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Europe's Renewable Energy Ambitions Lift Wind Turbine Makers' Prospects

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Europe's Renewable Energy Ambitions Lift Wind Turbine Makers' Prospects

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Europe has established itself as a seat of offshore technology on the back of advanced know-how, supportive policies, and governments' targets. The continent's push to cut greenhouse gas emissions to 55% below 1990 levels by 2030, and become climate neutral by 2050, implies a huge increase in renewable energy sources. The EU's November 2020 Strategy on Offshore Renewable Energy proposes that offshore wind capacity should reach at least 60 gigawatts (GW) by 2030 (including 1 GW of ocean energy) versus 25 GW at year-end 2020, and 300 GW by 2050 with ocean energy capacity at 40 GW.

S&P Global Ratings expects European OEMs will ramp up production to satisfy increased appetite for green energy, especially after proposals in July to accelerate the reduction of greenhouse gases under the European Green Deal. 2021 is set to be a record year for offshore installations in Europe, according to industry advocate WindEurope, with 3.7GW to be added by year's end. In particular, Europe's top two OEMs--Spain-based Siemens Gamesa Renewable Energy (SGRE) and Danish company Vestas--are poised to benefit from the related surge in demand.

We believe large power companies like Orsted, RWE, Vattenfall, Iberdrola, and EnBW will continue to fuel offshore wind energy development in the next five years (see "European Offshore Wind Will Continue To Lead Global Growth," published Sept. 8, 2021, on RatingsDirect) as production costs stabilize. We expect the U.K. and Germany to remain a hot spot for offshore capacity expansion, with commitments to add 40 GW and 20 GW respectively by 2030 (source: WindEurope). SGRE has already announced its intention to invest about £186 million to double its offshore blade facility in Hull, U.K., and Vestas plans to expand its Isle of Wight blade facility.

Why Europe Remains Ahead

The two European OEMs leading the continent's offshore wind technology market, SGRE and Vestas, together represent about 90% of installed capacity; they also dominate the nascent U.S. market. SGRE supplied about 61% of the offshore capacity currently online, and Vestas 27% (see chart 1). Unsurprisingly, SGRE is also involved in about 82% of projects under construction (see chart 2), according to WindEurope, while Vestas has a stronger position in onshore wind farms. We expect both companies will capture much of the expected future growth, thanks to their established positions, strong operating know-how, and technological prowess.

Chart 1

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Chart 2

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Technology efficiency goes hand in hand with the ability to provide large turbines, while reducing installation and maintenance costs.   European OEMs can meet the rising demand for large wind turbines, while helping customers maximize their returns. According to WindEurope, the average capacity (amount of energy a wind turbine can produce) of wind turbines installed in Europe in 2020 was 8.2 megawatts (MW), a 5% increase on 2019. Vestas has presented its V236-15.0 MW offshore turbine, capable of producing up to 80 gigawatt hours (GWh) of energy per year depending on site-specific conditions. Meanwhile, SGRE is working on its SG 14-222 DD (capacity of up to 15MW) turbine, with production slated to start in 2024. This year, Ming Yang Smart Energy, a Chinese private wind turbine OEM, has released details of a planned MySE 16.0-242 wind turbine with 16MW capacity; the prototype should be ready in 2023, with commercial production starting the year after.

China-based OEMs are starting to catch up with European and U.S. peers.   These companies traditionally serve local markets, while expanding in the wider Asian region. Among European manufacturers, only SGRE has managed to indirectly enter the market through a licensing agreement with Shanghai Electric. In the past, products from Chinese OEMs slightly lagged those of European players in terms of power output. But Chinese players' turbine technology has evolved in recent years and is becoming more advanced.

