Wind turbine components being transported to a site in the Netherlands. The major Western turbine manufacturers are on a path to profitability, though some will get there sooner than others.
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The major Western wind turbine-makers saw order intake rebound materially in 2023 amid an improving market environment, with federal tax credits in the US driving a wave of new contracts.
The 45.9 GW of new orders secured by the four largest manufacturers from Europe and US, up 44% from 2022, sets the stage for the companies to return to profitability in the coming years after a brutal period of inflation and supply chain disruption.
Denmark's Vestas Wind Systems A/S, the world's largest turbine-maker, is already back in the black, swinging to a full-year operating profit of €231 million in 2023 after posting a €1.15 billion loss in 2022. Germany's Nordex SE broke even at an EBITDA level in 2023 following a prior-year loss of €244 million.
"We are absolutely sleeves up," Vestas CEO Henrik Andersen told analysts during the company's Feb. 7 earnings call. "We are coming out of 2023, [and it] has taken enormous discipline and enormous commitment to get [here] from where we started the year."
The turnaround comes after the Western manufacturers raised the price of their turbines, with Vestas' pricing peaking at an average of €1.15 million/MW for onshore machines in the fourth quarter of 2022, a year-over-year increase of about one-third.
Analysts said the volatile market conditions that led to the price hikes are now largely in the rearview mirror.
"We are a long way past that crisis period where the companies really got hit by [rising] steel costs and the complexity of the logistics," said Sean McLoughlin, head of industrials research at HSBC for Europe, the Middle East and Africa. "If anything, the policy support for wind looks better than ever."
That support is coming from both sides of the Atlantic and is starting to show results for the turbine manufacturers. The Inflation Reduction Act (IRA) has spurred a clean energy manufacturing renaissance in the US, and Europe hopes to do the same with a sprawling suite of clean-tech incentives.
"It feels like it's only now that [the policies] are translating into orders," Jefferies analyst Lucas Ferhani said, noting particularly strong growth in the US, Germany and France.
"The orders they're getting now should be at ... much better margins than before," Ferhani said in an interview. "2024 will be a year of transition, and 2025 will have a much higher volume of orders."
US draws massive orders
The acceleration of activity in US onshore wind, spurred by tax credits within the IRA, was a major catalyst for new turbine contracts in 2023.
Vestas' 18.4 GW of orders in 2023 included a more than tripling of US onshore wind deals to 6.8 GW, boosted in particular by a 1.1-GW order with the giant SunZia project in New Mexico that represented Vestas' largest-ever contract in the US.
The Danish manufacturer effectively shares the US market with General Electric Co., whose spinoff of its energy transition unit, GE Vernova LLC, is set to complete in early April.
GE Vernova secured its own record 2.4-GW order with SunZia in January. The onshore wind business has now turned a profit for two consecutive quarters and is guiding toward high-single-digit margins in 2024, in contrast to the offshore division, which is still loss-making.
In onshore, the company is focusing on offering fewer products and serving fewer markets, with the US its main target. In a recent filing with the SEC, GE Verona pointed to IRA-driven project and manufacturing tax benefits for onshore wind worth an estimated $1 billion per gigawatt.
GE Vernova's strategy "is clearly to build the workhorse [onshore] machine for the US," Marc Hamer, managing partner at advisory firm Greentech Partners, said in an interview. "It's a home run for them. It just makes sense for them to focus on that."
Analysts see the IRA driving the US back to peak onshore wind installation rates in the coming years, having seen annual installed capacity more than halve from 2020 to 2022, to 8.5 GW from 17.2 GW.
The ramp-up could create room for the likes of Nordex and German industrial group Siemens Energy AG to make inroads in the US turbine market, eating into some of GE Vernova's and Vestas' market share.
"If you do onshore, [the US is] the biggest market in the world outside China," said Hamer, who was previously CFO of Nordex's international business. "For the players who are not [active there], it must be a clear strategy to be in that market."
'Uncertainty' at Siemens Gamesa
For Siemens Energy, any hopes of a US push hinge on the turbine division restarting sales of its 4.X and 5.X platforms, which have been suspended while the company fixes long-running technical issues.
Onshore orders at Siemens Gamesa Renewable Energy SA fell to 3.5 GW in the 2023 calendar year, down from 6.6 GW two years earlier.
"That is something that really hurts," Hamer said about the suspension of onshore sales. "It creates a lot of uncertainty."
At Siemens Energy's capital markets day in November 2023, executives outlined a plan to make €400 million in savings at Siemens Gamesa and pledged to bring the business back to breakeven by the 2026 financial year. The unit reported a €4.3 billion loss in fiscal 2023.
As the onshore wind issues persist, Siemens Gamesa continues to lead the market in offshore wind, where orders last year amounted to 8.2 GW, more than the previous two years combined.
Vestas recorded 3.1 GW of offshore orders in 2023, almost as much as it secured in the three years from 2020 to 2022.
Despite grappling with rising capital costs in recent times, offshore wind developers made a record €30 billion of new investment decisions in Europe alone in 2023. The market is embarking on almost 50 GW of new European auctions in 2024.
"There's an expectation that we'll see a lot more better-priced offshore wind projects that give good clarity to 2030 and beyond," HSBC's McLoughlin said in an interview.
Threats to pricing discipline
Analysts see profitability at the Western manufacturers improving steadily as the backlog of low-margin turbine contracts are worked through and newer ones, secured at higher prices, are executed.
"The goal is not to go from red to green and revert back to the old ways," said Indra Mukherjee, associate director of global clean energy technology at S&P Global Commodity Insights. "[Turbine-makers] will likely continue exercising pricing discipline to steady their margins in the future."
Over the medium term, Vestas is guiding toward a double-digit EBIT margin, and Nordex is aiming for an 8% EBITDA margin, while GE Vernova sees a high-single-digit profit margin in the long term. Siemens Gamesa's quality issues mean the company foresees negative profit margins for at least the next two fiscal years.
Still, it remains to be seen how the manufacturers would respond if one company decided to offer turbines at prices that are significantly below its competitors.
"By 2026, 2027, there's a discussion to be had about whether companies can bring prices down to undercut and gain market share," Jefferies' Ferhani said.
Another unknown is the impact that less expensive Chinese turbines would have on competitive dynamics. Chinese manufacturers are yet to make significant moves in the US or mature European markets, but they have started to win contracts in other parts of Asia as well as the Middle East, Latin America and Eastern Europe.
The European Commission's Wind Power Action Plan in 2023 referenced the threat of competition from China and raised the possibility of trade barriers to ensure a level playing field in the EU.
"For the Western big four, maintaining pricing discipline and growing orderbooks simultaneously, despite the presence of cheaper alternatives, will be the primary challenge to reckon with," Mukherjee said.