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WIND POWER IN 2023 - CHALLENGES FOR GOAL OF STABLE DEVELOPMENT

Nguyễn Đinh Huy (George, Mr), Eng

Vice General Director - VATEC

March 01st, 2023

 

In 2022, the world's wind power industry will have about 777GW of newly installed wind turbine capacity, bringing the total cumulative capacity to 900GW. Although the Covid-19 epidemic has basically stabilized in many countries, but the disease control policy is somewhat negative in China and the Russia-Ukraine war since February 2022 has brought unprecedented challenges to most areas of life, especially the energy sector, when oil and gas prices are strongly fluctuating.

In Europe, the EU's new energy security strategy, REPowerEU wants wind power to more than double from the current 200 GW installed by 2030 (touching 400GW). In Asia-Pacific, a similar increase is expected from 400GW installed capacity at present to approximately 800GW by 2030. This requires massive investments in new and existing industrial production capacities, and across the whole supply chain – from installation vessels to cranes, ports, research and innovation, grids, and skilled workers.

Source: Global Forecast, Monthly update report, January 2023 – Windpower Intelligence

Factors such as price volatility, cost inflation, interest rate, political unpredictability and supply chain bottlenecks will continue to make commercial decisions increasingly difficult and uncertain in 2023.

Project developers find the financial performance of the project no longer attractive?

Cost inflation from raw materials, higher interest rate and rising energy prices have resulted in a reduction of the financial viability of projects. As a result of this, developers may seek to renegotiate financing agreements, potentially resulting in delays in the development of projects or even causing them to cancel projects.

Some developers of offshore wind projects in the US have already expressed their concerns. In December 2022, Avangrid Renewables filed a motion with the Massachusetts Department of Public Utilities (DPU) to dismiss the review of power purchase agreements (PPAs) issued to its 1.2GW Commonwealth Wind offshore windfarm in 2019. Avangrid Renewables has declared that it wants to submit a revised bid that reflects economic changes since late 2021. Mayflower Wind Energy LLC, a joint venture between Shell New Energies US LLC and Ocean Winds has also expressed worries regarding the financing challenges for its project in Massachusetts. Despite these worries, the PPAs for both projects have been approved by the Massachusetts DPU and ask companies to report the progress of the project.

Elsewhere in Taiwan, Orsted cited “high inflation and increasing interest rates”, together with limitations set by current regulation, is making projects “uninvestable at this stage” – the developer declined to bid in Taiwan’s Round 3.1 lease auction. Orsted announced a $365mn impairment on a major US offshore project thanks to “unprecedented cost inflation”.

The root cause of this problem is poorly designed auctions: Government auctions for new wind farms are nearly all about price. This has driven a race to the bottom. Some countries even allow negative bidding, where developers must pay for the right to build a wind farm. This means extra costs that must be passed on to the supply chain (which is losing money) or consumers (who are struggling to pay power bills).

Rising Costs Squeeze European Wind Turbine Manufacturers’ Margins, but open opportunities for manufacturers from Asia

European onshore wind turbine manufacturers’ profitability is under pressure due to increased raw material prices, supply chain difficulties and temporarily reduced orders. Original equipment manufacturers (OEMs), including Vestas, Siemens Gamesa Renewable Energy and Nordex, and suppliers, including Flender, are affected. However, long-term sector fundamentals remain supportive.

Onshore wind turbine orders have slowed in 2022, reflecting a slow licensing process in Europe, and despite long-term demand trends remain supportive for equipment used in production renewable energy production. This will lead to a potential reduction in installed capacity in 2023 and may impact OEMs' revenue as more stable service revenue and rising selling prices only partially offset lower volumes. Nordex's total orders in 2022 are 20% lower than in 2021, while Siemens Gamesa's onshore orders are down 44% year-on-year.

Vestas, the leading OEM, with about 20% of installed onshore wind capacity globally, was also materially affected, with a decline in order intake of about 18% in 2022 yoy, according to our estimates. Like other OEMs’, Vestas’s EBIT margin turned negative in 2022.

General Electric, one of the world’s leading wind turbine suppliers, reported that revenues in its renewable energy arm fell almost a fifth in the year to December, in part because of lower turbine orders.

European Onshore Wind Turbine Suppliers' Average Selling Prices and EBIT Margin

Source: FitchRatings, February 2023

Commodity prices: higher steel and other commodity prices, higher shipping costs and supply chain bottlenecks have made all major components going into a wind turbine more expensive. The supply chain must absorb these additional costs because of the time-lag between a wind turbine order and its actual delivery.

