Is the Long Renewables Honeymoon Over?

The European renewables industry press, which is usually unequivocally upbeat in its assessments, is currently reporting a broad spectrum of substantial problems in the sector, ranging from bankruptcies and technical problems to tepid policy support and increasing public resistance.

In a fundamentally viable energy generation sector such stories could be regarded as minor perturbations, but in one that has been for decades all but completely insulated from risk by subsidy and other non-market support, it suggests deep-seated structuro-physical weakness.

The German wind turbine manufacturer Senvion S.A., formerly trading under the name of RePower, is currently in financial difficulties. This Hamburg-based firm, which has installed over 1,000 wind turbines in the UK alone, applied to commence self-administered insolvency proceedings in mid-April this year, and is at present sustained by a EUR 100m loan agreement with its lenders and main bond holders. Senvion has delayed both its AGM, which was due to take place on the 23 May, and also the publication of its recent financial results. At the time of writing the company had not yet announced a new timetable.

For nearly eight years, from 2007 to 2015, Senvion was owned by the Indian wind turbine manufacturer, Suzlon, and is now the property of the private equity firm, Centerbridge Partners. It is currently rumoured in the industry press that Centerbridge may now be compelled to cut its losses by making a distressed sale to Asian, probably Chinese, companies seeking a cheap way of acquiring a wind power market toehold in Europe. Western companies are thought to be unlikely to have the appetite for such a purchase, and their reluctance is entirely understandable: as Ed Hoskyns shows in a recent note for GWPF using EurObservER data, the annual installation rates for wind and solar have halved in the EU28 since 2010. Senvion may be the first major company to feel the effects of this downturn, and is certainly large enough for its difficulties to have wide ramifications, with two of its suppliers, FrancEole, which makes towers, and the US company TPI Composites, which makes blades, both being hurt by reduced revenues. Indeed, FrancEole was already in a poor way, and is now reported as being on the verge of liquidation.

Projects that were being supplied by Senvion are also affected, with the building of one, Borkum West 2.2, a 200 MW offshore wind farm, being suspended mid-construction since components due from Senvion have not been delivered on schedule. This delay, which has been front-page news in some circles, must be causing considerable headaches for Borkum West’s developer, Trianel GmbH, which is apparently now seeking to establish direct links with Senvion’s suppliers so that they can complete the project. 

Elsewhere in the offshore wind universe, two large and relatively new projects are in the midst of what must be costly repairs involving significant downtime. Having received regulatory approval, the Danish mega-developer Orsted is about to start removing and renovating all 324 blades on the 108-turbine, 389 MW, Duddon Sands wind farm in the UK part of the Irish Sea, a year after problems first became apparent. The machines used, the Siemens 3.6–120, have suffered leading edge erosion, a problem that affects perhaps some 500 turbines in Europe (See “Type Failure or Wear and Tear in European Offshore Wind?"), and requiring the application of a remedial covering to each blade.

Less can be read in the public domain about the repairs about to restart at the gigantic, EU-funded Bard Offshore 1, which is owned by Ocean Breeze Energy GmbH & Co. KG. The project, which commissioned in 2013, has eighty 5 MW turbines, with a total capacity of 400 MW. Bard had already suffered a well-known series of cable failures, and it now transpires that both nacelles and rotors have been undergoing replacement for about two years, though Ocean Breeze is, according to industry press reports, apparently declining to confirm how many turbines are affected. The company’s website gives no information in either German or English that I could find.

There would, then, appear to be a great deal of work in servicing offshore wind installations, but this has not been enough to prevent Offshore Marine Management Ltd (OMM), a UK-based offshore wind contractor, entering into voluntary liquidation after several years of losses. Interestingly, OMM, a relatively small company though prominent in the UK, cited the increasingly “competitive nature” of the sector as a factor underlying its failure, and it seems likely that it was unable to survive the efforts of developers determined to reduce both capital and operational and maintenance costs to the bone (and judging from the failures reported, perhaps into the bone itself). With margins pared thin, costly local suppliers may quite simply be forced out of the market, and regardless of their other merits. Related evidence of this phenomenon, which is clearly global, can be found in the fact that the Danish mega-developer Orsted is now grumbling that the Taiwanese government’s insistence of a high level of local content for its projected 900 MW Changua 1 & 2a offshore wind farms will double the capital cost from approximately £1.6m/MW to about £3m/MW.

