- In a report released last week, Allianz Research found that the world’s eight largest renewable energy companies reported a combined $3 billion decline in their assets in the first half of the year.
- “The entire sector is struggling with rising construction and financing costs, quality control issues and supply chain problems,” the report said.
- Vestas CEO Henrik Andersen told CNBC that the sector is at an inflection point and that the market will identify its “winners and losers” over time.
The installation of a wind turbine will take place in Germany on July 14, 2023. The International Energy Agency is calling for an increase in renewable energy installations in the next few years.
Ina Fassbender | AFP | Getty Images
Renewable energy companies are generally experiencing a poor earnings season as weak supply chains, manufacturing errors and rising production costs reduce their profits.
As the world seeks to rapidly transition to cleaner energy, equipment manufacturers are struggling to keep up with rising global demand, leading to rising production costs and questions about the economic sustainability of large-scale projects from major industry players.
Manufacturing errors, particularly at Siemens Energy’s wind turbine subsidiary Siemens Gamesa, have emerged as companies struggle to build turbines faster and on a larger scale.
Gamesa’s problems led Siemens Energy to scrap its profit forecast earlier this year and seek guarantees of up to 15 billion euros ($16 billion) from the German government last month.
Specialist wind energy companies are also often outbid by traditional oil and gas companies for seabed licenses. If they win a contract, electricity prices are often too low to justify manufacturing costs, so companies hope that their governments in Europe and the United States will provide higher subsidies and restore market balance.
As a result, most wind energy stocks have been down sharply since the turn of the year.
In a report released last week, Allianz Research found that the world’s eight largest renewable energy companies overall reported a $3 billion decline in assets in the first half of the year, with wind projects in particular facing turbulent conditions. The firm’s economists said last earnings season was a “learning moment” for the industry.
“The entire sector is struggling with rising construction and financing costs, quality control issues and supply chain issues. Inflation and global energy price fluctuations have also led to increased costs for wind power projects, raising doubts about the feasibility of many ventures,” said economists at Allianz Research.
“Some projects in the US, but also in the UK, are at risk of being abandoned if governments do not offer support. Because these projects were initiated before the energy crisis and had low guaranteed feed-in tariffs, they are now becoming more and more unprofitable.”
Although balance sheets remain strong, renewable energy companies have written down assets and lowered their profit outlook. Danish company Ørsted announced last week that it was abandoning the development of two offshore projects in the United States, resulting in impairment charges totaling $5.6 billion.
However, fellow countryman Vestas offered a glimmer of hope. The company achieved EBIT (earnings before interest and taxes) before special items of 70 million euros ($74.73 million) in the third quarter, well above the 31 million euros forecast in a consensus prepared by the company. However, the company also warned that external factors were clouding its near-term outlook and downgrading its full-year capex and margin forecast.
Its CEO Henrik Andersen told CNBC on Wednesday that the sector is at an inflection point and that the market will identify its “winners and losers” over time.
“We are very disciplined, we work with our customers and partners can rely on us and governments can rely on us. This, I hope, creates a strong foundation to be one of the industry’s winners,” said Andersen.
“It’s not broken, but you can’t close your eyes and hope that whatever project you bring into the discussion will always come about as macroeconomic factors change.”
Political recalibration
Jacob Pedersen, senior analyst at Sydbank, agreed that Vestas in particular was well placed to move forward, but that both companies and policymakers would need to rethink their strategies if the transition to net zero is to be realistic.
“We know that a large part of the problem is related to the projects that were won at low prices in 2019/20. Since then, inflation and interest rates have risen, it has become much more expensive to build these projects, and that is the case.” “It has left an order book full of deficits, and that order book is getting smaller and smaller over time,” Pedersen said on Wednesday to CNBC’s “Street Signs Europe.”
Pedersen added that there is “a huge need for a realignment of political opinion” on the costs of the planned energy transition, as wind turbine prices have increased by an average of 20-30% since 2020.
“The transition to wind turbines, to a greener energy portfolio around the world, is becoming more and more expensive, and so I think we’ve also seen some signs – we know that the US is a big problem for the offshore industry right now because the rise in interest rates,” explained Pedersen.
“But we have seen that the most recent projects have been awarded on much, much better terms, on terms that should be beneficial for companies to generate profits in the future.”
The European Commission last month announced a new wind energy action plan that aims to significantly increase installed wind capacity. Pedersen said this is evidence that the necessary recalibration is underway, but it cannot be achieved overnight.
“This is a process that takes time and for project developers to invest in new projects, for wind turbine manufacturers to invest in the capacity needed, to get us to where politicians want to be, a lot more is needed, namely this “Companies simply don’t have the money to invest as much as they need to,” he said.