Long-term demand for renewable energy equipment remains strong despite these short-term challenges, further supported by the gas supply crisis in Europe, which is likely to spur on the energy transition. The US Inflation Reduction Act, which earmarks USD369 billion for clean energy investments by 2030, and tax benefits for green projects, should also support demand for wind turbines, but European OEMs and suppliers will hardly see its benefits before 2024. It takes a long time to build an offshore wind farm (from 7-10 years), which means that OEMs only see revenue a few years after the project is announced as a winning bid.

 

GWEC Market Intelligence shows that out of 35 global wind turbine suppliers, 23 are based in the Asia-Pacific (APAC) region, mainly China and India. The top three western turbine OEMs – Vestas, Siemens Gamesa Renewable Energy and GE Renewable Energy are fairly globalised with local partners. China is the primary base for wind turbine components manufacturing and also a global export hub for generators, blades and gearboxes. Europe is the second-largest provider of generators and blades globally, followed by the US. Latin America, primarily Brazil, serves as a blade export hub to North America and other markets

 

With the government's tariff cuts, China's offshore wind turbine manufacturers have dominated the offshore wind rankings and pushed Vestas, Siemens Gamesa out of the top 3 in the Chinese market in 2021. Globally, Vestas, Siemens Gamesa and GE retain leading positions in offshore wind turbine production, with no offshore wind turbines originating from China installed offshore. European countries. However, in the context of the three manufacturers mentioned above, their competitiveness is declining, opening up opportunities for manufacturers from China and India.

Source: GWEC, Global Offshore Wind Report 2022

Source: GWEC, Annual Wind Report 2022

Challenges from global politics, energy policy

In the European market, which is directly related to the Rusian-Ukrainian war, reactive political policies with regards to high inflation have also created uncertainties for project developers. In the UK, for example, a windfall tax with a temporary levy of 45% on profits has been introduced for electricity generators and this includes offshore wind farms. Although this only applies to wind farms that are not supported by the Contracts for Difference (CfD) subsidy mechanism, it still impacts project developers who operate these wind farms, and it will have them questioning their future investments.

Licensing congestion is still the main problem when there are about 80 GW of wind power projects facing difficulties in licensing procedures, mainly wind power on land. That means the EU is building wind farms at half the rate needed to meet the REPowerEU targets

In some Asian countries, which have just witnessed an explosion in the size of installed capacity in 2020 and 2021, such as China (30.7GW of onshore wind power and 16.9GW of offshore wind power in 2021), Vietnam 4.126GW (onshore and nearshore)…thanks to the Government issued a fixed price mechanism. In essence, this is a preferential mechanism for electricity prices and only really effective in a short time. Since the end of the fixed price mechanism, although the potential for wind power is still very huge, these countries are still looking for ways to develop new policy mechanisms that are more sustainable for the market, harmonizing benefits between project developers, governments and consumers. It will take a few years for these countries to research the policy, test it and perfect it.

In early 2023, the Ministry of Industry and Trade of Vietnam has just issued a transitional pricing mechanism for 62 wind power projects that meet the conditions with a total capacity of 3.479GW. Although the ceiling price set by the Government is quite low and partly does not meet the expectations of investors, this is also an optimistic signal showing the determination to implement the commitment of the Government at the COP26 Conference in Glasgow towards Net Zero by 2050.

For offshore wind power, Vietnam's potential is huge when there are nearly 100 investors registered to implement with a total expected capacity of up to 156GW. However, up to the present time, the legal system for this field have not been elaborated in detail. Important directional plans such as marine spatial planning and electricity planning have not been approved. Issues related to national security have not been considered. This leads to the survey and implementation of the above projects being stalled and leads to the risk of not being able to achieve the first 7GW of offshore wind power by 2030.

In order for the wind power market to more effectively adjust to the context of geopolitical volatility in the world, it is evident that more proactive policy mechanisms appropriate to each country's features are required.

Conclusion: The demand for renewable energy in general and wind power in particular is very large and makes an important contribution to the energy structure of countries in the future globally. However, political instability, negative consequences from war have not ended, and asynchronous development policies will significantly affect inflation, investment costs, interest rates, and equipment supply chains. These factors are challenges that need to be considered and resolved in 2023.

References:

(1): Global Offshore Wind Report 2022 – GWEC

(2): Annual Wind Report 2022 – GWEC

(3): Global Forecast, Monthly update report, Janury 2023 – Windpower Intelligence

(4): https://www.offshore-mag.com;https://www.ft.com;

(5): FitchRatings, February 2023

 

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