European OEMs still have a competitive edge, based on cost, technology, and access to funds.  Chinese OEMs should not pose an immediate threat to European wind turbine manufacturers, although they may gain market share in Europe in the longer term. With China being the largest market for new capacity in 2020, according to the Global Wind Energy Council, there is plenty of unfulfilled demand, particularly since the country remains closed to foreign suppliers. We believe Chinese players will continue to satisfy local demand before expanding to Europe. By contrast, in Europe, the ability to produce turbines locally would be important for new entrants to deliver the required scale and commitments under long-term service contracts. Success would also necessitate a considerable amount of advance investment, which favors European OEMs, who we believe have easier access to funding in Europe than Chinese players.

Floating Technology Complements Fixed Structures

Floating wind farms could help a lot of European countries achieve their energy transition targets. WindEurope forecasts that total installed floating capacity in Europe could reach up to 7 GW by 2030 versus 62 MW today, and be as high as 150 GW by 2050. This implies that, by then, one-third of all offshore wind installations could be floating. At the moment, 6% of commissioned projects are floating, 71% of which were completed by Vestas and SGRE. In addition, we observe that half of the current projects under construction consists of floating wind platforms, underlining the growth potential.

Cutting-edge technology for floating offshore wind platforms, particularly where fixed structures are unsustainable, could unlock more growth opportunities for European OEMs.  About 60% of European offshore wind capacity is in waters 60 meters or deeper, according to WindEurope, and Europe already has several floating wind farms. Norwegian oil company, Equinor, has been at the forefront of this energy generation niche, installing a pilot floating turbine (Hywind Demo) in 2009. Almost a decade later, in 2017, SGRE commissioned its 30 MW Hywind Scotland project in the U.K., and this was followed in 2020 by Vestas' 24 MW Windfloat Atlantic project in Portugal. The world's largest floating wind power plant--Hywind Tampen--will be installed in Norway, equipped with 11 of SGRE's SG 8.0-167 DD turbines; it's scheduled to be commissioned in late 2022 and will be the first ever floating wind plant to power offshore oil and gas platforms. What's more, the location of offshore projects favors floating structures. The North Sea is better suited to bottom-fixed wind farms, since the seabed is easy to access, flat, and mostly sandy. The Atlantic Ocean and Mediterranean Sea are not a good fit for fixed structures because they are deep and the seabed rocky. Additional hurdles emanate from weather conditions and engineering aerodynamics.

A critical success factor is the scale of projects, which influences the cost for developers.   The average capital expenditure (capex) per MW for Hywind Demo and Hywind Scotland reduced by 70%, and Equinor expects a further average 40% drop for Hywind Scotland and Hywind Tampen. Yet, for OEMs, the race for technological improvement also hurts profitability, since each new model requires additional spending on research and development, as well as capex. On the other hand, OEMs may save money by installing fewer turbines of a larger size. The main challenge for OEMs in the future is how to balance technology advancements with customers' demand for bigger turbines.

Long-Term Profitability Hinges On Cost Control

This year, wind turbine manufacturers face higher costs linked to raw material price inflation, supply chain constraints, and more expensive logistics services. As a result, both SGRE and Vestas lowered their profit guidance for 2021.

We understand from SGRE that, in particular, the prices of steel and copper weighed on margins. Compounding this effect was the ramp-up of the 5.0X platform in Brazil, where the company was required to use local content, which added €230 million of provisions. Consequently, SGRE's EBIT margin before purchase price allocation, and integration and restructuring costs, integration, and restructuring costs was -5.6%.

Operating under similar industry conditions, coupled with the integration of its offshore business, Vestas recorded an EBIT margin before special items of 2.9% for second-quarter 2021.

The raw materials-intensive wind turbine industry is vulnerable to metal price inflation.  Steel, aluminum, iron, and cooper comprise most of the turbine's weight; epoxy (resins), glass, plastics, and other rare materials the remainder. The prices of the main metals used for production have reached record levels this year (see table 1). We assume continued price growth as economies recover (see "Metal Price Assumptions: Prices Stay Hot, But No Signs Of A Melting Point," published June 29, 2021), which goes alongside mounting demand, especially for base metals such as copper, iron ore, nickel, and zinc. Supply disruptions amid the COVID-19 pandemic are complicating matters, in a market already struggling to keep up with the demand for steel.

