9 minute read
A new direction
prices, coupled with the cyclical nature of the market, means that today there are several sources of cost pressures that the supply chain is facing.
Local content uncertainty adds complexity
Offshore wind local content policies are a key tool being used by governments to help increase domestic employment, stimulate the economy, and create a national supply chain that can provide goods and services to wind farms that are being constructed in their respective nations.
The UK government has launched a consultation that aims to make changes to the Contracts for Difference (CfD) subsidy scheme to boost local supply chains. Taiwan’s Ministry of Economic Affairs has also set several local content rules for the third round of Taiwan’s offshore wind auction.
Turbine OEMs are noticeably looking to set up shop locally in select countries to access local and regional opportunities. Siemens Gamesa and GE have both announced plans to construct offshore wind blade manufacturing facilities, with the former committing to constructing their facility at the Portsmouth Marine Terminal in Virginia, US, and the latter investing in a facility in Teesside in the Northeast of England.
Aside from equipment-based local content policies, vessel-specific policies can have a direct impact on turbine transport and installation (T&I) companies. In Taiwan, the local content rules for the third round of auctions state that locally flagged vessels should be used, if not, the vessels should be owned by locally registered companies with local content of more than 50%.
The Jones Act in the US has also created its own uncertainties and complications for the turbine T&I sector. An example of this reaction to the Jones Act is Eneti’s recent cancellation of its plans to construct a Jones Act compliant wind turbine installation vessel (WTIV) in the US, instead focusing on its current fleet and project commitments.
Collectively, these policies create a further layer of complexity and will likely add financial pressure on developers and the supply chain. Companies will be forced to take decisive steps to optimise their asset base to access local/regional opportunities.
Turbine OEMs: future challenges ahead
The combination of developers taking bigger risks, the cyclical nature of the industry, and a greater demand for localisation is a challenge that all stakeholders need to manage to successfully deliver. The performance of turbine OEMs is closely watched as an indicator of the health of the industry.
The three major wind turbine OEMs (Siemens Gamesa, GE, and Vestas) have faced financial difficulties, with Siemens Gamesa and GE’s Renewable Energy segment announcing losses in the 3Q21 and 4Q21. Vestas has done comparatively better than the other two OEMs, but nevertheless their profits declined even though y/y revenues increased.
However, it is primarily the (much larger) onshore wind business of these companies that have created the difficulties. Siemens Gamesa’s onshore business has, for example, been affected by ramp-up challenges with regards to its 5.X onshore turbine platform. This has resulted in some necessary design changes, impacting production and the schedule for executing projects. Meanwhile, GE’s onshore wind business in the US was impacted by the expiry of US production tax credits (PTC) in 2021, creating uncertainty resulting in project delays and deferral of customer investments. Siemens Gamesa has been keen to stress that its offshore business is “profitable and growing”.
While it is important to acknowledge that the current financial predicament of turbine OEMs may not be attributed to their offshore wind turbine segments, these OEMs would likely exercise company-wide cost discipline, potentially looking at ways to increase profitability via their offshore segments. More broadly, the difficulties in the onshore business are a case study in how things can go wrong. A focused and disciplined growth strategy will be key.
A potential future difficulty that the three major turbine OEMs could face is the influx of Chinese players entering the offshore wind market. MingYang has begun making moves outside of Mainland China, with its first turbine already installed at the 30 MW Taranto wind farm offshore Italy. Adding to its international orderbook are contracts to supply a total of three MySE 3.0 MW typhoon-proof turbines in Japan, and a 11 MW hybrid turbine for an unnamed floating wind project in Europe.
Aside from supplying directly to European wind farms, the Chinese Turbine OEM has shown intent to set up a factory in Europe to strengthen its presence in the region, with the signing of a Memorandum of Understanding (MoU) with the UK’s Department for International Trade (DIT) to explore investing in a blade manufacturing factory, a service centre, and possibly a turbine assembly factory. Should MingYang successfully entrench themselves in the international market, the three major turbine OEMs will need to contend with a new normal of diluted market share and even more competitive pricing.
Going strong, but for how long?
One segment of the supply chain that Westwood sees as doing comparatively well are dedicated turbine T&I companies, with notable examples being Cadeler and Fred Olsen Windcarrier.
