The financial cost of decades of climate inaction and the risks inherent in rushing to catch up were laid bare on Monday when a German industrial giant forecast a jaw-dropping 4.5 billion euro (US$4.9 billion) annual loss.
Siemens Energy AG’s woes stem chiefly from technical problems with a new generation of onshore wind turbines. Wind power is vital to cutting carbon emissions, and the industry has raced to launch bigger and more powerful machines.
However, the Siemens Gamesa Renewable Energy SA wind business moved too fast and has now discovered abnormal vibrations arising from blades and bearings which might have to be replaced.
While the affected models represent only 4 percent of its installed fleet, the direct costs of rectifying the problems are estimated at 1.6 billion euros. The company faces further unexpected costs related to ramping up production of offshore turbines, as well as unfavorable tax effects. Bernstein Research analyst Nicholas Green has evocatively dubbed the problems “Turbinegeddon.”
The wind industry should be flying high but instead is entrapped by a cornucopia of troubles. Projects are too often held up by red tape and NIMBYism, while contracts signed years ago have become onerous due to material and logistics cost inflation. Chinese companies that dominate their home market are looking increasingly to expand overseas, pressuring pricing.
An even bigger concern is that powerful new turbines might prove unreliable — small component irregularities can cause turbines to malfunction. The rotors of a high-spec onshore model span 170 meters and a nacelle (the central structure) can weigh several hundred tonnes (the latest offshore turbine designs are even larger). Needless to say, it is not straightforward to repair massive equipment high above the ground and compensate wind park owners for forgone electricity production. Though Siemens Energy might be able to recoup some money from subcontractors and suppliers, most of the financial risks often lie with the manufacturer.
Vestas Wind Systems A/S and General Electric Co have had their own warranty issues, but one cannot necessarily conclude the entire industry has a problem. Gamesa has many homemade issues: The business has had six leadership changes in as many years, Bernstein says. Oversight of its supply chain and communication about potential issues seem to have been lacking.
Regrettably, the latest problems became apparent only after Siemens Energy completed a 4 billion euro buyout of Gamesa’s minority investors in December last year, thus ensuring even more of the financial risk accrued to itself (For its part, German engineering giant Siemens AG is looking to reduce its part ownership of Siemens Energy; for now it owns a 32 percent stake, spread across the company and its pension arm).
Siemens Energy is fortunate the rest of its activities — comprising things like gas turbines and electricity-grid connections — are performing well. The cash impact of fixing the technical issues would also be spread over several years. Management ruled out raising equity.
However, turbine manufacturers might decide they need to raise prices and move more slowly to avoid similar issues. Siemens Energy is being more selective about order intake and has delayed turbine deliveries until it can get to the bottom of the current problems. Management has also vowed to “put stability and profitability first before growth.”
These events might also push up wind companies’ cost of capital amid lingering fears that problems with more turbines would arise — Siemens Energy has shed more than 6 billion euros of market value since the issues were first revealed in June.
These effects tend to hold back the energy transition just at the moment we need it to speed up. It is the kind of thing that happens when you ignore a massive problem (climate change) for decades and then race to catch up.
Chris Bryant is a Bloomberg Opinion columnist covering industrial companies in Europe. Previously, he was a reporter for the Financial Times. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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