EU wind support package to address auction design, permitting, under-utilization

The EU's wind power package to be announced Oct. 24 will focus on a number of measures from auction design to permitting in a bid to counter sub-optimal growth, supply chain stress and the potential threat of cheaper suppliers from China.

Contrary to solar, where costs are falling rapidly amid oversupply from China, European wind is still facing rising costs with the supply chain firmly in Western hands, but unable to turn a profit.

Sector association WindEurope sees the biggest potential in changes to the auction system, a spokesperson told S&P Global Commodity Insights.

On permitting, WindEurope noted some "very positive developments in Germany where a high number of permits was granted in 2023 already."

Slow permitting, often due to local opposition to massive new wind turbines, was the main reason for wind's slowdown before the 2022 energy crisis.

WindEurope previously said some 80 GW of European projects were stuck in permitting, leading to underutilization of Europe's manufacturing capacity.

Both the European Commission and some national governments brought in fast-track measures during the 2022 energy crisis to reduce permitting times, which are often longer than five years.

"Germany has been quick in implementing the emergency measures. We are leaning on other countries to do the same," WindEurope's Christoph Zipf said.

State guarantees

Another focus is the proposal by German energy minister Robert Habeck to offer state guarantees to turbine manufacturers until orders are back at the required level.

WindEurope sees a number of risks associated with such measures, but notes that there are currently some under-utilized capacities in onshore wind manufacturing, while some manufacturers have asked to increase their turbine output by receiving state guarantees.

Cheaper imports from China, the driver for lower solar component prices, is another risk Europe may want to avoid.

A short hike on material costs during the pandemic lifted project costs, while the shift to higher interest rates increased financing costs with higher labor costs another factor.

The major European turbine-makers -- Vestas, Siemens Gamesa and Nordex -- have all been forced to raise their sales prices in recent quarters amid rising costs along the supply chain.

Market leader Vestas' average selling price hit Eur1.15 million/MW in the fourth quarter of 2022 compared with Eur710,000/MW two years earlier.

"I would be lying to say last year wasn't... really tough," Morten Dyrholm, global senior vice president at Vestas, said at the BNEF Summit in London on Oct. 11. "We had to just get prices up. There was no other choice."

Dyrholm added that the cost of raw materials is starting to stabilize while transport costs are also coming down, suggesting the turbine market might be "through the worst" of the volatility. The third quarter will also see Vestas post its highest quarterly order intake in two years -- 4,044 MW across 11 countries, according to a preliminary analysis -- after a period of subdued sales activity due to the higher prices.

Turbine costs have come down slightly from their 2022 highs. While Vestas is yet to reveal its average price for the third quarter, Germany's Nordex revealed its average price had fallen to Eur790,000/MW compared with Eur890,000/MW in Q2 and Eur910,000/MW a year ago.

Still, the turbine-makers have yet to prove to the market that they can once again turn a profit. All three companies recorded negative profit margins in the second quarter.

"That means that prices will be higher, at least for a significant period of time. That's just how it is," Dyrholm said.

Wind power prices

The EU27 had 188 GW onshore as well as 16 GW offshore wind installed by end-2022, WindEurope data show.

EU wind turbines generated some 400 TWh or almost 17% of the bloc's electricity in 2022.

Some 98 GW of new capacity is forecast to come online in the EU27 over the next five years, of which 78% will be onshore, according to WindEurope's latest annual forecast.

Including offshore, the EU aims for 420 GW of installed wind by 2030, which would require a massive ramp-up from around 2026 when any new policy measure could start to be felt on the ground.

Market instruments from auctions to two-way Contracts for Difference or Power Purchase Agreements will be the main tools to incentivize new projects.

"We want to move away from price only auctions and towards auctions that award the wider societal value of wind energy," WindEurope's Zipf said, adding that the European Commission might make non-price criteria a more prominent feature of wind auctions.

German onshore wind capture prices averaged Eur73.93/MWh in Q3, according to Platts Renewable Energy Price Explorer.

The Platts Pexapark index for a standard 10-year onshore wind PPA in Germany was pegged at Eur61.61/MWh on Oct. 17.

Analysts at S&P Global Commodity Insights estimate break-even levels for a 10-year onshore wind PPA in Germany starting in 2025 at around Eur79.70/MWh to recover newbuild costs, operating costs, and financing costs, according to a report published in July, indicating little scope for PPAs for new onshore wind.