The demand for renewable energy capacity is only increasing, powered by a steadfast determination to all-but entirely reduce reliance on Russian oil and gas and to achieve hugely ambitious net-zero targets set by governments all over the world, in the case of a climate emergency.
Yesterday Germany, Belgium, the Netherlands, and Denmark made a combined pledge to build at least 150GW of offshore wind by 2050, adding to the European Union’s overall target of 300GW of offshore wind by 2050.
Introducing hundreds of gigawatts of renewable energy into systems around the world is the objective. The market is incredibly competitive, and this means that bids being made at lease auctions and prices being agreed on contracts for difference are forcing projects to be delivered at lower and lower costs, even in the face of record-high wholesale electricity prices. Put simply, the relatively small wind supply chain is struggling to keep up.
True price of reduced cost of wind
The consequences of this relentless push to reduce the levelized cost of energy are now being felt. Against the backdrop of soaring costs and high project demand; supply chain operators are really feeling the squeeze, with profitability suffering enormously, especially for turbine manufacturers.
It’s clear that something needs to change and that may be why Siemens Energy announced yesterday that it is considering plans to buy the 33 per cent of shares in Siemens Gamesa Renewable Energy that it doesn’t currently own.
Market reaction to proposed SGRE buyout
Off the back of this, the Siemens Gamesa share price has increased – indicating that investors welcome this move given Siemens Energy already owns such a large chunk of Siemens Gamesa.
But ultimately it remains to be seen whether this decision by Siemens Energy can start to rebalance the costs of projects to improve profitability in the supply chain. It is unlikely that there will be any marked, short-medium term impact on the market as a result of this buy out, should it go ahead.
Now read: Siemens Energy considers Siemens Gamesa buyout
For now, it might remain in the best interests of the entire industry for turbine manufacturers to work with developers – as they have been – to ensure projects can be delivered against the business plans that they have agreed. But that needs to change at some point. Recent financial reports show this and the current situation for turbine companies is unsustainable.
Between a rock and a hard place
The wind supply chain is small, and the success of the sector depends on the profitability of all those that operate within it. It is unhealthy for the limited pool of turbine manufacturers servicing a rapidly growing industry that they are losing substantial amounts of money every quarter.
Especially as those manufacturers need the ability to scale up if the industry is going to work with governments to meet the significant targets for renewable energy capacity that are being set.
Perhaps it is time to pause and reflect.
A better way forward for OEMs?
By focussing on profitability, consolidating product offerings, scaling back investment in bigger turbines, and encouraging greater standardisation in the supply chain, turbine firms might begin to feel the benefits.
They may find the current macro-economic challenges they’re facing become more manageable, that they’re able to deliver on more projects, offer more certainty to developers and generate greater profit - money they can then invest down the line to eventually speed up the energy transition.
If this move by Siemens Energy prompts the sort of changes within Siemens Gamesa that enhance its profitability, albeit by increasing project costs to a degree, it could prove to be an incredibly important step forward for the longevity of a wind industry chasing enormous capacity targets.
Will Sheard is director of analysis and due diligenceat K2 Management