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Speaker 1: This is Dana Perkins and you're listening to Switched on

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Speaker 1: the bn EF podcast. On today's bonus episode about the

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Speaker 1: Things to Watch in twenty twenty four, we speak with

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Speaker 1: BNF's head of Wind Research, Oliver Metcalf, and he shares

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Speaker 1: what we should be thinking about in the wind sector

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Speaker 1: in the year ahead. The conversation takes us across the

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Speaker 1: world and across the wind value chain. For example, we

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Speaker 1: talk about offshore wind and whether twenty twenty four will

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Speaker 1: offer stability for wind developers following last year's turbulence. We

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Speaker 1: also discuss Chinese manufacturers and whether we can expect another

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Speaker 1: year of very low prices and margins for turbines coming

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Speaker 1: out of China. And finally we turn to auctions. Following

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Speaker 1: some notable flops in twenty twenty three, are we set

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Speaker 1: for a more positive twenty twenty four. To access the

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Speaker 1: accompanying research note titled wind Ten Things to Watch in

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Speaker 1: twenty twenty four, b and EF subscribers can find it

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Speaker 1: on BNF dot com and at bnof go on the

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Speaker 1: Bloomberg terminal. As always, if you like the podcast, give

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Speaker 1: us a review you and subscribe on your device. But

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Speaker 1: right now, let's speak with Ali about what lies ahead

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Speaker 1: for wind in twenty twenty four. Allie, good to have

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Speaker 1: you back on the show today.

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Speaker 2: Thanks Dane, No great to be here.

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Speaker 1: We are here to talk about the year ahead for wind,

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Speaker 1: one of the really central parts of the energy transition

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Speaker 1: for renewables. And I want to know how you did

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Speaker 1: against your scorecard in twenty twenty three when you last

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Speaker 1: took a look at making some predictions.

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Speaker 2: Well, we did pretty well, actually, so by our own

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Speaker 2: grading that might be a bit of cheating, but we

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Speaker 2: had seven predictions that were correct, two predictions we thought

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Speaker 2: were somewhat correct, and then one that didn't go so well.

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Speaker 1: So I actually think you'd be surprised how many of

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Speaker 1: the teams, because you know, we're doing a series of

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Speaker 1: these shows over the course of this month, and some

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Speaker 1: teams were overly optimistic headed into twenty twenty three and

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Speaker 1: kind of got knocked back a little bit. But this year,

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Speaker 1: would you say that your twenty twenty three predictions were

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Speaker 1: optimistic or maybe had kind of a more somber tone,

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Speaker 1: Because I'm leading into the fact that what we're going

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Speaker 1: to talk about today is largely an optimistic twenty twenty.

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Speaker 2: Four I think we were quite optimistic last year. The

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Speaker 2: one we did slightly less well on was very much

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Speaker 2: too optimistic. We thought that governments around the world were

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Speaker 2: going to be really positive and auction off a load

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Speaker 2: of seabed areas for floating wind projects. Floating wind is

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Speaker 2: a newer technology during twenty twenty three, and actually what

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Speaker 2: happened was there were a load of delays. These auctions

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Speaker 2: for seabed kind of hit hurdles and it meant that

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Speaker 2: there was only one auction in the event last year.

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Speaker 2: It was an auction for sites off the coast of

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Speaker 2: the UK, and we saw delays for another auction in

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Speaker 2: the UK and for an auction in Norway, and we're

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Speaker 2: still waiting for Spain and Portugal to set out the

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Speaker 2: regulatory process for a floating offshore wind project in those countries.

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Speaker 2: So it was not as good a year for the

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Speaker 2: floating wind sect as we're predicting in twenty twenty three.

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Speaker 2: One of my favorite predictions that we actually got right

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Speaker 2: last year was around offshore wind financing. So at the

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Speaker 2: beginning of last year we predicted that it would be

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Speaker 2: a record year of offshore wind financing activity in twenty

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Speaker 2: twenty three. Now the offshore wind industry had a really

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Speaker 2: tough twenty twenty three. In the end, there was high inflation,

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Speaker 2: there was rising interest rates, and that has a disproportionate

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Speaker 2: effect for a capex intensive industry like offshore wind. So

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Speaker 2: that led to many developers asking governments to renegotiate their

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Speaker 2: off take contracts, even canceling projects in some cases, and

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Speaker 2: developers were kind of finding out that the finances didn't

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Speaker 2: really stack up on those projects. But actually, as we've

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Speaker 2: been crunching the numbers at the end of the year,

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Speaker 2: we've seen that the industry did in fact hit a

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Speaker 2: new financing record outside of China. We're still learning up

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Speaker 2: those numbers for inside China, but it's great to see

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Speaker 2: that really validates our view that this is a sector

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Speaker 2: on an exciting growth trajectory after all, and developers really

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Speaker 2: made things work despite a really challenging year last year.

