When the global wind energy capacity approaches 1,000 GW worldwide and with an expected growth rate of 3% per year, we are faced with the following dilemma: If the market grows continuously, how is it possible that all the manufacturers lose money that only for the first three would be around €4,000 million in 2021, around 10% of their turnover?
We also don’t know if they are all, what happens in China stays in China, but at least it happens with all Western brands, let’s not call manufacturers because part of their components are also manufactured in that Asian country. In parallel, I pose a second question: How could I get out of this situation? Here the analysis is more complicated and I will only dare to outline a few lines in a second article.
Well then, the loss scenario, which, as far as we know, does not affect all renewable technologies (once again we do not know what happens in China with photovoltaics, for example) derives from various factors, some intrinsic to the sector and others external to it. The first can be grouped into those derived from the demand for wind turbines, which in the past was based on a system of regulated tariffs known ex ante (so-called feed-in) and that allowed manufacturers to determine the price of their machines in depending on the income prospects of the producer.
At that time, comfortable for manufacturers, it was said that it was cheaper to buy a machine in Spain and take it to Germany than to buy it directly in this country due to the different remuneration. I doubt it was ever applied, but the model was believable. The only drawback is that in this scenario, unit orders used to be for a few MWs, so several had to be accumulated to have a large order portfolio.
The arrival of auctions complicated the commercial strategy, and not so much because they offered low prices to compete mainly with photovoltaics, but also because manufacturers saw an opportunity to have important orders in the long term if they were linked to winning promoters, therefore that was offered at low prices, with disastrous consequences for its income statement.
Product diversification and the cost of raw materials
Another intrinsic element to the sector has been the diversity of sizes, especially in diameter, but also in nominal power, in a rush forward to differentiate itself from competitors in products that could be considered “quasi commodities”, all look alike once certified, both from the point of view of design and compliance with codes, and reduce the unit cost in €/MW.
All this supposes an additional cost in the production chain and jeopardizes future spare parts, a point that is addressed in another article. Here the Chinese manufacturers are different, especially those that have a presence in Europe, for a testimonial moment, since they concentrate on a few platforms to optimize costs.
The last of the factors that explains the current situation, and although it is not uniform for all manufacturers, is linked to the lack of adequacy of the supply chain and the extra costs that it entails. In the past, many component manufacturing plants were built to facilitate obtaining authorizations, without in many cases their location being the ideal one to serve the future market, much less the growing size of the machines.
The political and in many cases economic implications, some factories were built with public support and a commitment to maintain employment in the medium term, make it difficult to optimize the production chain. A notice for future access contests.
On the side of external factors, the main one is the increase in the costs of materials, especially copper and steel, and freight for the transport of components and finished products. As regards copper, it varies depending on the type of machine, but its percentage in the cost can be around 2%-3% and according to the World Bank report on raw materials, its cost has increased by 50% from 2020 until reaching €10,300/mt in 2022.
Steel has had a lower percentage rise, around 30% to reach €1,400/tm in 2022 but with a very high weight in the case of towers made of this material to reach 10% of the cost of the machine. In many cases, the problem is that it has not been possible to contractually transfer these cost increases to customers.
Additionally, and among the external factors, there is the aforementioned competition in auctions with other technologies, mainly photovoltaic, which made it necessary to set prices at similar prices when they are multi-technology, but also for reasons of institutional and political image in the case of mono- technology: it is worth supporting renewable technologies, but let’s give priority to the cheapest ones.
And to make matters worse, a certain contraction of the market is observed as can be seen in the following graph for Europe, with a 36% drop in orders over the year 2021 for the same dates with a significant concentration in the Scandinavian countries. :
On the contrary, the demand for equipment to manufacture photovoltaic modules in Europe has increased by 62% in the second half of this year compared to 2021, according to the German association VDMA, in order to compete with Chinese manufacturers and meet the demand European demand with a growth of 47% compared to the same period last year.
In any case, the growth of installed power in our country in 2022 alone has been 1,200 MW, which represents a significant workload for both AEMER member companies and exhibitors in the new edition of EXPOFIMER 2023 that we will organize new in Zaragoza, between March 8 and 9 of next year.
In this new article some future lines are proposed for the economic improvement of the necessary wind turbine manufacturing sector.
Institutional proposals
As already mentioned in the previous article, the situation is complicated and the exits are not easy. Siemens Gamesa Energías Renvobles (SGER) in a recent publication entitled “Why we need the European wind industry and how to safegurad it”, whose proposals have later been endorsed by WINDEUROPE, emphasized the importance of the European wind industry, a pioneer since the application of PURPA in the USA in the early 80s, and key to guaranteeing European energy independence, strongly compromised by the limitations of Russian gas and the risk of imports of Asian equipment.
This document analyzes the situation of the sector derived from the relative volatility of the market that, for example, has extended the deadlines for obtaining permits and shows the case of Germany, with the continued fall of the market since 2017, which which has meant, among other things, the loss of 37,000 jobs in recent years, without, for the moment, additionally, orders for offshore wind turbines. We are by no means in that situation, but it is a warning to take into account for solid and sustained growth, and take into account social reactions (which do not only affect wind power).
