The Blog - Wind energy market analysis

Posted 15/11/2019

Richard Heap

   

Financing Wind 2019: Industry grapples with cost cutting conundrum

The falling cost of wind energy has made the sector more financially attractive than it has ever been. However, this has also made it tougher for companies to develop profitable projects. Siemens Gamesa CEO Markus Tacke tackled this topic in his keynote speech at Financing Wind Europe in London on 31st October 2019.

The falling cost of wind energy has made the sector more financially attractive than it has ever been. Well, more attractive for people buying the energy.

For companies across the supply chain it has been a different story.

Tighter margins, job cuts and some high-profile restructurings and insolvency filings. It also makes it tougher for companies to develop profitable projects.

This was one of the main topics we discussed at our Financing Wind Europe conference in London on Thursday 31st October. We were joined by 260 delegates from a wide range of firms to discuss some of the major challenges and opportunities facing the industry, with some of wind’s biggest names. Tighter profit margins is a topic that Siemens Gamesa CEO Markus Tacke tackled in his keynote speech.

“There is overall an increased interest in investments. At the same time, we are challenged by falling and declining margins, not only OEMs. All parties, and we need to find solutions… That is, in general, not helping the industry.”

It is natural to want to focus on the good news, but we cannot ignore what's happening here. Ultimately, wind companies have to make money or they will come into financial difficulties, and this will hinder the growth of the industry.

What he said

Tacke had some suggestions – and some positives for the industry too.

He highlighted how, since 2010, $1tn has been invested in wind sector globally, and said it is good that the cost of wind in most countries now matches or is cheaper than the marginal cost of fossil fuels.

He also said that wind enjoys wide public support, with a caveat that there are regional variations and wind definitely isn’t universally loved.

Finally, he reiterated that investment is there for quality projects.

But there are undoubtedly steps that could be taken to support the growth of wind. In terms of policy, there are two big ones that he is in favour of.

The first is a carbon price floor to help direct people towards renewables investments and set a level playing field for renewables compared to other energy types. Second, he said that corporate power purchase agreements would help to grow the demand for renewable power, adding that this could help take complexity out of the market.

This builds on calls from organisations including WindEurope that governments need to remove the hurdles to corporate PPAs: “I am pushing wherever I can to move this industry forward,” said Tacke.

But it isn’t all about policy and, in terms of Siemens Gamesa’s strategy, he said there are three steps that are needed to support further growth of wind.

First, it is to have a strategy for how to operate in a low-profit environment.

We know all about the influence of competitive auctions on the market, and it was a vital step for the industry to take, but we aren’t going to see a return to high feed-in tariffs set by central governments. Companies need a plan for the current market, not hark back to how things used to be.

Second, he said that Siemens Gamesa is focused on the areas where growth is the most profitable. That means offshore wind, and onshore wind in emerging markets. That will help to support the firm’s lower-margin developments.

“It is very clear that the offshore wind industry has found a floor when it can become merchant,” he said.

And third, he said Siemens Gamesa is focused on investing in technology that will be needed to help run renewables projects more profitably – namely, hybrid installations that include storage technology.

But this isn’t just a technology story. Tacke said it was up to manufacturers to find the most attractive market models as well. He argued that it was the job of manufacturers to help the industry make its investment case.

By doing this, he said the market could reach a situation where margins would grow once more.

The bottom line

Competitive auctions have made it tougher for companies in the wind sector, but this was a step that needed to be taken to foster political and public support. The focus is now on making sure that companies in this sector can capitalise on that support in a sustainable way.

As he reminded everyone in the room: “We’re on the right side of history.”

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