As Global Wind Turbine Manufacturers Face Headwinds Over Failures, Should India Firms Worry?

Last year, as turbine manufacturers in the US and Europe announced job cuts, the cuts were blamed on the increasing cost of raw materials (like microchips) and inflation putting pressure on bottomlines. GE Renewables and Siemens Gamesa were the headline grabbers, hoping they had seen the last of a tough year. Vestas, the third of the western majors, saw revenues plummet on project delays, and negative margins, even as its order book regained robust despite lower fresh orders, thanks to higher prices.

In 2023, even as global demand revived strongly on the back of a fresh push for energy security based on renewables , the firms have been unable to take full advantage due to a whole new issue. Turbine failures and other component failures. These O&M failure risks continue to be a subject of agony for wind turbine manufacturers. Repairs and replacements have emerged as major liabilities, impacting the revenue numbers. Speaking at its quarterly results, Vestas CEO Henrik Andersen  made it clear that the provisions for warranty claims were too high to be sustainable. Vestas had earmarked just 2 to 3% for repairs and maintenance, but last year, this figure exceeded 4% that were devoted for warranty provisions. Even as insurance companies seek higher premiums to backstop warranty claims, these firms risk a damaging a cash cow that had served them very well until now. OEM maintainance contracts.

Increasing warranty provisions for Vestas

In the first quarter of 2022, Vestas maintained that a large part of its warranty provisions of EUR 93m were associated with offshore turbines. The firm held that this was a consequence of “expected challenged profitability and lower order intake for offshore projects utilizing the V174 turbine.”

This is the second instance of warranty provisions in fiscal year 2022 for Vestas. On the same platform for offshore wind, Vestas suffered a loss of EUR 83m, thanks to the damage, which seem to be going out of control.

Siemens takes the hit too

Siemens Gamesa revealed that its loss touched about EUR 940 million, mainly attributable to component failures, before it delisted from the markets after 2022.

Siemens has hinted that its profit prospects do not shine as brightly for 2023 either following Siemens Gamesa’s revelation that it has been facing the heat from rising warranty provisions and is bearing maintenance costs. Unlike Vestas which seems to be suffering mainly from offshore installations, in Siemens the problem seems to be with Onshore installs.

Siemens, however, has also said that it looking to stem the problem and is convinced that it can be absolved.

One way that Siemens has been gearing up for any such warranty provisions shocks is that it has pegged the forecast at a higher level.

Similar fate for General Electric & Orsted

Sharing in the fate of Siemens and Vestas is General Electric Co., whose colossal wind turbine in a wind farm witnessed a mishap as it collapsed recently. The turbine had been in operation, only for a year.

In what turned out to be a spate of accidents, another turbine from GE of the same model also suffered the same accident in Colorado. NextEra Energy, which was operating the wind farm, blamed this collapse on a blade flaw.

Orsted, which is the world’s largest developer of offshore wind farms, has not painted a story that’s any different than that by the other three wind giants. From one of its turbines, a blade simply fell off near the Denmark coast.

However, with major firms such as Siemens, Vestas and GE facing a spate of such episodes, now prevalent across US and Europe, can they really be termed as accidents? And does a ‘fault’ justify them? Keep in mind that these are on a much higher base, and constitute a fraction of the turbines running .

The problem, as Fraser McLachlan, CEO for an underwriting firm, is that these collapses are generally more noticeable on newer turbines. If these episodes continue, insurance premiums are sure to take a hike. What’s more, one could see the introduction of a new set of coverage limits.

The ambition to establish turbines that are more powerful and bigger, designed better, are exerting pressure on manufacturing as well as the supply chain. To stabilise these innovations and production, however, is a time-taking process.

As is amply clear, there are questions being raised about the quality standards and the quality checks of the new turbines that are being introduced. In a bid to create new and better turbines, quality is losing out.

With firms like Siemens Gamesa having a strong presence in India, it remains to be seen how the issue is handled here, as the country itself is also at the beginning of a push to larger turbines. Suzlon, the market leader, has almost 20 GW of installed capacity worldwide. As it looks forward to the 140 GW target set for 2030, it has a lot to look forward to. With over 13 GW of turbines being operated in India by it, it is well placed to spot and learn from any issues here. However, it’s largest selling product in India , the S120, is 120 metres high and 2.1 MW in rated output. Its next planned launch is 160 metres high and a planned output of 3-3.15 MW. With margins on the main WTG business squeezed due to global supply issues, the firm/s here have tried to enhance margins from the AMC business, which could be at grave risk should the new generation of larger turbines run into issues.