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Speaker 1: You had mentioned how inflationary pressure did have an impact

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Speaker 1: last year in twenty twenty three, yet the industry still

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Speaker 1: made a lot of progress in terms of wind installations.

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Speaker 1: As we're still grappling with that this year. What does

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Speaker 1: twenty twenty four have in store for wind installations and

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Speaker 1: do you have a prediction against that.

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Speaker 2: Well, there's a general expectation in the market that will

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Speaker 2: begin to see interest rates fall in many countries over

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Speaker 2: the course of this year. That's vital for wind developers

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Speaker 2: because in the same way that a central bank interest

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Speaker 2: rate determines the rate of a mortgage that you might

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Speaker 2: pay on your house, it also forms a base rate

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Speaker 2: for loans that developers take out to build a wind farm.

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Speaker 2: And so those falling interest rates will be crucial for

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Speaker 2: new financing activitivity and new investment in twenty twenty four.

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Speaker 2: So we're actually expecting the biggest year yet of wind

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Speaker 2: installations in twenty twenty four, and a big part of

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Speaker 2: that story is about the US and China. So those

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Speaker 2: are the world's two largest markets. So China is continuing

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Speaker 2: to build these batches of giant projects in the deserts

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Speaker 2: in the north of the country, and it's also ramping

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Speaker 2: up off your wind bill to hit installation targets that

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Speaker 2: are set for the end of twenty twenty five across

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Speaker 2: all different provinces. And then in the US last year

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Speaker 2: we began to see a lot of progress in defining

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Speaker 2: the rules and regulations around the Inflation Reduction Act, so

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Speaker 2: that was a big bit of climate legislation that the

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Speaker 2: country passed in twenty twenty two. Now that led to

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Speaker 2: a boom in turbine orders last year, and we're expecting

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Speaker 2: to see some of those projects come online in twenty

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Speaker 2: twenty four, So a really good story for onshore wind

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Speaker 2: in the US. And the US is also going to

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Speaker 2: commission its first two commercial scale offshore wind farms this year,

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Speaker 2: So a really positive year for the world's two largest

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Speaker 2: wind markets in twenty twenty four.

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Speaker 1: So last year did have some delays for wind turbines

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Speaker 1: and things were pushed back in some cases by a

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Speaker 1: number of months. Do we see I guess the manufacturing

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Speaker 1: sector catching up in the year ahead. Are they still

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Speaker 1: going to be grappling with what you're pointing out is

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Speaker 1: increased demand.

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Speaker 2: Well, we're expecting to see the momentum of that strong

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Speaker 2: US order intake for turbine makers continue in twenty twenty four.

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Speaker 2: Now that's a really really good sign. But we're also

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Speaker 2: expecting to see something similar in Europe. So Germany and

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Speaker 2: Spain are starting to implement reforms for onshore wind permitting

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Speaker 2: and that's boosting the pipeline of projects that are able

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Speaker 2: to bid for government subsidies and are able to come

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Speaker 2: through that development process. So we're expecting this year for

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Speaker 2: kind of European project developers to start putting in more

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Speaker 2: and more orders and begin to match some of that

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Speaker 2: activity we saw in the US last year. So that's

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Speaker 2: a positive thing also for the profitability for some of

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Speaker 2: these wind turbine makers that struggled over the last few years.

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Speaker 2: These companies have been fighting against negative margins on their

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Speaker 2: turbine sales, so this increasing order book is really positive news.

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Speaker 2: And we saw Vestus, one of the world's largest wind

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Speaker 2: turbine makers, announce a profit in their third quarter of

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Speaker 2: last year for the first time in a while, and

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Speaker 2: so that's a positive trajectory in terms of Vestas, but

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Speaker 2: also some of the other turbine makers that we're siving

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Speaker 2: more positive announcements. It doesn't mean that some of these

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Speaker 2: companies aren't still subject to global market impacts. So we

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Speaker 2: saw new logistics bottlenecks start to arise because of some

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Speaker 2: of the disruption that we've seen to shipping in the

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Speaker 2: Red Sea. So we track vessel traffic through the Sewerz

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Speaker 2: Canal and we saw that plummet since we've seen commercial

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Speaker 2: ships being targeted by militants in Yemen, So that means

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Speaker 2: that the price of shipping a container from Shanghai to Rotterdam,

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Speaker 2: which is a really important shipping route for the wind

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Speaker 2: supply chain, that's more than quadrupled since the beginning of

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Speaker 2: December last year. So, in general, a positive picture for

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Speaker 2: the wind supply chain, but there are some effects that

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Speaker 2: are providing new barriers.

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Speaker 1: Okay, we'll have to watch what happens with these supply

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Speaker 1: chains and then what does this all mean for costs

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Speaker 1: and essentially wind turbines what they're going to end up costing.