Certainly, financial performance has been good, as Cadeler reported a net profit margin of over 15% in 1H21. Bonheur, the parent company of Fred Olsen Windcarrier, announced in their 3Q21 results that its Wind Service segment, which includes Fred Olsen Windcarrier, registered an EBITDA margin of 25% in comparison to 18% in 3Q20.
The core solution on offer by these companies is WTIVs. The versatilities of WTIVs, primarily used in installing turbines and occasionally installing foundations, has spurred more new-build WTIV orders compared to only five heavy lift crane vessel orders. Demand for WTIVs has resulted in an acceleration in investment in WTIV assets, both in terms of new orders as well as vessel upgrades.
A total of six WTIVs are expected to be upgraded; five of these upgrades have already been confirmed, with the final one being an option. Most of these upgrades are scheduled to be completed between 2023 - 2024, coinciding with offshore wind projects that will begin installing turbines with rated capacities of more than 13 MW.
Outside of these vessel upgrades, a total of 12 WTIVs are currently on order (outside of Mainland China), with a further three currently under letters of intent (LOI)/option agreements. Some of these new-builds will be designed to be future-proofed, and they will be capable of installing turbines with ratings up to 20 MW.
Although the current market for turbine T&I companies appears very positive, the sustainability of their profits remains a question. As cost pressures increase in the industry, and local content bites – both developers and turbine OEMs will look at ways to manage their risk, resulting in pressure being placed down the supply chain and potentially affecting turbine T&I companies.
A review of 2018 - 2021 turbine installation awards shows that 64% of turbines (outside of Mainland China) were awarded by project developers and 27% of turbines were awarded by turbine OEMs. This shows that both segments of the market can play a role in exerting pressure on turbine T&I companies.
However, any proposed reallocation of risk must be strategically considered by developers and OEMs, as reductions in the profitability of turbine T&I companies may cause longer-term harm. Based on the development pipeline, Westwood projects that potential shortages of available WTIVs could occur either by 2025 (taking into consideration only firm orders) or by 2027 if LOI/options are exercised.
In addition to the current order book, more WTIV plans have been announced. Havfram and J.P. Morgan joint venture have an LOI in place with CIMIC-Raffles to build a series of WTIVs, with delivery of the first one expected by 2024. Should these plans materialise, the supply tightness may kick in by 2029. To avoid a shortfall of available vessels, which could significantly push back development targets and have longer-term financial impact, developers and turbine OEMs will need to take a balanced approach towards implementing any cost pressures on the turbine T&I sector.
Positioning the supply chain for the future
Offshore wind technology has been evolving at a rapid pace, to which the supply chain has adapted. Future opportunities are now evolving in the industry through the development of floating offshore wind, as well as the coupling with other markets – such as hydrogen and more
Figure 1. Wind turbine installation vessel (WTIV) deliveries excluding Mainland China orders. Source: Westwood WindLogix. broadly power-to-X. These developments present real opportunities for the supply chain but will also come with their own set of challenges. There are several uncertainties on floating wind and hydrogen/power-to-X, including the pace at which these markets will grow and when the development of commercial scale projects will begin. This creates further difficulties for the supply chain, as they currently do not know how much investment will be required and when investment decisions will need to be finalised. Therefore, companies will need to invest ahead of the curve and continue innovating to ensure that they are ready to take advantage of the opportunities once these markets evolve to a commercial level.
Collaboration to succeed
The offshore wind industry is set to explode in the next decade, and is constantly evolving to deliver that growth, taking on more risk and at the same time becoming more complex. Tensions are rising whilst trying to balance delivery, profitability, and creating local economic value. Other renewable industries have experienced and continue to experience similar pressures – highlighting the need to act sooner rather than later. Therefore, the industry needs to carefully manage that balance going forward. It is important that all companies involved in the development of offshore wind farms work together, rather than place pressure on each other, to ensure that capacity targets can be met. A collaborative approach will help to reduce the current supply chain tensions – ensuring all can benefit from the sector’s growth. Additionally, government bodies must play an active role in ensuring that future policies do not hinder continued growth. This highlights the importance of industry groups and other bodies that can bring diverse stakeholders together, as well as the importance of transparency to help solve the issues faced by the offshore wind sector.
Note
Data accurate as of 28 February 2022.
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