Navigating wind's current storm

Why is investing in wind so challenging?

Wind is one of the two largest forms of clean energy generation with global cumulative installed capacity set to hit 2.38 terawatt-hours by 2032 (Source: Wood Mackenzie). This represents a 10-year compound annual growth rate of more than 10%, a remarkable outlook for an asset class that has arguably been around for more than a hundred years. And there is little doubt that growth will continue beyond 2030 as governments seek to achieve decarbonisation targets.

Cumulative wind installs have grown in recent years, with 1 TW turbines in place by year-end

Source: Bloomberg

But the wind industry is facing head-winds. As things stand, the sector is having a challenging time delivering against its promise, with setbacks on several fronts.

In onshore wind, the most mature segment of the industry, new projects face permitting problems and growing opposition as prime sites become saturated and developments move closer to inhabited areas. Anti-wind NIMBYism is not helped by the increasing size of wind turbines. Chinese manufacturer Goldwind has an onshore machine on the market with a generating capacity of 16MW that has a rotor diameter of 252 meters, exceeding the length of two football pitches—not an easy sell for those who prefer the view without turbines.

In offshore wind, where there is the most promising growth outlook, recent large-scale development auctions have failed due to the disconnect between governments’ low cost targets and increased supply chain costs. Developers could not see a way to build projects at the rates being offered by governments. In August 2023, for instance, only one of three US offshore wind leases in the Gulf of Mexico was taken up in a lacklustre auction that featured just two bidders. In September, there was not a single offshore wind deal struck in the UK’s fifth contract for differences auction – where this development poses a significant risk to the UK’s plan to triple Britain’s offshore wind capacity to reach 50GW by 2030. This will also be a blow to the regional green economy supply chain, which was expected to create more than 100,000 new jobs by the end of the decade.

Supply Chain Pain

Outside of China, all parts of the industry are suffering supply chain pains. After managing to achieve cost reductions of 57% onshore and 73% offshore between 2012 and 2022, Western wind turbine manufacturers are heavily lossmaking, largely due to four main issues:

• Intense competition has forced major players to overreach in terms of new product development, rushing to market with sub-par machines. In February 2023, for example, Siemens Gamesa—now folded into Siemens—blamed a quarterly net loss of $974 million on warranty provisions from faulty components, especially blade failures. These failures could cost turbine manufacturers considerable sums for years to come on installed capacity.
• Chinese vendors, which have long played catch up in the industry, are now besting Western manufacturers on performance and cost thanks to greater scale and vertical integration. The world’s most powerful wind turbines are now being made in China.
• Thin margins – Beyond making ever-larger versions of current concepts, the scope of innovation in the industry is limited by the paper-thin margins that manufacturers are forced to accept so developers can win government auctions.
• Increasing costs – High commodity prices are driving inflation in the industry, with the nominal cost per megawatt of capacity for onshore wind rising 21% in the last five years.
  
  

Major Western wind turbine manufacturer EBIT margin performance

Source: Bloomberg

While the supply chain remains under stress, there is a danger that some of the biggest Western supplier names in the industry today could go under. German turbine maker Enercon has already called for government support in the face of Chinese competition.

Chinese turbine manufacturers now dominate the 100GW per annum global market
…now with 130 GW of capacity

Source: Bloomberg

Is innovation limited primarily to size?

It’s interesting to note that innovation over the past decades has been primarily about increasing generation output, with turbines just getting larger and larger. A decade and half ago, turbines were less than 1MW rated capacity. With today’s largest turbines, market leader Goldwind is testing its 12MW onshore and 16MW offshore designs, which have 240m and 252m the turbine blade diameters compared to the deployments [a decade ago]. Simply competing on size creates some concerns both on siting these large generators, also on maintainability.

Wind turbine innovation has focused on increased size to achieve higher efficiencies
…but with growing public resistance – who wants to have these in view of their back gardens?

With technology advances to-date, costs appear to be going up, not down. For the wind sector, by contrast to solar PV, there appears a narrower focus on innovation. PV designs compete on cost, size, efficiency, building-integrated designs and flexible form factors. Yet in wind, the varied form factors (micro-wind generation, etc) have remained ‘niche’.

While other renewable technologies have benefited from cost reductions, recent wind generation developments show increasing costs.