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Speaker 1: I know that contracts are being secured already now for

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Speaker 1: next year, but for any new contracts that are being

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Speaker 1: secured going forward, will turbine prices likely go up or down?

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Speaker 2: The good news is that some of the input costs

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Speaker 2: for manufacturing a turbine have started to come down. That's

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Speaker 2: part of the story that's helped turbine makers begin to

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Speaker 2: move towards profitability again. We're expecting turbine makers to keep

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Speaker 2: those prices high though, despite those falling input costs. Not

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Speaker 2: so good news for developers, but it's really going to

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Speaker 2: help turbine makers return to profitability in the long term,

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Speaker 2: and that'll be a good thing for the wind industry

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Speaker 2: as a whole.

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Speaker 1: What's happening with Chinese manufacturers, So you're mentioning that in

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Speaker 1: some parts of the world they're just now starting to

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Speaker 1: turn a profit, but in China, the winterbines are actually

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Speaker 1: selling for even less. Are they essentially going to raise

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Speaker 1: their prices in order to turn a profit or are

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Speaker 1: they able to find different cost reductions that are not

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Speaker 1: available in other parts of the world.

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Speaker 2: So for the Chinese turbine makers, that's someway that we're

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Speaker 2: predicting a little bit more strain on profitability. So China

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Speaker 2: cuts national subsidies for onshore wind at the end of

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Speaker 2: twenty twenty for offshore wind at the end of twenty

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Speaker 2: twenty one. That put a lot of pressure on developers

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Speaker 2: to still deliver projects, and they pass that pressure onto

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Speaker 2: their suppliers. Chinese turbine manufacturers like Goldwind Minyang. There's a

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Speaker 2: company called Windy, and they're really kind of pushing them

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Speaker 2: to cut their prices so that they could make those

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Speaker 2: projects work. That's meant that Chinese wind turbine prices have

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Speaker 2: hit pretty astonishing load. So in the second half of

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Speaker 2: twenty twenty three, we saw that Chinese turbine prices had

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Speaker 2: fallen by fifty seven percent compared with the first half

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Speaker 2: of twenty twenty and that kind of steady decrease in

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Speaker 2: prices has really stressed profitability for some Chinese turbine makers.

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Speaker 2: So Goldwin, the biggest Chinese turbin manufacturer, we saw their

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Speaker 2: margins for their manufacturing and sales segment decreased from seven

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Speaker 2: point two percent in the second half of twenty twenty

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Speaker 2: one to minus ten point four percent in the first

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Speaker 2: half of twenty twenty three. And similarly, we saw ming

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Speaker 2: Yang's margins fall from thirteen point one percent to one

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Speaker 2: point one percent over the same period. So we're seeing

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Speaker 2: some of this kind of steady decrease in prices start

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Speaker 2: to challenge turbine makers, and there's no real indication that

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Speaker 2: we'll see prices rise again this year, and so it

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Speaker 2: could be another tough year in terms of turbine sales

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Speaker 2: profitability for these Chinese turbine makers.

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Speaker 1: So last year, one of the things that we saw

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Speaker 1: was that even though there were a lot of projects

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Speaker 1: that happened, there were a few option flops, and do

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Speaker 1: you think governments will be changed essentially some of the

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Speaker 1: way that auctions and the off takes work in the

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Speaker 1: year ahead in order to stop so many of these

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Speaker 1: from happening.

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Speaker 2: Yeah. So the UK government held an auction last year

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Speaker 2: that had a really low price cap and the sector

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Speaker 2: basically complained that that didn't effect didn't account for all

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Speaker 2: the cost increases that they've been facing over the previous year.

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Speaker 2: So in the event of that auction, there were no

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Speaker 2: offshore wind projects that secured a subsidy, So that was

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Speaker 2: a bit of a flop that auction, especially for off

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Speaker 2: your Wind, And there have been signs that governments in

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Speaker 2: the UK and around the world are willing to pay

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Speaker 2: a little bit more for off your Wind this year

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Speaker 2: and also include more risk sharing mechanisms in the contracts

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Speaker 2: that they are offering. So the UK government has boosted

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Speaker 2: that price cap for off your Wind for its twenty

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Speaker 2: twenty four auction by sixty six percent, and there are

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Speaker 2: several states in the US that have introduced some mechanisms

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Speaker 2: in their contract to link the prices that developers get

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Speaker 2: paid to things like inflation or things like commodities prices

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Speaker 2: to better share that risk between the government and the

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Speaker 2: off takers. So that's a good sign for the off

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Speaker 2: your wind industry going forward. Doesn't apply in all markets,

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Speaker 2: and we also saw developers last year rely on corporate

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Speaker 2: buyers in markets where there weren't attractive government deals on offer,

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Speaker 2: So we're expecting to see more of that in twenty

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Speaker 2: twenty four as well.

