Wind Energy

Profits gone with the wind

118892056 wind turbines dpa 1800
More wind turbines don't automatically translate into more wind-energy profits. Source: DPA

From a purely technological perspective, wind energy has been a huge success. German engineering has shown how to manhandle Mother Nature and power a growing chunk of the nation’s vast industrial economy with clean energy from wind rather than dirty energy from the ground, or risky energy from nuclear plants exposed to natural catastrophes or human error. Wind meanwhile outstrips all other main sources of installed power capacity in Germany, and has accounted for the lion’s share of power generation on a few days this year.

At the heart of this transformation has been a range of renewable-energy subsidies that have dramatically scaled up once-niche wind – and solar – technologies and slashed their manufacturing costs in the process, making both increasingly competitive to fossil fuels.

From a purely financial perspective, however, wind energy like solar has been a heavy burden on its consumers. Last year, they paid €23 billion ($27 billion) for renewable energies via a surcharge on their electricity bills. Because of that surcharge, the average amount spent last year on electricity by a single household rose to €1,060, up 50 percent from 2007.

“We are going through turbulent times; there will be some upheavals in our industry.”

Hans-Dieter Kettwig, chief executive of Enercon

To ease this burden, the German government has been gradually reducing subsidies. However, that move, while good for energy consumers making the transition to renewable energy, is causing problems for the manufacturers and operators of wind turbines supplying that energy. Instead of relying on subsidies guaranteed by law, the companies must now compete in an auction system based largely on awarding contracts to the lowest bidder. As a result, prices have plummeted. “We are going through turbulent times; there will be some upheavals in our industry,” said Hans-Dieter Kettwig, chief executive of Enercon.

The German grid regulator, Bundesnetzagentur, announced on November 24 that it had awarded just over 1 gigawatt of contracts in an auction that was significantly oversubscribed with 210 bidders. That competition resulted in a 10 percent fall in prices compared with the previous auction. The average awarded price was 3.8 cents per kilowatt hour, a drop of nearly 50 percent within a year. According to industry experts, companies need a minimum 4.5 cents per kilowatt hour to build and operate a wind park profitably.

“The problem is that prices are falling so fast that technological progress can’t keep up,” said Arash Roshan Zamir, an analyst with Warburg Research.

29 p17 Turbines-01

The balance sheets of key suppliers of wind-power systems in Germany show the consequences. From the beginning of January 2016 to the end of September 2017, Vestas from Denmark and the three German providers Siemens Gamesa, Nordex and Senvion saw their operating profits halved. The quartet’s earnings before interest and taxes in the first nine months of 2017 were only €860 million, down from nearly €1.7 billion in the same period a year earlier. Rosier prospects are not on the horizon. “On average, we expect turbine manufacturers to see a margin drop of 2 to 3 percent in 2018,” Mr. Zamir said.

Suppliers have responded with radical austerity measures. Earlier this month, Siemens Gamesa announced plans to cut 6,000 of its 27,000-strong workforce as part of a major restructuring plan. Investors are also responding – by fleeing. Since the beginning of the year, Vestas’ shares have lost a quarter of their value, Siemens Gamesa’s dropped about half and Nordex’s more than 60 percent.

“Consolidation in the industry will intensify even more,” said Dirk Briese, head of the consultancy wind:research. “There are too few orders to have enough money to drive the development of new, larger and more efficient turbines. At the same time, new generations of turbines are the prerequisite for winning orders.” Mr. Briese’s bitter forecast for wind technology suppliers – they can expect even more “shrinking sales and profits.”

John Blau is a senior editor with Handelsblatt Global. Franz Hubik covers renewable energies for Handelsblatt. To contact the authors: blau@handelsblatt.com, and hubik@handelsblatt.com

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