Table 1

S&P Global Ratings Metal Price Assumptions
--Revised assumptions (as of June 29, 2021)-- --Previous assumptions (as of March 30, 2021)--
2021 2022 2023 2021 2022 2023
Aluminum ($/mt) 2,100 2,000 2,000 1,900 2,000 2,000
Copper ($/mt) 9,000 8,500 8,000 8,500 8,000 7,500
Nickel ($/mt) 15,500 15,000 14,500 15,000 14,500 14,500
Zinc ($/mt) 2,700 2,600 2,500 2,600 2,500 2,500
Gold ($/oz) 1,800 1,600 1,400 1,700 1,500 1,300
Irone ore ($/dmt) 190 120 90 130 100 80
Metallurgical coal ($/mt) 150 140 140 130 140 140
Themal coal (Newcastle; $/mt) 90 60 60 70 60 60
mt--Metric ton (1 metric ton = 2,205 pounds). Oz--Ounce. Dmt--Dry metric ton. Prices for 2021 relate to the remainder of the year. Source: S&P Global Ratings.

Component shortages and rising transport expenses have magnified cost inflation.   Components, including electronic parts and materials like resins, are in short supply, with OEMs experiencing delayed deliveries of epoxy resins, for example. Such resins are used in the production of wind blades, and the main suppliers are in Asia. To ensure sufficient supply of those components, OEMs are prioritizing the most urgent deliveries, rerouting shipments, and changing timelines, among other measures. The complexity and costs of such deviations are usually quite high; hence, logistics have been difficult for the whole industry, and the recent spike in demand for industrial goods has exacerbated the situation. Transportation has been an issue since the pandemic began, with costs elevated. Logistics costs are not usually locked into the contract value, making them hard to control.

OEMs are taking steps to curb costs and support profitability.   Wind turbine OEMs have been taking measures to safeguard profitability by activating clauses and revisiting price indexation mechanisms on existing contracts. We understand that newly signed contracts already include more efficient pass-through mechanisms. That said, such price-related contract changes will take time to translate into better earnings, considering long lead times and the already significant existing pipeline. It also takes time for customers to review and adapt their internal processes. We expect metal prices will remain high but start normalizing next year. We therefore assume OEMs' profitability will remain under pressure in the second half of 2021, while easing gradually during 2022 unless further unexpected risks materialize (see charts 3 and 4). We believe that, despite continuing strong demand and relative stability of sales, offshore wind OEMs will continue to experience earnings volatility. This is because of execution risks inherent to large-scale projects, alongside the need for continuous technological advances and investments in this dynamic industry. As the installed base increases, however, services business, which yield much higher margins, should help cushion earnings.

Chart 3

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Chart 4

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Continued Financial Strength Is Key To Meeting Rising Demand

Strong balance sheets and liquidity are paramount for OEMs to manage expanding project pipelines and remain competitive. Historically, wind OEMs have maintained net debt positions, but debt has increased more rapidly since the pandemic started, even as execution risks for large projects increased.

We expect that, in the future, wind turbine manufacturers will place more emphasis on evaluating execution risks, careful working-capital management, and strong funding arrangements. We note that, as of June 30, 2021, SGRE had about €4.6 million of liquidity available, including €1.67 billion in cash (see chart 5). The company also benefits from performance guarantees amounting to €10.2 billion as of March 31, 2021. Vestas had a €2 billion revolving multi-currency credit facility, plus €2 billion available for cash drawings and/or issuance of guarantees, on top of €1.6 billion in cash as of June 30, 2021 (see chart 6).

