Global wind power giant plunged 37% overnight, causing a collapse in the European wind power industry. What is causing the market panic?

Recently, there have been some concerns in the wind power industry.

On Friday, Siemens Energy's stock price plummeted more than 37% due to the withdrawal of its 2023 performance guidance, which was caused by the faster-than-expected wear of turbine components produced by its wind power subsidiary Siemens Gamesa.

Under Siemens' "leadership", the European wind power industry fell across the board on Friday, with Vestas, the Danish wind turbine manufacturer, which also ranks among the top ten in the world, falling 5.1%, Orsted falling 1.1%, and the Nordex index in Germany falling 2.2%.

Siemens Energy said that its review of its subsidiary Siemens Gamesa found that "the failure rate of wind turbine components has increased significantly."

Siemens Gamesa's Spanish branch found that there were "more serious than expected" quality defects in its onshore wind turbines. The company must repair defects in rotor blades and bearings, from component failures to small cracks. CEO Jochen Eickholt also mentioned problems with "conventional turbines," but did not elaborate.

In terms of the scope of the problem, Reuters pointed out that the "problem facing Siemens Gamesa affects 15-30% of the turbines in the world with a total capacity of over 132GW. Its total power generation capacity is equivalent to about 132 nuclear power plants."

Therefore, the maintenance costs of these components are high. Siemens Energy's management believes that the cost could be as high as 1 billion euros, which actually accounts for more than one-third of the company's reserved profits for maintaining these turbines, and this problem may last for several years.

Siemens Energy CEO Christian Bruch said on a conference call on Friday that Siemens Gamesa "covered up too many things" and that the quality issues were "more serious than he imagined."

What is even more alarming is that Siemens Gamesa is not an isolated case in this industry.

Wall Street News previously mentioned that what is most worrying for investors is that "these problems may reflect fundamental and systemic design flaws in wind turbines." Turbine manufacturers have been pursuing the manufacture of larger and more powerful wind turbines, but now the market is concerned that these manufacturers may have overused the technology. When these large devices have problems, the cost of repair is high. Morgan Stanley analysts also believe that Siemens' warning comes at a time when "more and more people are expecting the worst period for the wind power industry to be over," and technical issues are also a problem for other industries.

Collapsed Wind Turbines

The average lifespan of a wind turbine is 20 years, but in recent years, both newly installed and existing wind turbines have experienced collapses.

In September 2021, a giant wind turbine about 240 meters high collapsed in Germany.

In March 2022, a large new wind turbine in Lithuania collapsed.

In June, a wind turbine that had been in use for less than a year at General Electric in Oklahoma City collapsed, and a few days later, another turbine of the same model collapsed in Colorado.

In July, part of the blade of a generator in Sweden fell off.

In January of this year, a generator at the Eemmeerdijk wind farm in the Netherlands collapsed.

The causes of the accidents are different - the collapse of the German wind turbine was caused by defects in its concrete-steel hybrid tower, and the wind farm operator in the United States attributed the accident to blade defects and said that measures have been taken with General Electric to prevent similar accidents in the future.

According to Bloomberg, wind turbine failures are on the rise, and post-sales costs such as maintenance have already burdened manufacturers, and Siemens, General Electric, and Vestas, the three major manufacturers, all admit that competition to manufacture larger turbines has caused problems.

Siemens Gamesa reported a loss of 884 million euros at the end of last year, more than twice the same period last year, and net debt was 1.9 billion euros. The company said in its quarterly report:

The results of the regular monitoring of installed equipment and technical fault assessments seriously affected the group's financial performance in the first quarter of 2023.

Vestas added 210 million euros in warranty terms for repairs in the fourth quarter of last year, as rising recall and higher upgrade costs affected the company.

Vestas also said that due to "very" frequent repairs and upgrades, its production cost losses are rising to 4%.

General Electric attributed its $2.2 billion annual loss to an increase in wind power department warranty terms in the September quarter, which led to a 17% drop in revenue.