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Speaker 1: So we're spending a lot of time talking about all

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Speaker 1: of the new installations that are going to be happening

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Speaker 1: in the year ahead and even happened last year, but

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Speaker 1: there's a lot of existing installed capacity. Wind farms are

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Speaker 1: not a brand new technology, and I want to know

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Speaker 1: what the year ahead holds in store for repowering and

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Speaker 1: kind of maintaining some of these.

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Speaker 2: Yeah, so you're right, Dana. It was the early eighties

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Speaker 2: when we first started seeing a lot of grid connected

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Speaker 2: wind turbines increase in number, and we're beginning to hit

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Speaker 2: the point of critical mass where there are large volumes

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Speaker 2: of these turbines that are reaching the end of their

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Speaker 2: planned lifetimes. And so many of those early projects were

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Speaker 2: built on the absolute best wind sits in a market,

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Speaker 2: and so developers are looking at replacing those projects to

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Speaker 2: harness those really good conditions and wind speeds again, so

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Speaker 2: the wind industry calls that process so that those project replacements,

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Speaker 2: and we're expecting to see record replacement activity across Europe

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Speaker 2: this year, and especially in markets like like Germany and

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Speaker 2: Spain that are those markets that have the largest fleets

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Speaker 2: of wind turbines that are over fifteen years old, and

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Speaker 2: that's being helped by policy as well. So previously permitting

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Speaker 2: a project replacement was was a pretty similar process to

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Speaker 2: permitting a brand new project, so you often had to

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Speaker 2: restart a really long process that can take five years

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Speaker 2: or even more in some cases. Now the EU has

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Speaker 2: taken some steps to ease that process, extending temporary legislation

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Speaker 2: which streamlines the permitting process specifically for these onshore wind

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Speaker 2: project replacements, and some countries are taking that even further,

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Speaker 2: exempting some of these repowering projects from repeating some environmental studies,

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Speaker 2: for example, especially if they carry them out the first

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Speaker 2: time round. So all of that means that we think

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Speaker 2: that we'll see two gigawats of projects that come online

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Speaker 2: in Europe this year that will be these so called

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Speaker 2: repowering projects.

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Speaker 1: One of the things that we talked about on this

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Speaker 1: show earlier in the year. In twenty twenty three was

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Speaker 1: about the US market in particular and some auctions that

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Speaker 1: were one and projects that ultimately didn't end up happening,

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Speaker 1: and those developers more or less tearing up their contracts

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Speaker 1: and starting over what is this going to mean for

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Speaker 1: the US and do you think this trend is going

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Speaker 1: to continue?

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Speaker 2: Well, the bad news is that the year kicked off

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Speaker 2: with something a bit less positive. So BP and Equinor

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Speaker 2: canceled their one point three gigawatts Empire Win two project

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Speaker 2: in the US. But despite that, we predict that there

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Speaker 2: are going to be fewer cancelations in the rest of

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Speaker 2: twenty twenty four. So the projects that are at most

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Speaker 2: risk that we saw getting canceled last year are those

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Speaker 2: that have locked in their offtake contracts, so locked in

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Speaker 2: the price they're going to get paid for their generation,

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Speaker 2: but haven't yet secured all of their supply chain contracts

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Speaker 2: and reached a final investment decision that kind of final

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Speaker 2: go ahead for the project. So we went through an

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Speaker 2: exercise where we basically categorized all the projects in the

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Speaker 2: global pipeline in terms of whether they're at high risk,

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Speaker 2: medium risk, or a low risk of cancelation, and the

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Speaker 2: good news is that we identified only three gigawatts that

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Speaker 2: fitted into that highest risk category. So those are projects

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Speaker 2: that still hold fairly low priced contracts, that don't have

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Speaker 2: contractual protection from inflation in their off take contracts, and

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Speaker 2: are also projects that are due to deliver sooner, so

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Speaker 2: projects that have less time to wait for interest rates

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Speaker 2: and equipment costs to ease. So that the fact that's

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Speaker 2: only three gigawats, that's only one percent of our total

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Speaker 2: offshore wind forecast from twenty twenty four to twenty thirty five.

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Speaker 2: So again that's another bit of evidence that the troubles

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Speaker 2: that the sector faced last year were a bit more

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Speaker 2: of a bump in the road rather than an existential

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Speaker 2: threat to the offshr wind industry as a whole.

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Speaker 1: Excellent, Ali, thank you very much for sharing your thoughts

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Speaker 1: on the year ahead. You've got an optimistic view, but

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Speaker 1: it's grounded in fact, because, let's be honest, last year

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Speaker 1: you also had a really good run of accuracy on

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Speaker 1: what you were thinking about.

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Speaker 2: Well, fingers crossed for this year, thanks Dana.

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