Siemens Energy announced that quality problems at its wind turbine unit would take years to fix, wiping over a third off its market value and dealing a blow to one of the world’s biggest suppliers of wind turbines. Siemens Energy saw $6.3 billion wiped off its market capitalization due to quality problems affecting its Siemens Gamesa wind turbine business—the biggest manufacturer of offshore wind turbines. Its 2023 profit outlook was scrapped as deeper-than-expected problems affected up to 15 to 30 percent of the more than 132 gigawatts worth of wind turbines worldwide. It could cost more than 1 billion euros ($1.09 billion) to fix flaws in rotor blades and bearings that could cause damage ranging from small cracks to component failures that would need to be replaced. Serious problems would require the turbine to be removed and repaired onshore by sending in a massive ship, which can only be done in the summer due to safety reasons.
The initial discovery of faulty components at Siemens Gamesa occurred in January. An extended technical review of its installed turbine fleet and product designs was launched following that and found a substantial increase in failure rates of both onshore and offshore turbine components. The various issues resulted in a 472 million euro ($512 million) hit to its first-quarter operating profit, and the company expects the negative impact on cash flow to last up to eight years.
The company promised a clearer picture of the problems when it publishes its third quarter results on August 7. Siemens has a 17 billion euros service order that provides service on installed wind farms for five years ahead, sometimes 10-year contracts, and is facing a very large liability having to replace those components. The trouble at Siemens is raising sector-wide concerns at a time when turbine manufacturers are facing rising costs for raw materials such as steel and also fierce competition. Many wind developers have had to delay projects due to the availability of components and rising costs.
Siemens Energy will have to focus more on fixing existing problems than focusing on growth at a time when the company’s order book has been at a record high. The company had a 56 percent order increase in the second quarter, driven by Europe and the United States. For example, Siemens Gamesa’s wind units are planned for Dominion Energy’s offshore wind project in Virginia. Governments across the world are setting ever more ambitious climate targets which require the rapid development of renewables, including wind power that may be difficult to attain within the prescribed timelines.
Siemens Problems May Affect Europe’s Offshore Wind Plans
At a summit held in April, the leaders of nine European governments pledged to work together to roughly quadruple the amount of offshore wind generation capacity in the North Sea and nearby waters by 2030 and to increase it by about tenfold by 2050. The offshore areas around Britain and Norway have the greatest potential for offshore wind investment as the waters contain strong winds and shallow water suitable for turbines. Along with Britain and Norway, seven E.U. members participated in the summit including Germany, the Netherlands, Denmark and France, which have North Sea coastlines, and Ireland and Luxembourg.
The offshore wind industry largely originated in northern Europe, generating 25 percent of Denmark’s electricity and 15 percent of Britain’s electricity last year. Europe is turning to offshore wind because of its climate policies and to achieve energy independence from Russia, which has long been the key supplier of oil and natural gas to Europe. Russia’s war with Ukraine and the West sanctions of Russian energy have driven up energy prices in Europe, and made the Europeans seek other sources of supply.
Europe is also the home of some of the world’s largest turbine makers, including the Denmark-based Vestas Wind Systems and Siemens Gamesa Renewable Energy, a company headquartered in Spain that has been a leader in offshore machines. The industry employs an estimated 300,000 people in Europe. However, to reach Europe’s ambitious goals for installing more offshore wind generation will not be easy. Lead times for offshore wind development are five years or more, depending on the awarding of leases and actual construction. Further, other manufacturers may find problems similar to Siemens and may need to turn their attention to fixing current turbines rather than manufacturing new ones.
Unfortunately for Europe’s offshore wind plans, heavy investment in new models, inflation and other problems have exhausted the wind companies’ financial operations. To scale up production as rapidly as needed may be difficult. Although wind developers say they will proceed carefully, building many large structures at sea, including (under current plans) artificial islands, is bound to have an impact on the maritime environment.
Next year barges and cranes are expected to begin work on an artificial island in the North Sea about 30 miles off the coast of Belgium. Largely made of sand, Princess Elisabeth Island may cover almost 60 acres of seabed and cost around $2 billion. Some people in the energy industry say the island is a harbinger of the future, when more of the European power network will be located offshore. The futuristic looking structure, with high walls to protect it from the sea, will be a gathering point for power cables from a large wind farm planned for waters nearby. Cables will also link these facilities to another island planned for the sea off Denmark and to Britain.
Other plans for energy islands are also underway. Copenhagen Infrastructure Partners, a renewables investment firm, wants to build an island off Denmark that could include machines for making hydrogen from the wind. Building massive structures in the sea is not free of environmental risks as mentioned above. Climate advocates are making the sea an industrial place when the impact on sea life—crabs, lobsters, and fisheries–is unknown. Along the U.S. Atlantic coastline dead whales have turned up that many believe are caused by offshore wind development.
The wind industry is pushing more North Sea development as a means for energy trading needed to balance a system that will be dominated by intermittent renewables like wind and solar power. Because these energy sources are variable, they require ways of storing power at times of excess generation and access to transmission line and cables when there are power deficits. A network of high-capacity cables already crosses the North Sea bottom allowing electric power to flow toward the market with the highest price. One of these interconnectors, for example, may bring power generated by nuclear plants in France to Britain or hydropower from Norway to Germany when deficits occur in those countries.
Europe has big plans for offshore wind development in the North Sea and surrounding waters, and the Biden Administration has been encouraging it in the United States by lowering royalties and providing lucrative incentives. However, those plans may not materialize as wind manufacturers, such as Siemens, are finding problems with wind structures that need immediate investment, reducing their cash flow. As the lead time for offshore development is five years or more, Europe’s plans for 2030 and 2050 may not come about, particularly as inflation is also hurting the industry. Development of artificial islands for wind turbines may turn out to be more of a challenge and cost hog than expected and the environmental damages are still unknown to fisheries and other sea animals.