Problems with turbines have caused wind turbine stocks to plummet – and a number of problems remain

As wind energy’s biggest players prepare to report quarterly results, questions of supply chain reliability are top of mind for both stock analysts and industry leaders.

Siemens Energy The company made headlines earlier this year when it abandoned its profit forecast and warned that costly failures at its wind turbine subsidiary Siemens Gamesa could drag on for years.

It raised concerns about broader problems across the industry and put the spotlight on the profits of European wind energy giants.

Siemens Energy is scheduled to report its fiscal fourth quarter results on November 15. The company’s shares are currently down more than 35% year-to-date.

Aside from the turbine issues, the German energy giant reported orders worth about 14.9 billion euros ($15.7 billion) in the third quarter, up more than 50% from a year ago, driven mostly by large orders from Siemens Gamesa and Grid Technologies. But the 2.2 billion euro charge from Gamesa’s quality problems led Siemens Energy to forecast a net loss of 4.5 billion euros for the fiscal year.

Ahead of its fourth-quarter earnings release, analysts at Kepler Cheuvreux suggested in a research note on Tuesday that the company “remains vulnerable to large negative cash flow fluctuations in the next fiscal year” despite its previous profit warning.

“We assume that Siemens Gamesa will record very weak order intake in the first half of the year, which will be accompanied by significant delivery delays and increasing customer penalties. The challenges at Siemens Gamesa will continue to overshadow the resilience of the group’s other businesses,” they added.

Morgan Stanley lowered its price target on Siemens Energy from 20 euros per share to 18 euros per share, but maintains an overweight long-term strategic position on the company’s stock.

“Siemens Energy’s valuation currently factors in a negative value for the Gamesa division, which we believe may have been overextended,” Ben Uglow, capital goods analyst at Morgan Stanley, said in a research note on Monday.

“While we recognize the low visibility of Gamesa’s margin performance and know that restoring investor confidence will take time, we remain overweight due to the undemanding valuation and strong fundamentals of the gas and grid businesses.”

Elsewhere, Deutsche Bank Earlier this week, the company cut its 12-month share price forecast for the Danish wind energy producer Ørsted up 36% ahead of its preliminary earnings report on November 1st. The value of the share has already halved so far this year.

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Deutsche Bank previously highlighted challenges in the wind power industry, including delivery delays, reduced tax credits and rising tax rates. However, Ørsted’s share price fell further earlier this year when the company raised the possibility of a €2.1 billion impairment charge on its US offshore wind portfolio.

Meanwhile, Danish wind turbine maker Vestas has seen its share price fall by around 30% year to date, despite continued significant order intake, as the entire industry is plagued by reliability concerns. Vestas will publish its interim financial report for the third quarter on November 8th.

Supply chain concerns

ONYX Insight, which monitors wind turbines and tracks over 14,000 in 30 countries, said in a report on Tuesday that supply chains remain the biggest challenge for the sector and reliability is not far behind.

The analytics firm, owned by British energy giant BP, surveyed senior executives from over 40 wind turbine owners and operators around the world to gauge the sentiment of industry leaders and found that 57% cited the supply chain as the top barrier to their operations .

Ashley Crowther, ONYX’s chief commercial officer, said the ongoing impact of Covid-19 on the manufacturing sector was just beginning to heal – and then came a Russian plunge in Ukraine and the subsequent rise in inflation.

“Survey respondents are now citing delays in new projects due to longer lead times for delivery of new turbines and significant price increases,” Crowther said in the report.

“This is consistent with what OEMs have communicated to their investors, such as Vestas noting in its 2022 annual report that they “increased our average selling prices of our wind energy solutions by 29%.” The same applies to main components, especially main bearings of newer turbines. With large rotor diameters, long delays mean that turbines remain out of operation for a long time.”

Although supply chain issues are causing problems for operators, the most immediate impact has been on OEMs such as Siemens Gamesa and Vestas, Crowther noted, as recent financial results showed.

“Major Western OEMs have recently reported losses or profit warnings and announced major restructuring projects to address the challenges they face. Some are even rethinking their approach to the aftermarket, which has always been considered the most profitable part of the business,” he added.

Reliability issues

Those surveyed by ONYX also expressed concerns about reliability: 69% expected more reliability issues due to aging assets and 56% saw problems associated with new turbine technology. Only 22% expected fewer reliability problems due to new improvements in turbine technology.

“As the sector matures, turbines get older and the failure rate of electromechanical systems increases with age,” noted Crowther.

“Even in the first phase of operation of newer turbines, a number of failures occur due to shorter development cycles, new turbine designs and pressure on turbine prices. This means that the machines are not durable enough.”

During an initial boom in the wind industry several years ago, OEMs faced enormous market demand and in turn developed a variety of turbine designs that were delivered in short cycles to a customer base that wanted to produce more energy with greater efficiency and lower costs. Crowther explained.

“Today, OEMs have lost significant amounts of money due to the spate of supply chain issues and too many turbine designs to support, including those paid out in liquidated damages,” he said.

“Manufacturers have entered a spiral of price competition and are trying to produce larger turbines at more competitive prices. But as larger turbines are manufactured in shorter production cycles, it is no surprise that manufacturing quality has declined.”