  Source: Bloomberg

Development challenges

Beyond these wind-specific challenges, the sector faces three further problems that are common to all forms of renewable generation. The first is increased power price volatility from the growing presence of renewables on the grid, combined with climate change and geopolitical shifts. Without subsidies, wind project owners cannot make money from low or negative power prices, and so will likely require continued government support to build new plants. But this need is hindered by the second headwind, which is that government budgets are under pressure in many major markets, reducing government subsidies that have historically been a critical part of developing the asset class.

Not only are governments struggling with high inflation, but when it comes to electricity networks then they have a growing need to balance a buildout of intermittent generation with more secure—and often more expensive—source of supply, such as nuclear, biomass, storage and other plants. Also affecting government spending is the third problem for renewables: in many markets, a lack of transmission infrastructure and bottlenecks in existing grid connectivity are materially impacting progress for developers. Without significant government spending on new grid infrastructure, clean energy will simply not get built.

For all these reasons, wind development looks set to fall short of its near-term growth potential. Bloomberg’s recent forecasts suggest relatively flat growth over the balance of the decade.

Global Wind Installations (GW)

  Source: Bloomberg

4 reasons to remain hopeful for wind's long-term outlook

The wind industry’s struggles represent a low point for an industry that should be flourishing as society moves from fossil fuels to renewables. Yet despite this bleak picture, there are still good reasons to support capital flows into wind. Inflationary pressures are subsiding, long-term demand for renewables remains strong and the European Union and the US, which together accounted for almost 39% of global wind power in 2021, are looking to attract clean energy investment, with energy security becoming more of a driver. A careful appraisal of recent developments suggests that the outlook for wind could be brighter than it currently looks. 

Let’s look at each trend.

Inflationary pressures are subsiding – Global inflation, arguably the biggest problem for the wind industry in 2022, is expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, according to the International Monetary Fund. In the euro area, inflation has been falling throughout 2023, dropping to 5.2% in August from 9.2% in December 2022. And in the US the rate has been dropping since the middle of last year, down from a peak of 9.1% in June 2022 to 3.6% in August 2023.

Long-term demand for renewables remains strong – To say that more wind capacity will be needed in the coming years would be a vast understatement. Growth estimates for onshore wind in Europe and the US are more than 40% while those for offshore projects are above 100%. Furthermore, these forecasts are largely based on confirmed project pipelines and completely ignore the fact that deployment of wind and other renewables must grow geometrically in the future if society is to achieve the climate goals set out in the Paris Agreement.

A key feature of the energy transition is that most of electricity generation will need to come from either solar or wind power by 2050. According to the International Energy Agency’s Net Zero by 2050 pathway, annual capacity additions for wind worldwide will need to rise from 111 gigawatts a year in 2020 to 390 gigawatts by 2030. The IEA says that wind power will need to see an elevenfold increase in capacity by 2050.

The European Union and the US are looking to attract investment – In August 2022, a less-than-vibrant market for renewables in the US was galvanised by the passing of the Inflation Reduction Act (IRA), the largest-ever Federal package to support clean energy development. For wind, the IRA’s main gift was to provide regulatory certainty over tax-based funding up to the end of this decade.

The importance of the IRA cannot be understated, since renewables advocates have long complained that the short-term nature of tax incentives provided little support for local manufacturing and long-term planning. Rystad Energy estimated the IRA could increase US renewables installations up to 40% by 2030, adding 85 gigawatts of onshore wind capacity to the 193 gigawatts that would have been expected under the previous regulatory regime.

Mindful that manufacturers and developers could decamp to the US in search of profits, the European Union has been working on a big support package of its own in 2023.  It presented a Green Deal Industrial Plan in February and followed this up with a Net-Zero Industry Act proposal in March. The Act provides a regulatory framework for the quick deployment of renewables, ensuring simplified and fast-track permitting, promoting European strategic projects and developing standards to support the scale-up of technologies across the single market.

Energy security concerns are driving support for wind – Russia’s invasion of Ukraine showed how fossil fuel energy supplies could be weaponised in a geopolitically unstable world. In Europe, particularly, this has led to a dash for homegrown renewables, with wind and solar at the forefront. Wind is attractive from an energy security standpoint not only because it is a mature, cost-effective technology that can be deployed at scale, but also—for now—because it can largely be built out using local supply chains.

