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| 1 minute read

Onshore wind – a new breed of subsidies?

The reduction of the cost of onshore wind energy has been marvelled at for some time, even more so as it has allowed for the steady reduction of various forms of governmental subsidies. However, taking a closer look at the losses of the non-Chinese wind turbine Original Equipment Manufacturers (OEMs) in the recent past, including yet another profit warning by one of the largest players in the market a few days ago, one has to wonder whether there is a new breed of subsidies at work here: Products being sold below their cost. How does this happen?

It seems clear that the losses we see cannot have purpose and intent behind them, as balance sheets across the industry already look sufficiently fragile to allow for strategic moves to squeeze out competitors.

A more likely explanation seems to be that calculations are oftentimes based on questionable assumptions. Specifically, it is the nature of long-term project business that there is a time gap between contract effectiveness and execution. In theory, this time gap can be used to bring down the cost of the sold product sufficiently to make money, even if the price does not cover the current cost of it.

This principle has worked well in some areas in the past, in particular when the time gap spans years rather than months (e.g. in large offshore projects). However, it will work far less well in an environment where this gap is smaller, while at the same time new and ever larger products are thrown onto the market in rapid succession. This also undermines the effectiveness of one of the most well-known tools for cost reduction there is, i.e. the experience curve.

What is the solution?

Yes, cost-out efforts remain important, even though promises of miraculous 20% to 30% reductions within short time frames should in fact be replaced by a more sober view. But maybe more crucially, discipline regarding new product variants should get more attention, so that at least there is a chance that the required volumes that trigger running down the experience curve can in fact be produced.

And yes, prices per megawatt should probably pause their rapid decrease, too. This is never an easy discussion to have with customers, but then, even they might appreciate that it is better to talk about prices now than to face a monopolist at a later stage.



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