Howard Mustoe
Mon, August 7, 2023
Wrinkles in rotor blades and faulty gears are among a number of manufacturing flaws uncovered - Matthew Lloyd/Bloomberg
When Siemens announced a deal to merge its wind power business with rival Gamesa in 2017, executives saw only upside.
Then Siemens chief executive Joe Kaeser said there was “a clear and compelling industrial logic” that would make “renewable energy more cost-effective”.
Yet the turbine industry has proved as fickle as the wind.
Siemens warned on Monday that it was facing a €4.5bn (£3.9bn) loss this year as a result of issues within its wind turbine division.
Wrinkles in rotor blades and faulty gears are among the problems uncovered, which have led to operating issues and warranty claims from buyers. Inflation has only added to headaches.
The admissions of failures wiped as much as €6bn off the value of Siemens on Monday.
The German industrial powerhouse has been in the wind power market for almost two decades and Gamesa, which was until last year a joint venture, traces its roots in the industry back to the 1970s.
Yet a rapid expansion of its manufacturing in recent years has left the combined business over-extended.
Jochen Eickholt, chief executive of Siemens Gamesa, admitted: “We sold turbines too quickly,” describing the company as a “victim of our own ambitions”.
Siemens Gamesa manufactures blades for wind turbines, which can measure over 100m in length and are made up of many layers of material.
The technology must be highly precise and testing uncovered flaws causing “abnormal vibrations”, which could lead to damages and other issues.
Jochen Eickholt, chief executive of Siemens Gamesa, has put the issues down to “wrinkles” within layers of the blades and has blamed suppliers. Some have been cut off in response.
Hiccups weren’t picked up earlier because the company was focused on the rapid introduction of new turbines and the ramping up of capacity, Siemens Energy chief executive Christian Bruch said.
Kathryn Porter, an independent analyst at energy consultancy Watt Logic, said: “There’s been pressure from the developers to have bigger turbines, because then obviously it’s easier to build, but there have been a lot of warranty problems.
“Now you’re getting people saying behind the scenes, maybe we need to have a pause on this bigger and bigger turbine thing because they just keep breaking.”
Profitability has been weak in the industry for a long time, she said.
Problems at Siemens’ turbine business are not new. The company said in June that the issues would cost €1bn to fix and Bruch described the problems as “more severe than I thought possible”.
Issues have been focused within its onshore wind turbine business, which is a tougher market than offshore.
However, worryingly, new issues are still being uncovered.
Deutsche Bank analyst Gael de-Bray said in a note: “As we feared, in addition to the onshore quality issues, [Siemens Energy] expects higher product costs and further challenges in the ramp up process in offshore, which led to additional charges of €600m.”
The German company is not alone in struggling: its competitors and its customers are also battling a more expensive landscape for the green energy industry.
Energy giant Vattenfall last month shelved plans for a major wind farm off the coast of Norfolk - Vattenfall
Vestas, the world’s biggest wind turbine maker, lost €1.5bn last year after a surge in costs, particularly metal prices.
Chief executive Henrik Andersen said in May: “The wind industry remains challenged by political uncertainty, slow permitting processes and high inflation, which we expect to continue throughout 2023.”
Operators face significant challenges too. Energy giant Vattenfall last month shelved plans for a major wind farm off the coast of Norfolk after soaring inflation made the project unviable.
Wind farms in the UK are largely governed by contracts for difference (CfDs), which are government deals guaranteeing operators a stable price for their power for 15 years. This price stability helps developers to borrow the money required to build them.
However, the combination of surging costs and fixed earnings long into the future means budgets can easily be blown.
Sweden’s Vattenfall said its costs had surged 40pc since agreeing a deal with Whitehall last year. The surge rendered the project, which had the capacity to power 1.5 million homes, unviable.
Ana Musat, executive director for policy at industry group RenewableUK, said: “The economic circumstances are quite difficult across the board, we’ve seen really high inflation, we’ve seen interest rates going up. And if you’re in a capital intensive industry, like this one, those will impact you immediately.”
In CfD auctions, companies put forward a “strike price” they will sell their electricity for and the most competitive offers result in subsidy deals with the Government. When market power prices go below this strike price, the company’s revenues are topped up – and when it rises above, they make payments to the Government. CfDs are funded through levies on consumer bills.
The UK is currently in the middle of another round of bidding for the contracts. In this current allocation round, which finishes next month, offshore wind is competing with solar and onshore wind, which are both cheaper to build.
The maximum strike price for offshore wind has been set at £44 per megawatt hour for this round, called AR5, a very similar price to the last round which concluded last summer, dubbed AR4.
Duncan Clark, head of Ørsted UK and Ireland, which is developing the Hornsea 3 windfarm off the Yorkshire coast, said current wind power deals were “excellent value” for taxpayers but warned the company had been hit by “an extraordinary combination” of higher costs since then.
Musat said: “We have had 11pc inflation, interest rates going up by 5pc. So I think just to expect projects to be able to deliver under those same cost profiles, is really not realistic. Something’s going to give.”
All of this means the wind power industry faces more, not fewer, stumbling blocks.
Siemens Energy has put its entire wind division, Siemens Gamesa, under review despite only recently taking full control.
The review will look at “all options”, Bruch said when asked whether parts could be sold. An update is expected in November.
Yet as problems mount, Bruch is still optimistic. “We believe more than ever in the potential of wind power,” he told reporters.
Investors hope that proves more than just hot air.
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