Together with solar and storage, wind power is destined to be one of the 3 pillars of the future of electricity generation. It is estimated that, in the next 10 years, more than 700GW of wind power will be installed in the world, just behind solar. Looking at these numbers, anyone could suppose that the health of the sector is unbeatable, but nevertheless there are certain worrying signs that should make us reflect on how the sector can and should prepare to better face the great challenges that await it in the future.
One of the clouds is the health of manufacturers. The OEM’s are usually the thermometer of the sector so now you could say that the fever is rising. As explained in this article (in Spanish), price pressure is causing profits to be cut and medium and small manufacturers to be on the verge of collapse: Senvion in bankruptcy and selling its business in parts, Suzlon on the verge of bankruptcy not finding a white knight to refloat it, Enercon in trouble, Nordex’s capital increase and takeover bid which could prepare potential future M&A moves… and big ones like Vestas and SGRE suffering to maintain a minimum of profitability.
Another worrying sign in my opinion is the loss of the storage collocation battle. Battery storage projects are, for the most part, associated with PV projects. This will accentuate the great competition that is already the solar PV for wind.
But let’s be positive, constructive (and a little naïve) and try to contribute some ideas to make the sector more competitive and transform the great demand that is expected in the coming years, into benefits for all …let’s go ahead.
- Very low prices and missing money
The current prices of auctions and PPAs are ridiculous and cannot even cover the costs as we saw in my previous post. This is putting pressure on the whole value chain which is not sustainable in the medium term. BNEF explains it very well in their New energy Outlook with the concept “missing money”:
In short, we have 2 problems:
– Auction prices and PPAs: very low and do not cover costs.
- Challenge 1: The sector must push for auctions where the time factor is valued. Monotechnology auctions must also be encouraged in order to diversify sources. And finally, the sector itself should encourage regulators to put more mechanisms into auctions that prevent unrealistic prices that distort the market (putting a floor price would not be a bad option if it were well calculated).
– Missing money: the second problem is even more complex: as the volume of renewable generation is greater and enters the zero marginal cost electricity markets, market prices will fall as there are fewer “blocks” of “expensive” generation. This cannibalization effect is very dangerous, as many developers are winning auctions with very low prices hoping to compensate with high free market prices.
- Challenge 2: This is an issue that is beyond the scope of the sector but should be pushed to redesign electricity markets and adapt them to the new reality. This is a complex issue that many experts are working on so we will see if there is any progress in the short term.
- Product development costs and their amortisation: product cycles are becoming shorter and turbines larger, so there are fewer units to amortise costs and achieve the necessary economies of scale.
- Challenge 3: Cost sharing. In a turbine, the truly differential elements are the blades and the software (control and component firmware). All the rest is more or less standard. There are cases in which several different manufacturers develop the same component with the same supplier separately. Although it has always been a taboo subject in the industry, I think it’s time to seriously consider joint developments such as those in the automobile. Differentiation by aerodynamics, control, quality and service would be more than enough for there to be healthy competition. The important thing is that development costs would be reduced, and even more models could be launched. I believe that today only Vestas, SGRE and GE can afford to make custom developments. The rest should share developments in order to compete.
- Turbine operation: it is necessary to reduce costs and continuously improve assets.
- Challenge 4: Sharing information. This sector is one of the opaquest in terms of operational experience. Very few shares their operational data and there are no platforms to solve common problems. That OEMs do not share information is understandable but that operators do not do it is not easy to understand. It is necessary to change the mentality and enter into a collaborative mode. In offshore, some steps have already been taken, especially in sharing operating costs between several operators of nearby projects. This field is yet to be explored and there are win-win opportunities everywhere.
Clearly these are big challenges, but I firmly believe that the sector is now mature and professional enough to carry them out successfully. The future is very bright (and windy) but we must put the means and tools to harness it profitably.