company also intends to improve the profitability of new orders through disciplined bidding to ensure the health of deals agreed.

By 2026, Siemens Gamesa is seen having worked through onerous contracts that are contributing to current losses, chief financial officer Maria Ferraro claimed. For next year, the turbine unit still expects €2bn in losses, though.

Siemens Gamesa was also hit by Vattenfall earlier this year scrapping its 1.4GW Norfolk Boreas project off the UK, although that order had not been firmed yet.

Despite the setbacks, the company is still the “undisputed leader” in offshore wind, Barla reckoned, with an order intake of 7.9GW during the fiscal year of 2023, more than double compared to an average of 3.2GW in the past four. The company at the end of the third quarter had a turbine order backlog for both onshore and offshore worth €22.4bn.

But Siemens Gamesa’s fortunes are also closely linked to the ongoing malaise in its onshore unit, where it has said it is in the middle of fixing massive quality issues, while focusing on its 5.X platform and concentrating on Europe as its core market is the way forward. It remains to be seen if onshore will stop consuming a great part of the company’s attention in the coming years.

Vestas

While the Danish manufacturer was also exposed to industry-wide headwinds, it “is still the best-in-class and continues to retain the position in the foreseeable future,” Barla said, but added it “has an uphill task” to meet its target of a 10% profit margin by 2025, a view shared by most analysts.

JP Morgan in a note to investors said offshore risks remain, regarding the OEM’s new V236 offshore wind turbine platform, and stakes have gone up after the company booked its first firm orders for it.

“We still expect Vestas to miss its €3bn offshore revenue target for 2025 and forecast €1.95bn sales vs. consensus €2.65bn. However, we believe offshore risks are now better understood amongst the investor base,” the bank noted.

Vestas is not exposed to Orsted’s US project cancellations, and CEO Henrik Andersen said the industry shouldn’t dwell on “one or two negatives” in offshore wind, but instead take price increases in the sector into account and adjust accordingly when working together with customers and governments.

“When you do a global transformation in an important area like the energy transition, there will be some bumps on the road,” he said in a recent results call.

“I think in a time where the world re-established itself at different macroeconomic levels and interest rates, and also energy pricing, there will be some adjustment.”

Despite current problems “offshore wind is a very attractive energy source,” the CEO said, but insisted wind at sea “is not for free”, reflecting an industry-wide concern that tender prices have gone down too much in most geographies.

The company at the end of the third quarter had a wind turbine order backlog worth €21.6bn, with 17.3GW in onshore wind and 3.68GW offshore.

GE Vernova

“Offshore Wind remains difficult this year, with losses of roughly $1bn in 2023. Next year we expect offshore will have similar losses,” GE CEO Larry Culp predicted during a call on third-quarter earnings, where he also acknowledged the company is working its way through “a tough $6bn backlog” of offshore wind orders over the next two or three years.

All companies that have expanded into producing offshore turbines have had initial losses on it, Sydbank’s Pedersen said when commenting on the potentially loss-making backlog.

“That was actually not very surprising, but still, it's a testament to problems in the industry,” he said.

In a filing to the US Securities and Exchange Commission, GE added its offshore wind business "continues to experience pressure related to our product and project cost estimates, as well as in our delivery schedule projections.”

The OEM has faced additional costs due to a redesign of its flagship Haliade-X offshore wind turbine after losing a patent infringement case by rival Siemens Gamesa that affected parts of the machine.

GE on top of that was affected by Orsted’s cancellation of the 1.1GW Ocean Wind 1 project, for which it had been lined up as preferred turbine supplier.

Asked by Recharge whether prices had already been fixed when GE in 2021 announced it had 'finalised' that contract, the company declined to comment. Therefore it is unclear whether the project cancellation in the end was a relief for the OEM, or a loss of future revenue.
Culp nevertheless saw some positive developments, saying: “We know the industry is ready for a reset” after New York state had reacted to complaints from Orsted and others about rising costs by announcing it would re-tender part of its fourth offshore wind round (after the state’s regulators at first had rejected a renegotiation of offtake prices, though).

“GE will have to weather tough conditions onshore and anticipated $1bn [of losses] offshore in 2024,” analyst Barla said, but added: With “the company’s ability to streamline products, operations and capitalise on the US demand, it is expected to recover in 2025.”

Chinese competition

As Western OEMs are mostly expected to slowly dig themselves out of a pile of difficulties ranging from onerous old contracts, large project cancellations and the slow ramp-up of factories, they may face a new problem. Chinese rivals are increasingly pushing into the European market and (at least on paper) have launched models of up to 22MW in capacity.

Vestas repeatedly has said it doesn’t plan to match the super-sized technology as the company first needs to earn back its investments in R&D and factory set-ups from its 15MW platform.

In the middle of its financial woes, Siemens Gamesa may not have the money to develop a larger offshore turbine at this point.

GE Vernova CEO Scott Strazik, meanwhile, has said the company has an 18MW version of the Haliade in the works – bigger than what Vestas and Siemens Gamesa have to offer but smaller than some of the Chinese OEMs.
The question of Asian competitors trying to push into the European market is not new, Vestas CFO Hans Martin Smith told Recharge earlier this year, and the way to counter that was to be a technology leader in a different way.

“Being that type of leader does not necessarily entail that you have to also push out new platforms,” he said… There are many other things that also have value, but which are different from putting on a bigger rotor or selling something with a higher rate of power.”

The question is whether developers will content themselves with the turbine size limits of Western OEMs.

Several developers have already said they would consider Chinese turbines on land, among them Norway’s Statkraft and Abu Dhabi’s Masdar.

To shield Europe’s wind industry from Chinese competition, wind groups have demanded to introduce non-price criteria in offshore wind tenders that could include aspects such as local content, data security or grid access.

China’s Mingyang is currently bidding in the Norwegian offshore wind tender. A win could give it a starting order volume in Europe to justify its plan to establish a manufacturing footprint on the continent. It could also help it comply with possible local content rules.
At Recharge’s Global Offshore Wind Summit in Oslo, Karsten Merker, co-general manager for Mingyang Europe, also said his company could offer protections for data from its turbines to prove it's not a security risk to Europeans.
So far, the inroads by Chinese OEMs into Europe’s offshore wind market have been tiny (a 30MW project off Italy’s coast), and industry experts often point to a perceived technological edge of European manufacturers.
Martin Brudermüller, the chairman of German chemicals giant BASF, however, recently shocked the sector by telling a German newspaper that Chinese offshore wind turbines are not only cheaper but also better than machines from European manufacturers.

BASF is building a 500MW offshore wind project in China’s Guangdong province together with Mingyang. How Brüdermüller can really know about the supposed superiority of Chinese turbines is a bit unclear, though. The chemicals giant only owns 10% in the project, and it hasn’t been built yet.

It will remain to be seen whether developers in Europe (or in the US) will really opt for Chinese technology at a significant scale.

"I don’t think Chinese OEMs would have any significant offshore market share [in Europe] in the next five years," Barla told Recharge.

"However, they will gain a share in Asian markets like Vietnam-nearshore and South Korea."

Chinese OEMs, despite having announced super-sized offshore models, have not yet built a track record in 10MW-plus technologies even in the Chinese market, Barla added, which will make it tricky to convince developers to source their machines in multi-billion offshore projects.

"So, Chinese OEMs' 20+MW technologies will not directly impact Western OEMs' position in the next five years," he thinks.

(Copyright)
Published 4 December 2023, 08:22Updated 4 December 2023, 08:22
EuropeUSChinaFinanceTechnology