E-FWDThe E-FWD logo.

analysis

The sky’s the limit to offshore wind’s growing pains

Human innovation cannot be stopped – but some of the world’s biggest wind turbine suppliers are, in a sense, asking each other to do just that.

As Vestas, Siemens, Nordex and GE struggle to return to profitability, they are pressing home the message that offshore wind turbine sizes cannot keep increasing. Their lobbying effort has even gone as far as calling for a moratorium on scaling and a government-imposed cap on turbine sizes.

Reverse price auctions such as the Contracts for Difference (CfD) regime, pioneered in the UK and exported across Europe and beyond, put the race for scale on steroids. This trend delivered spectacular cost reductions, with CfD clearing prices plummeting 75% since the first contracts were awarded at administratively-set prices in 2014.

Those turbine OEMs able to deliver the biggest energy yield per acre of seabed were rewarded with brimming order books in prime markets such as the North Sea. But fulfilling many of those orders is contingent on them making eye-watering investments in product R&D at a time when they are literally haemorrhaging cash.

Damned if they do…

Turbine OEMs cannot sustain the breakneck speed at which new products are being rushed out into the market. Bringing a new platform to market costs hundreds of millions of euros, and none of the three main US and European OEMs have achieved sustainable profits in recent years. 

Vestas’ financial performance has been the least awful, eking out five marginally profitable quarters since Q1 2021. Siemens Gamesa has been deeply in the red since Q1 2021, while GE Vernova has been loss-making for more than two years straight. Against this dire backdrop, and amid a volley of steep interest rate hikes, injecting major capital sums into product development is untenable.

“Size does matter, but a non-stop race in offshore wind turbine size is not healthy or sustainable, as it requires turbine OEMs to continue making huge R&D investments during a period when they are suffering losses,” the Global Wind Energy Council said in its offshore wind annual report. “OEMs also risk the substantial upfront investments required for vessels and infrastructure. The wind industry has reached a point where it is unable to risk any more losses.”

…damned if they don’t

But at the same time, the OEMs cannot afford to take their foot off the accelerator. Their route to market is through developers, who are today designing projects to compete in auctions in the latter part of the decade. Unless these projects leverage the latest, largest turbine models with the lowest cost of power production, they will fail to secure a CfD and must wait for the next auction – when they will have to compete with projects using even bigger machines.

Increasing turbine size is by far the largest driver of offshore wind cost reductions. Unlike solar PV or electric vehicle batteries, wind turbine manufacturing struggles to achieve economies of scale. Calling for substantially higher CfD strike prices jars when cost-of-living concerns are at the top of the policy agenda, so the harsh reality for offshore wind is, ‘grow or die’. The irony is that the bigger the turbine, the fewer of them you need per site, which makes economies of scale that much harder to achieve.

This impossible situation prompted Vestas to break ranks this summer and call for détente in the turbine wars. All the Western OEMs and their supply chain partners are on the same page, gasping for breath. Their views were echoed by Wood Mackenzie, which argued for a size cap. But while they might be singing from the same hymn sheet in the public sphere, behind closed doors the competitive pressures are unrelenting.

If, say, Vestas unilaterally decides to pause and focus on marketing its flagship V236 15MW machine, it risks losing market share to GE, Siemens or a new entrant that discretely offers developers a 20MW-plus platform in time for a CfD allocation round in 2028 or 2029. One wind industry source compared these manufacturers to Tour de France cyclists in the peloton, chugging along in a weary pack while keeping a close eye on each other. “None of them know if they have enough left in the tank to make a break for the finish line without running out of steam,” the source observed.

Here comes China

As if coordinating a détente between Western OEMs wasn’t hard enough, these companies must now contend with ambitious Chinese rivals. MingYang Smart Energy and Goldwind are already deploying 20MW-plus machines in their home market, and are expanding across Asia-Pacific. Entering the US is tricky due to local content requirements and strained trade relations, so naturally they have designs on Europe.

