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August 2023

The Wind Industry Needs a Reboot - Per Lekander, CEO, Clean Energy Transition LLP

In the future, most of our energy will need to come from sun, wind and water. Thus, there is no clean energy transition without a healthy and fast-growing wind industry. This is particularly the case in northern countries like the UK with long dark winters. However, the wind industry’s current state is worrisome. Projects are being shelved, turbines are failing, and global turbine manufacturers are loss-making.

This troubling situation has nothing to do with low demand; after all wind energy demand is growing by over 10% per annum. Instead, what we are witnessing is a self-inflicted crisis driven by a dysfunctional industry, both on the manufacturer and operator side. Turbine manufacturers have been chasing sales volume by selling untested products at excessively low prices. Turbine operators, such as utilities, have compensated over-optimistic tender offers with squeezing the turbine providers into losses. In addition, some of them sell sub-par projects to insurers and pension funds with even more unrealistic assumptions. Yet investors have continued to plough money into the sector with few questions asked, suggesting a mindset of “if it is green it has got to be good and if it isn’t, at least it looks good in our annual report”.

The wind industry needs a painful reset. Turbine manufacturers need to adopt world-class manufacturing techniques, resulting in standardised products produced in large series with zero tolerance for errors. Buyers need to stop tendering based on hope and the expectation that suppliers and investors should pay for that hope. Current steep losses mean that some of this change will happen out of necessity, otherwise more companies will disappear.

The wind industry also needs to target much higher margins and profits, in line with other high-risk project businesses, like the oil and gas industry. An offshore project can take up to ten years to complete and a lot can happen during that period. Vattenfall recently cancelled a UK offshore project because costs had increased by 40%. Unfortunately, this power will now be replaced by fossil fuels.

Companies need to plan for a situation where a poor project might break-even and a great project achieves a 30% return, unlike today when a good project achieves a 10% return and a poor one ends up with a massive loss. Failure to adjust will perpetuate a cycle of recurring crises within the wind industry. Short-term costs might rise.

Over time, a healthier, more productive wind industry with better economies of scale and far fewer faults will achieve lower costs, robust profits and better growth, whilst simultaneously accelerating the transition to clean energy. There is no energy transition without a healthy wind industry and for now it is failing!

Per Lekander Portfolio Manager & CEO Clean Energy Transition LLP