One wonders whether this underlying reality was discussed at the recent and apparently robust meeting between the Scottish Government and the offshore wind industry, convened because the Scottish metal manufacturing firm BiFab had not been commissioned to make equipment for the 950 MW Moray East wind farm, a wind farm that has one of the much over-hyped Contracts for Difference at £57.50/MWh. The supply deals had instead been awarded to Lamprell, which is based in the UAE. The Scottish Energy Minister, Paul Wheelhouse, MSP, used the meeting to express “significant frustration” that local firms had been involved to such a small degree hitherto, in spite of repeated promises. Did Benji Sykes of the Offshore Wind Industry Council, present at the meeting, cite the Taiwanese case and explain to Mr Wheelhouse that something very similar would apply in Scotland, and that if local content was insisted upon, then construction costs would increase substantially and subsidies would also have to be increased to pay for it? Did he explain that there is genuine doubt whether Moray East can be viable at £57.50/MWh, even with low-cost international suppliers, and that local content would certainly not improve that situation? It would seem not. However, he did promise to “work closely” with the Scottish government to “ensure that communities up and down the country reap the economic benefits offshore wind offers”. Mr Wheelhouse has probably heard that before. How much longer will he go on believing it?

So much for the action in the foreground. The backdrop is also sombre. The Crown Estate, which in effect controls offshore wind development in UK territorial waters, has delayed pre-qualification for Round 4 projects until after the summer of 2019, and the German maritime agency, the BSH, has disappointed developers by not assigning new development zones as had been requested. In delay is danger, and the offshore wind industry in general will be deeply concerned at the loss of momentum that may result from these decisions.

Onshore wind is doing no better. The most recent auction for wind contracts in Germany took place in February and was radically undersubscribed, with only 476 MW of a possible 700 MW being awarded, the underlying causes being, it is reported, less favourable planning consent regulations and less generous price support. Senvion itself is described in some reports as being one of the supply chain casualties, alongside the German tower and foundation maker, Ambau GmbH, which has already filed for bankruptcy.

One wonders why these companies were not better prepared. Reductions in subsidy in Germany were inevitable, and the tightening of planning regulations is long overdue and unsurprising. Indeed, it is remarkable that the German public has tolerated for so long such intense development in close proximity to domestic housing. However, some German states are now considering an exclusion zone of 1 km from the nearest turbine, which is still extremely close for structures in excess of 100m, and now heading, believe it or not, to over 200m in overall height. The German people have been patient, but the mood is clearly changing; indeed, the premier manufacturer and developer Enercon has recently been compelled by court order to suspend construction of its 30 MW Wulfershausen wind farm because it had, apparently, breached the local authorities’ requirement that no dwelling should be within a distance ten times tip height.

This less favourable atmosphere is contributing to a general sense that existing onshore wind farms in Germany will not be repowered in great numbers at the end of their lives. About 15 GW of Germany’s onshore wind is now over fifteen years old and the end of the economic lifetime is in sight. But industry sources quoted in the subscription only press suggest that less than a third of this will actually be repowered, much less than had been expected only a few years back. The reasons given for this sudden change in prospects include declining public acceptance, reflected in tougher planning conditions, and falling subsidies.

Meanwhile, in Norway and in its home territory Sweden, Statkraft, Europe’s largest generator of renewable energy, has suspended further onshore wind construction because it would be “very challenging” to develop profitable projects in these areas. They are concentrating on other less resistant markets, such as the United Kingdom, where it has acquired a 250 MW portfolio of projects from Element Power.

But as it happens, things in the UK may prove to be no more promising. It has just dawned on the wind industry that government is actually acting on Amber Rudd’s landmark energy reset speech when Secretary of State for the Department of Energy & Climate Change in November 2015. In that speech Rudd remarked that “we also want intermittent generators to be responsible for the pressures they add to the system”. That of course was only right, but perhaps the industry hoped the intention would never materialise. If that was their expectation they were gravely mistaken. Aurora Energy Research has now released analysis of the regulator, Ofgem’s proposal to reform network charges, the “Targeted Charging Review”, and believes that the proposed changes “could set back subsidy-free renewables by up to five years”. When "unspun" this actually means is that if the regulator removes the hidden subsidy of avoided system costs, imposed by renewables but socialised over all generators, then more of the true cost of renewables will be revealed to the market, making it much less likely that even the most greenwash-thirsty corporate, NGO, or governmental body will sign an extravagant long-term Power Purchase Agreement (PPA) with a wind or solar farm. In other words, far from hindering the emergence of subsidy-free renewables, Ofgem’s reforms threaten to give the lie to the subsidy-free claim and show that it was never anything more than an empty PR gambit.

In spite of all this, it is doubtless too soon to say that the game is up for renewables. The industries concerned will fight back, and beg further direct and indirect public assistance while threatening politicians and civil servants with missed climate targets if that support is not forthcoming. In all likelihood they will be to some degree successful. But this will only delay the inevitable. As the depressing news stories summarised above suggest, after decades of public support and de-risking there are still fundamental weaknesses in the renewables industry that go well beyond teething troubles and localised management failure. One explanation, the sole necessary one in my view, is that the physics is against this industry, and that the physics is beginning to tell. It remains only to say that this blog is not licensed to give investment or financial advice.