MingYang launched its MySE 18.X-28X model earlier this year and is nearly two years into a memorandum of understanding with the UK government to build a blade manufacturing plant in Britain to supply North Sea projects. Goldwind is also said to be pushing hard to enter the European market while searching for potential manufacturing sites, according to market sources.

16MW turbines at a China Three Gorges offshore wind farm. Source: CTG

“Goldwind will build a factory wherever they get the biggest sales pipeline,” a senior source at a major UK utility developer tells efwd. “But new entrants from China are not the biggest threat facing the Western OEMs. These companies are nearly bankrupt. Competing is one thing, but (delivering on) the orders that they already have right now and making good on the current fleet has to be the number one priority.”

Cutting corners

The biggest casualty in the race for scale has been reliability. Siemens Gamesa is grappling with technical faults that could cost €1.6 billion or more to fix. The issues were largely confined to onshore machines, but the offshore segment also booked a €600 million charge from higher costs and ramp-up challenges, meaning Siemens Energy will lose money on certain contracts if customers take delivery.

Serial defects are a big red flag for Siemens as it pushes to fill its order book for its flagship offshore behemoth, the SG14-222 DD, which enters serial production next year. Undertaking fleet-wide repairs are an order of magnitude more costly at sea than onshore, exacerbated by the push into deeper, more remote waters. 

Accelerated turbine development cycles have been widely cited as the cause of higher-than-expected turbine failure rates, inflating warranty costs and performance liabilities that turbine OEMs carry on their books. The industry cannot afford to continue the current spate of mechanical breakdowns, component failures and serial defects as it heads into more challenging marine environments.

“One can view now that the industry is increasingly deploying continuous prototypes as their unit numbers reduce between new iterations, and that’s leading to serial defect risks,” says John MacAskill, global managing director of renewables at energy and marine consultancy ABL Group.

“It’s going to be horrific when we move to floating wind because each turbine on these first wave projects must be towed back to harbour for blade repairs or component replacements. A pause in the arms race would allow turbine manufacturers to refine their products and reduce costs. It is hard to invest in reducing costs and improving the reliability of WTG platforms when you’re bleeding money,” he told efwd.

Uninsurable risk

If reliability is considered collateral damage in the turbine wars, winning the ‘arms race’ will be a pyrrhic victory. Failure rates are “unprecedented” and this is building up a mountain of financial risk “right when scaling is needed to bring about the energy transition,” according to renewables underwriter GCube.

Turbines in the 8MW-plus category are suffering from component failures within the first two years of operation, compared to the five-year timeframe for failures in 4-8MW class machines, highlighting “the urgent need to address product quality and reliability”.

“The situation may create issues for the insurance market as traditional energy underwriters deploy capacity into the renewables market by offering broad policies and low premiums,” GCube says. New entrants “must learn from challenges in the onshore renewables market by taking a more realistic approach to pricing and T&Cs, otherwise risk substantial losses that would further exacerbate the current instability in offshore wind markets.”

Bigger means slower

The supply chain is struggling to keep up. Dutch monopile manufacturer Sif Group views the relentless quest for scale as detrimental to achieving offshore wind targets. The company recently invested €328 million to be able to make foundations that support 15-18 MW class turbines. The expanded facility will have an output of four monopiles per week, or 3-3.6 GW per year.

If Sif had instead invested that same amount in enlarging the monopile production capacity for 11MW class turbines, this investment would have yielded an output of 10 monopiles per week – equivalent to 5.5 GW per year. This “illustrates a suboptimal use of capital deployment if the overarching goal is to speed up Europe’s energy transition and offshore wind build-out,” the company said in a recent note.

Big kit needs more portside space and heftier machinery for marshalling and installation. Developers might be under pressure to squeeze more capacity from limited seabed space, but if the supply chain cannot physically handle the components, they will be unable to build.

Accelerated obsolescence 

Installation vessels are the weakest link in the offshore wind supply chain. With vessels quickly being rendered obsolete, assets are being retired years before the end of their design life. This is creating a gap in the vessel market that nobody is racing to fill due to the shortened timeframes to pay down investments and uncertainty over which turbine size to design for.

