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July 2, 2023
By
Elliot Smith
Wind turbine troubles have sent one stock tumbling.
There are fears it could be a much wider issue
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Siemens Energy stock plunged by
around 37% on June 23, while other wind companies also saw shares
retreat as investors worried that the problems at Gamesa might be a
symptom of a wider issue for the industry.
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"We have been aware for some time that turbine
failure rates across the industry can — and should — be more widely
understood," Evgenia Golysheva, vice president of strategy and
marketing at ONYX Insight, told CNBC.
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Industry body WindEurope denied that industry-wide
technical failures could be on the horizon, insisting that "the
problems at Siemens Gamesa are limited to Siemens Gamesa."
A Siemens Gamesa blade factory on the banks of the
River Humber in Hull, England on October 11, 2021.© Provided
by CNBC
Costly failures at wind turbine manufacturer Siemens Gamesa last month
sent shares of parent company Siemens Energy tumbling, and analysts
are concerned about wider teething problems across the industry.
The German energy giant scrapped its profit guidance in late June,
citing a "substantial increase in failure rates of wind turbine
components" at its wind division Siemens Gamesa.
Siemens Energy CEO Christian Bruch told journalists on a call Friday
that "too much had been swept under the carpet" at Siemens Gamesa and
that the quality issues were "more severe than [he] thought possible."
Siemens Energy stock
plunged by around 37% on June 23,
while other wind companies also saw shares retreat as investors
worried that the problems at Gamesa might be a symptom of a wider
issue for the industry.
Nicholas Green, head of EU capital goods and industrial technology at
AllianceBernstein, told CNBC that the pace of expansion, and the fact
that many components of larger turbines haven't actually been in use
for very long, means there could be inherent risks throughout the
sector.
"We have to acknowledge that putting brand new machinery — whether
it's on-shore or even more difficult off-shore wind farms — and the
pace of change in that machinery has put us into slightly uncharted
territory," he said.
"Although it's hard to tell at the moment, my best guess is that this
probably actually is an industry-wide issue. It wasn't that Siemens
Gamesa is a bad operator as such, it's that actually some of the
normal protocols and time in use, operational data in use, is
relatively limited."
Siemens Gamesa's board is now due to conduct an "extended technical
review" into the issue, which is expected to incur costs in excess of
1 billion euros ($1.09 billion). The company's shares have recouped
some losses, but remain down over 33% in the last month.
A
tough two years
The wind industry has expanded rapidly over the past two decades,
lowering costs to rival — and sometimes undercut — those of fossil
fuels, while boosting efficiency with ever-bigger turbines and
reducing reliance on state subsidies.
"These cost reductions have been achieved with innovations in turbine
technology and by pushing the boundaries of engineering," Christoph
Zipf, spokesman for industry body WindEurope, told CNBC via email.
He said that 20 years ago, a typical wind turbine would have 1 million
watts of capacity; today, European original equipment manufacturers,
or OEMs, are testing 15 MW turbines.
"This means that turbines have become bigger as well, posing
challenges to components (quality, materials, longevity). The
introduction of competitive auctions has also been a driving factor in
this cost reduction," Zipf added.
The Statistical Review of World Energy report published last week
revealed that wind and solar power accounted for 12% of the world's
power generation last year, with wind power output increasing by
13.5%.
The industry was hit hard by the Covid-19 pandemic, as resulting
lockdowns depressed industrial activity and reduced global energy
demand. The ensuing supply chain problems then hampered OEMs.
These manufacturers have since endured a further shock from soaring
inflation and input costs as Russia's invasion of Ukraine disrupted
markets and aggravated supply chain disruptions. WindEurope estimates
that the rise in commodity prices has increased the price of wind
turbines by up to 40% over the last two years.
"OEMs were sourcing some material from Russia (mostly nickel) and
Ukraine (mostly steel). The price of both skyrocketed after the
invasion. This comes on top of the challenging inflationary
environment all European businesses are operating in (i.e. rising
electricity prices, etc.)," Zipf explained.
"A main problem for the OEMs is that not all countries had indexed
their renewables auctions. Consequently wind turbine orders were not
necessarily indexed to inflation. The time between the order intake
and the commissioning of a wind turbine can take up to 18 months
(especially when supply of materials is short)."
However, Zipf denied that industry-wide technical failures could be on
the horizon, insisting that "the problems at Siemens Gamesa are
limited to Siemens Gamesa."
"Big turbine failures are extremely rare given the number of turbines
installed in Europe already. However, the competition in the sector is
pushing OEMs to come up with bigger and better turbines at a fast
rate, may be faster than in other sectors," he said.
He also challenged the notion that the industry has entered "uncharted
territory," arguing that the changes in turbine technology have been
"incremental and evolutionary."
"Naturally every new turbine model comes with new challenges, requires
rigorous testing and certification. But the European wind industry has
overcome all of these challenges and maintained its reputation for
delivering highly reliable high-quality turbines," Zipf said.
Facts and figures
According to ONYX Insight, which monitors wind turbines and tracks
over 14,000 across 30 countries, most turbines are designed and
certified for 20 years but contain components that will fail during
that time due to a "compromise between the cost of the system and
reliability."
"We have been aware for some time that turbine failure rates across
the industry can — and should — be more widely understood, given the
scale of their potential impact on the overall profitability of
projects," Evgenia Golysheva, vice president of strategy and marketing
at ONYX, told CNBC.
"It's not that they are made badly, but we now have a compromise
between the cost of energy and targeted reliability. Everyone who
builds, finances and operates wind turbines needs to have a realistic
picture of how many failures to expect."
In turbines built in 2023, more than 40% of gearboxes will need to be
replaced after 20 years of project life, according to ONYX, along with
over 20% of main bearings and more than 5% of blades.
Across the wind industry, around 65% of operations and maintenance
costs are unplanned, according to ONYX. It projects that major
corrective spending will rise to $4 billion by 2029.
"The growth of wind installations has been unprecedented, and the
industry has had to scale up very quickly with little time to digest
it. It's not a capacity issue, and it's not new, but it is good that
OEMS (who are under pressure from supply chain and from inflation) are
bringing this conversation into the public domain," Golysheva
explained.
"It's a conversation that is overdue, because the underlying issues
aren't going away. For example, wind turbine rotors are getting
bigger, the turbines are getting bigger, and the development cycles
are short, so it's crucial to have digital and other diagnostic tools
to be able to deal with reliability issues."
Green Play Ammonia™, Yielder® NFuel Energy.
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