Getting Faster and Bigger

One of the reasons for the rapid increase in failure rate may be the rapid development of the wind power industry, which has led to a linear increase in the scale of wind turbines. However, the current technological development of wind turbine manufacturers cannot stably grasp the expansion of this scale due to the progress of materials, manufacturing and design technology, as well as the progress of operation and maintenance tools, which has led to a technological revolution in wind energy, and wind turbines and their blades have rapidly become larger.

According to statistics, by 2021, the average blade diameter in the United States reached 127.5 meters, while the largest offshore wind turbine in the world was 13.6 megawatts (MW), with a rotor diameter of 252 meters.

The height of the turbine exceeds 850 feet (259.08 meters), the blade length is 300 feet (91.44 meters), and the power generation capacity has also increased accordingly. The larger the turbine, the more energy it can capture. However, the larger the turbine, the more likely it is to have problems and fall further.

On the other hand, industry insiders believe that the rush to increase production lines to produce larger turbines is the culprit.

Fraser McLachlan, CEO of GCube, which provides insurance for wind energy assets worth about $3.5 billion in 38 countries, said in an interview with Bloomberg:

We see these failures occurring on newer turbines in a shorter period of time, which is very worrying.

If the failure rate continues to rise, insurance premiums may increase, or new coverage restrictions may be imposed.

The three major manufacturers have confirmed in statements and recent conference calls with analysts that their efforts to rapidly develop more powerful turbines have brought challenges, and they are focusing on improving their manufacturing business and acknowledging that it is time to stop introducing new designs.

Larry Culp, CEO of General Electric, said in the company's earnings conference call in October:

Rapid innovation is putting pressure on manufacturing and the broader supply chain. The production and quality stability of these new products takes time.

Vestas and General Electric said that the proportion of units that cannot generate electricity is increasing, even though this is still a small part of their installed capacity.

Dawn of the Wind Power Industry?

It should be noted that wind power is in a period when clean energy is highly anticipated in Europe and the United States.

After the passage of the Inflation Reduction Act in the United States, the three major manufacturers and their suppliers are all hoping for growth in the next 10 years, especially in the emerging offshore wind power field.

Last fall, the US government launched a floating offshore wind power project aimed at reducing the cost of this emerging innovation by more than 70% and deploying 15GW by 2035. US Energy Secretary Jennifer M. Granholm said at a related summit in February of this year:

We believe that floating offshore wind power is one of the most promising clean energy technologies for the next few decades.

So far, there are only seven offshore wind farms in the United States. In contrast, according to data from the World Offshore Wind Energy Forum, as of the end of last year, there were 246 offshore wind farms operating in other parts of the world, including 134 in Asia and 112 in Europe, with thousands of turbines generating 54.9GW of electricity. However, to meet the United States' clean energy goals, manufacturers need to invest more, especially given the current situation of losses, rising supply chain and maintenance costs. According to a report released in January by the National Renewable Energy Laboratory, the Offshore Wind Energy Business Network and other partners, at least $22.4 billion in investment will be needed from now until 2030 to achieve the White House's goal of establishing a US-based manufacturing supply chain. The supply chain will include the construction of 34 new manufacturing facilities, including dedicated ports and ships.

Aaron Barr, an industry analyst at Wood Mackenzie, said:

The wind energy market is currently in a very strange paradox.

In all of the largest markets, we have the best long-term climate policy certainty ever, but we are going through a difficult period where the entire industry, especially the supply chain, has been hit by some issues that ultimately destroy profit margins and put many top OEMs and their component suppliers in a negative profit state.

Barr pointed out that during the period from 2020 to 2021, turbines were sold to project developers, and OEMs' capital expenditures and prices had been steadily declining. However, over the past two years, when turbines were delivered, the cost of raw materials, specialized logistics, and labor soared to their peak, affecting OEMs' profitability.

Quarterly data recently released by the US Clean Energy Association further reveals the paradox of the wind energy market. The fourth quarter of 2022 was the best of the year, with the wind, solar, and battery storage industries installing 9.6GW of clean energy, enough to power 2 million households. However, this was the lowest fourth quarter since 2019.

Barr said:

It (the wind power industry) must overcome this slowdown, most of which is caused by supply chain issues. If all participants can hold on until the end of this year, we believe the future of this industry is bright.