“Half of the existing fleet is set to be retired from service due to its inability to cope with increasing turbine and foundation weights and dimensions, meaning that more than 20 new installation vessels need to be commissioned,” Wood Mackenzie said when it called for a size cap.

“Of the US$13 billion in investment needed overall (in the next generation of vessels to deliver on 2030 offshore wind targets globally), installers have committed to slightly less than half,” it added.

Blame game

The quandary facing OEMs has prompted plenty of finger-pointing. Project developers have been blamed for delaying to place firm turbine orders until the last possible moment in the hope of leveraging the very latest giant turbines.

OEMs have been accused of incentivising this behaviour by promising new products that improve yield and drive down costs are just around the corner. Developers counter that OEMs are failing to deliver on their promises and must improve quality to restore credibility.

Some market observers question whether large Western industrials, which absorbed the leading turbine technologies in the latest round of consolidation, are best suited to succeed in this challenging space.

“These companies have struggled  for quite some time now with production efficiency and value delivery to their shareholders, which might be due to their legacy coming from industrial conglomerates,” says Julio Dal Poz, managing director energy transition at FTI Consulting. “GE was an example of efficiency a decade or so ago,  but has struggled since, and Siemens has also struggled with operational efficiency and value delivery for a while.”

“Another challenge in terms of industrial legacy could stem from their processes of selling wind turbines. I would not be surprised if there is some legacy from their involvement in selling gas turbines previously that has seeped into the renewables business. You need a completely different marketing mindset when it comes to selling giant wind turbines,” he told efwd.

Will anyone pump the brakes?

The turbine arms race cannot continue indefinitely. Extended to its logical conclusion, unchecked scaling would (theoretically) result in installing a single monstrous offshore structure per site, soaring into the upper troposphere. Leaving aside the physical constraints, containing costs on monumental offshore assets becomes all but impossible – as the oil and gas industry has discovered over the years.

The question therefore is how the race for scale could be brought into check. There is no right answer to this, and all market participants are asking each other where (and when) the resistance to turbine growth will kick in first.

The government could, in theory, heed calls from the OEMs and their supply chain partners to impose a cap. Tip height restrictions already exist in the planning rules for onshore wind, so consenting restrictions could be applied to offshore projects. The Dutch government imposed a 304-metre tip height restriction at the Hollandse Kust (west) offshore wind zone in 2021, and more recently proposed a universal height limit that Wood Mackenzie says would effectively cap turbine size at 25MW.

Whether the UK would prioritise such an intervention with so many other pressing energy issues is a moot point. If enough major markets followed suit, no OEM would design supersized machines to cater for an outlier country and risk falling foul of a future regulatory clampdown.

Endless growth = endless opportunity

The supply chain itself could mount a pushback. No developer wants to discover they can’t deliver their projects because investments into port and vessel capacity expansions cannot be mobilised in time. If supply chain companies baulk at 20MW machines, this could impose a natural limit to scale.

But there is reason to believe that ports and vessel owners will seek to exploit opportunities for green jobs and investment by enabling further turbine growth. Tom Wildsmith, head of commercial at Offshore Renewable Energy (ORE) Catapult, says there exists scope for expansion on both fronts.

“If you look at the sheer size of some of the vessels that have been built (for other offshore industries), the possibility is there (to fabricate bigger installers),” he told efwd. “We compiled a strategic report for floating offshore wind last year that identified opportunities for investment and growth in UK port infrastructure.”

 “Skills are worth mentioning here. There are potential roadblocks but there are some really interesting opportunities emerging in the longer-term O&M (operations and maintenance) space, especially if you think about wind farms moving to a 30- or 40-year operational lifespan. We are optimistic and see challenges turning into opportunities for UK companies.”Just like during the Cold War nuclear arms race, a détente can only be engineered through dialogue and cooperation. “Getting everybody around a table – the supply chain companies, investors, OEMs, policymakers and ministers – is the greatest chance to move forwards in a pragmatic way. (The drive for scale) is not going to be dented by one of those stakeholders acting unilaterally,” Wildsmith concluded.

Related Content