Wind power installations in Europe surged in 2017, driven by a frantic investor push to complete projects eligible for feed-in-tariffs before new European state-aid regulations put an end to buoyant subsidies.
New competitive tender auctions have created a vacuum in both energy prices and turbine prices, heaping pressure on manufacturers to develop increasingly efficient turbines. This will be capital-intensive, which could leave smaller manufacturers Nordex and Senvion under significant financial pressure. To lessen the earnings decline, manufactures will have to invest further afield and could turn to the American Midwest for stability, an industry consultant and several buyside analysts told Debtwire.
Renewable energy prices in Germany, the largest market for wind energy, collapsed 33% last year. At the same time the listed-Danish wind turbine manufacturer Vestas reported the average selling price of orders falling 26% to 0.74 million euro per MW (megawatt) and German peer Nordex suffered a near 70% fall in its European order intake.
“Wind is becoming competitive with conventional forms of power generation in most markets already and may not require any additional major subsidies in the future. This has led to a proliferation of auctions not only in Europe but most parts of the world, as a new price discovery mechanism,” according to Shashi Barla, Technology Consultant at MAKE, a Wood Mackenzie Business. “All the companies across the value chain are impacted by these transitions to auctions.”
Home or Away
While turbine prices continue to decline and the value-chain further consolidates in Europe, manufacturers will have to look abroad for new markets. US project development is focused on the Midwest, the Plains, the Mountain states and Texas, which cover more than 90% of the current activity.
Manufacturers have also begun co-investing in projects to secure production orders. Those with the largest fire-power for investment such as General Electric, Siemens Gamesa and Vestas could stand to gain market share.
“There are no major disadvantages to this type of business model, however, this boils down to the financial capabilities of the companies,” according to Barla. “For some smaller OEMs, it might be difficult to lock in capital for project development resources for projects, but they may adopt this strategy in few markets to gain market share. Considering the price pressure in the industry whilst transitioning to auctions and financial situation, we doubt if they [small OEMs] will be able to follow this strategy for many projects in the short term.”
Wind farm developers not only have to consider price, performance and reliability track record in choosing a wind turbine manufacturer, but also balance sheet risk so that projects are completed, and the decades long servicing requirements are fulfilled, Barla noted.
Wind remains the second largest form of power generation capacity in Europe after adding a record breaking 16.8 GW (Gigawatt) of new installed capacity in 2017 for a net capacity of 169.3 GW, according to WindEurope’s annual onshore and offshore wind statistics. Installations are though likely to decline this year in Germany and face a steep fall in 2019.
However, demand for wind energy is set to remain strong and order intake volumes in the European market are expected to start recovering in 2019 and 2020. The average sizes of the offshore wind farms are increasing significantly, especially in UK. Germany is also catching up with some large offshore projects being built.
“Specific to Europe, onshore markets are expected to remain stable, and growth is expected from offshore,” Barla said. “But offshore is a game for large turbine OEMs and Siemens Gamesa and Vestas are already dominant in the market. General Electric is expected to grow the market share and Senvion has been stable.”
While global players such as Vestas are likely to grow into other geographies, which should offset the impact of the changes in Europe, more regionally focussed players such as Nordex and Senvion are likely to face pressure on earnings. Both companies have strong liquidity positions, which is likely to seem them through the sectoral downturn but emerge with higher leverage.
The number of wind turbine producers remains higher than might be expected in a maturing capital goods industry, which could lead to consolidation in the future and means both Nordex and Senvion could become acquisition targets for the larger players.