(The SGER document proposes to the administrations five different lines of action, to a certain extent complementary:
Speed up the administrative procedure, especially with regard to environmental processing (this proposal has been taken into account in the EU Regulation approved in December 2022) and forecasts for five-year auctions,
Develop programs to stabilize the prices of raw materials throughout the entire supply chain, extending the indexing by CPI of the price to the results of the auctions, fundamentally of the marine parks, and introduction in the adjudication of qualitative criteria (economy circular, integration and improvement of the electrical operation, local communities, job creation and promotion of hybrid solutions or power to gas) without including additional support,
Establish clear rules of the game in the markets that avoid or reduce competition with Chinese products, not only for specific components but for the entire supply chain (the loss of the European solar industry is given as an example to avoid)
And finally, an efficient use of Next Generation funds and the RePower Program (all very energetic terminology), to reinforce the infrastructure (both electrical and ports), improve equipment through innovation and promote selective training)
But they may not be enough: manufacturers must reinvent themselves
In any case, the proposed measures could be insufficient because, above all, they depend on third parties with a high institutional component and, therefore, subject to a certain political volatility. In this sense, the sector would need to "reinvent itself" to a certain extent to depend to a large extent on itself.
In any case, the technological concept of future wind turbines continues to be marked by the traditional priority lines: increase in production for the same resource and reduction in the cost of generation (LCOE), although whenever possible, without increasing CAPEX. For example, while the rotor continues to increase in size and wind turbines of less than 115 m in diameter are not marketed to increase production, the power increases slightly on land to reach 5-6 MW (with the consequent reduction in the price per MW), but the stabilization of the height of the tower is observed, given that there is no notable increase in production and the overinvestment of adding sections is avoided and also complicates maintenance.
Additionally, there are other factors that also influence the final price of the machines and complicate the future scenario, such as: integration into the network and participation in the balancing services of the system's operation, the logistics of the increasingly larger rotors. and also, the adaptations to facilitate the response in social integration, without losing sight of the fact that in many countries the new sites have less wind than those of the startup of the wind power more than 20 years ago, which ultimately affects the LCOE, a determining factor for price auctions.
With regard to the marine, still a 5% of the total market, its future prospects also include a higher price in the short term with wind turbines over 200 m of rotor or 10 MW of power, and floating solutions relatively far from the coast.
Since the concept of the product remains unchanged, it is necessary to reduce costs to change the current situation and companies have focused on reducing workers to disinvestment in some component factories, which in this way would become external suppliers . It must be taken into account that the vertical integration of the sector is highly variable, compared to ENERCON, which manufactures everything except for bearings, to GE, which until it bought LM, a large part of its supplies were from abroad.
This outsourcing may not be a bad idea as it should be remembered that the wind industry initially developed as an assembly industry for equipment manufactured by third parties in which the integrator (OEM in English terminology: Original Equipment Manufacturer) performed the engineering (sometimes developed by a third party, the best known case is the German company Aerodyn), including in many cases the design of the blades and the large components were purchased from third parties, adapting to the final design of the wind turbine.
Therefore, and in line with the divestments proposed by SGER, it would make sense that non-critical components, such as the towers, were the same for all manufacturers, and would become cheaper when mass-produced. It could also happen with others that, although they currently have the same suppliers, could be standardized, such as generators, transformers, pitch systems and even multipliers. Competitive differentiation would come from systems integration and control.
Another key issue is the need to reduce the number of platforms, a flight forward to show certain competitive advantages, given the similarity of the wind turbines, but high risk and high cost, making the availability of various components necessary.
Maintenance, the obvious complement to manufacturing
In the meantime, the commitment to maintenance and complementary services by manufacturers, with different levels of intensity, is a way of obtaining additional income and being able to use the knowledge and experience of their staff.
There is a very obvious reason and according to some recent publications, maintenance can work with margins of 20% (independent ISPs would like to reach these values) and with less risk, than those that could theoretically be obtained today in manufacturing. that in no case would they exceed the digit of their best moments. Additionally, and for the already mentioned reasons of diversification and complexity of the machines, the supply of spare parts is key for many customers, which makes them loyal to the technologist.
In this scenario, the ISPS have a fundamental role to work directly with customers or jointly with manufacturers, given the necessary flexibility to serve an increasingly complex market. I am not referring only to machine maintenance, but also to all those that are linked to what is known as asset management: health and safety, cybersecurity, control and supervision systems, drones, CMS, recycling, transport and elements. lifting, electrical maintenance and of course, training.
The truth is that the situation is further complicated by what I would call the “wind paradox”: producers earn money given the high price of the electricity market and yet technologists have to reinvent themselves to avoid losing it. In the middle, all the independent suppliers, key in the current complicated scenario, with the additional need to also maintain the high availability of the wind turbines for more than 30 years, and with clients of different profiles, but where the price of the services continues to be the decision-making criterion, which makes it difficult to achieve minimum profit margins that are far from the figure indicated above. Once again, and I will not tire of repeating it, quality and professionalism are key, not everything will be price, because then what happens happens.
In this scenario, at AEMER we have decided to reorganize the EXPOFIMER 2023 Fair in Zaragoza, aimed at all renewables, not just wind power, and where we will address some of the issues mentioned plus other new ones, in line with what was the successful edition of the year 2021. In a sector as financial as that of renewable plants, it is once again important to address the issues of a technical and management nature that allow the solid growth of the sector to achieve the much-vaunted sustainability.
Alberto Ceña is Secretary General of AEMER, the Association of Renewable Energy Maintenance Companies.