As policymakers fight to provide the best possible environment for renewables deployment, there is little doubt that wind will benefit. The question for investors is: what areas of wind should we be looking at now?

Areas that are still investable

While the outlook for European turbine and component manufacturers remains uncertain, with Chinese players increasingly likely to dominate emerging growth markets in Asia Pacific and elsewhere, there are many segments of the wind industry that can offer significant returns. Some of the most interesting are as follows.

Not all segments of the value chain are suffering

Source: Bloomberg

IPPs and integrated development platforms – Owning and operating wind farms is sizeable business, since operational assets can generate revenues for 30 years or more. Major wind operators include Iberdrola Renewables of Spain, NextEra Energy Resources of the US and EDP Renovaveis of Portugal. Alongside these giant portfolio holders, a host of independent power producers (IPPs) can offer plenty of opportunity for growth capital.  Engineering, procurement and construction (EPC) players have always been assured of steady revenues in the wind sector, but the transformation of these companies into so-called development platforms has inflated valuations and sparked frenzied deal activity from 2021 onwards. In deals such as Ørsted’s takeover of Brookfield Renewable Partners' onshore wind business, acquirers are interested not only in the EPC capabilities of the developer but also in their project pipeline.

Operations and maintenance services – As the installed base of global wind power grows, so does the need for efficient operations and maintenance. This is a segment populated by a teeming ecosystem of inspection, repairs and maintenance companies, often with significant digital capabilities. Alongside these groups, there is an emerging growth opportunity in repowering, lifetime extension, decommissioning, recycling and other circular economy activities related to the wind industry.  Turbine blades are expected to yield 660,000 tonnes of waste by 2030.

Offshore wind supply chain – The Global Wind Energy Council expects offshore wind capacity, which topped 21 gigawatts worldwide in 2021, to hit 30 gigawatts in 2027 and 50 gigawatts in 2030. And these estimates could fall short following developments such as the IRA and the Net-Zero Industry Act. Getting this capacity commissioned will require a massive scale up of supply chain infrastructure, including investments in ports, cabling and installation vessels and subsea operations, as well as improved grid infrastructure and large-scale recruitment and training programmes.  If offshore is amongst the most interesting part of the wind industry from a growth potential, then floating platforms represent arguably one of the most interesting parts of offshore. The nascent floating offshore wind market exploded in 2022 with the Scotwind auction in the UK and the Pacific Wind leasing round in California. The UK aims to have 24 gigawatts of floating wind in the Celtic Sea alone by 2045, creating a €59 billion economy, while the US has a target of 15 gigawatts by 2035 and the California Energy Commission is looking to have 25 gigawatts installed by 2045, with up to 5 gigawatts by 2030.  

Small and micro-wind – Small and micro wind for domestic and farm operation continues to be a niche growth sector. Developments are progressing, with a wide array of solutions becoming more and more cost competitive, especially when complementing solar PV and other efficiency solutions. While it may be a while before we see cost and efficiency breakthroughs in this segment, the IRA and other regional subsidies are causing residential and rural commercial customers to integrate these solutions. In regions with increasingly volatile and high power prices, we can expect to see more installations. 

At Alexa, we recognise the significance of wind power.  We have expertise to guide capital through the various parts of the value chain of what will continue to remain a pivotal part of the energy transition.

SECTOR TRADING ANALYSIS

Wind

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 September 2023.

  Source: Bloomberg.

Solar

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 Septeml 2023.

  Source: Bloomberg.

Green Molecules

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 September 2023.

  Source: Bloomberg.

Energy Storage

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 September 2023.

  Source: Bloomberg.

Hydrogen & Fuel Cells

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 September 2023.

  Source: Bloomberg.

Mobility

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 September 2023.

  Source: Bloomberg.

Semiconductors

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 September 2023.

  Source: Bloomberg.

European Utilities

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 September 2023.

  Source: Bloomberg.

North American Utilities

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 September 2023.

  Source: Bloomberg.

Oil & Natural Gas

   Figures in dollars millions except for share price; actuals are converted using FX rate as of the relevant fiscal year-end, estimates using the latest FX rate as of 19 September 2023
   N/A: Not Applicable.
   Source: Bloomberg as of the 19 September 2023.

  Source: Bloomberg.

Selected M&A Transactions

  Source: Bloomberg.
 

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