Chart 5

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Chart 6

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Going Green Is A Two-Edged Sword

Wind power OEMs support decarbonization across the global energy sector by providing solutions to facilitate the transition to a more sustainable, low-carbon economy. Yet they have their own "green" strategies to implement. For OEMs, finding and allocating sufficient resources to achieve internal sustainable targets while accelerating growth will therefore be high on the agenda.

The following environmental, social, and governance factors could have an impact on credit risk in the wind turbine manufacturing sector over the next few years:

Shortage of skilled labor coupled with difficult offshore operating conditions.  

  • According to the International Renewable Energy Agency, the number of global wind jobs will increase to 6 million from 1 million by 2050. We believe the sector will find it difficult to fill vacancies without internal talent development and retention schemes and outreach, including through collaborating with academic institutions to attract skilled employees and creating working conditions that support continued innovation.
  • For offshore wind, the challenge will involve teams operating in remote areas with no access to operations and maintenance centers close to the shore.

Sustainability of supply chains and reduction of dependence on scarce materials. 

  • Recent disruptions are only one example of OEMs' vulnerability to and reliance on supply chains. They will need to closely manage the sourcing of raw materials, rare-earth metals, and components amid intense competition, while using a sustainable approach.

Recyclability of products.  

  • Wind turbine manufacturers use a lot of resources to ensure the recyclability of the end product, even though the decommissioning of old wind turbines is, in most cases, outside their control. We believe OEMs are on track to achieve their target of producing 100% recyclable turbines, given that 85%–95% is already recyclable; this task includes managing the complexity of recycling blades composites. SGRE and Vestas have pledged to make blades fully recyclable by 2040, and we've seen progress in this area. SGRE has introduced a fully recyclable blade for commercial use offshore, and Vestas has unveiled new technology that allows full blade recycling in the future.

Health and safety.  

  • Larger, more complex projects, and their maintenance, entail risks to the health and safety of employees, and more so in the offshore environment. Wind OEMs apply strict policies toward achieving zero-accident and injuries targets. Moreover, health and safety policies also apply to contractors, most of whom are typically involved in the installation process.

Community engagement and sourcing of conflict materials.  

  • Establishing solid and inclusive relationships with local communities is likely to be part of manufacturers' ESG strategy. OEMs' approach to constructing and installing turbines for offshore wind farms would influence the impact on local communities regarding noise, construction activity, and visual amenity. In turn, this may affect how wind farm operators are perceived in the community, with a potential knock-on effect on costs. Floating wind farms may resolve some of these concerns because construction is happening away from the shore.
  • Also, the use of minerals from conflict-affected and high-risk areas is also considered a risk for communities directly exposed to their sourcing. European OEMs are working to limit the environmental impact by adopting centralized due-diligence processes, tracing the origins of raw materials, and minimizing purchases from suppliers in such areas.

Editor: Bernadette Stroeder. Digital Design: Tom Lowenstein.

Related Research

External Research

  • https://etipwind.eu/publications/getting-fit-for-55/
  • Proposal For A Directive Of The European Parliament And Of The Council, July 14, 2021
  • Getting Fit For 55 And Set For 2050: Electrifying Europe with Wind Energy, WindEurope, June, 2021
  • Wind Energy In Europe: 2020 Statistics and the outlook for 2021-2025, WindEurope, Feb. 25, 2021
  • https://windeurope.org/intelligence-platform/product/wind-energy-in-europe-in-2020-trends-and-statistics/

This report does not constitute a rating action.

Primary Credit Analyst:Maria Vinokur, Madrid + 44 20 7176 3727;
maria.vinokur@spglobal.com
Secondary Contact:Massimo Schiavo, Paris + 33 14 420 6718;
Massimo.Schiavo@spglobal.com
Research Contributor:Patrick Wolf, Frankfurt;
patrick.wolf@spglobal.com
Additional Contact:Infrastructure Finance Ratings Europe;
InfrastructureEurope@spglobal.com

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