Speaker 1: This is Dana Perkins and you're listening to Switched on
Speaker 1: the bn EF podcast. On today's bonus episode about the
Speaker 1: Things to Watch in twenty twenty four, we speak with
Speaker 1: BNF's head of Wind Research, Oliver Metcalf, and he shares
Speaker 1: what we should be thinking about in the wind sector
Speaker 1: in the year ahead. The conversation takes us across the
Speaker 1: world and across the wind value chain. For example, we
Speaker 1: talk about offshore wind and whether twenty twenty four will
Speaker 1: offer stability for wind developers following last year's turbulence. We
Speaker 1: also discuss Chinese manufacturers and whether we can expect another
Speaker 1: year of very low prices and margins for turbines coming
Speaker 1: out of China. And finally we turn to auctions. Following
Speaker 1: some notable flops in twenty twenty three, are we set
Speaker 1: for a more positive twenty twenty four. To access the
Speaker 1: accompanying research note titled wind Ten Things to Watch in
Speaker 1: twenty twenty four, b and EF subscribers can find it
Speaker 1: on BNF dot com and at bnof go on the
Speaker 1: Bloomberg terminal. As always, if you like the podcast, give
Speaker 1: us a review you and subscribe on your device. But
Speaker 1: right now, let's speak with Ali about what lies ahead
Speaker 1: for wind in twenty twenty four. Allie, good to have
Speaker 1: you back on the show today.
Speaker 2: Thanks Dane, No great to be here.
Speaker 1: We are here to talk about the year ahead for wind,
Speaker 1: one of the really central parts of the energy transition
Speaker 1: for renewables. And I want to know how you did
Speaker 1: against your scorecard in twenty twenty three when you last
Speaker 1: took a look at making some predictions.
Speaker 2: Well, we did pretty well, actually, so by our own
Speaker 2: grading that might be a bit of cheating, but we
Speaker 2: had seven predictions that were correct, two predictions we thought
Speaker 2: were somewhat correct, and then one that didn't go so well.
Speaker 1: So I actually think you'd be surprised how many of
Speaker 1: the teams, because you know, we're doing a series of
Speaker 1: these shows over the course of this month, and some
Speaker 1: teams were overly optimistic headed into twenty twenty three and
Speaker 1: kind of got knocked back a little bit. But this year,
Speaker 1: would you say that your twenty twenty three predictions were
Speaker 1: optimistic or maybe had kind of a more somber tone,
Speaker 1: Because I'm leading into the fact that what we're going
Speaker 1: to talk about today is largely an optimistic twenty twenty.
Speaker 2: Four I think we were quite optimistic last year. The
Speaker 2: one we did slightly less well on was very much
Speaker 2: too optimistic. We thought that governments around the world were
Speaker 2: going to be really positive and auction off a load
Speaker 2: of seabed areas for floating wind projects. Floating wind is
Speaker 2: a newer technology during twenty twenty three, and actually what
Speaker 2: happened was there were a load of delays. These auctions
Speaker 2: for seabed kind of hit hurdles and it meant that
Speaker 2: there was only one auction in the event last year.
Speaker 2: It was an auction for sites off the coast of
Speaker 2: the UK, and we saw delays for another auction in
Speaker 2: the UK and for an auction in Norway, and we're
Speaker 2: still waiting for Spain and Portugal to set out the
Speaker 2: regulatory process for a floating offshore wind project in those countries.
Speaker 2: So it was not as good a year for the
Speaker 2: floating wind sect as we're predicting in twenty twenty three.
Speaker 2: One of my favorite predictions that we actually got right
Speaker 2: last year was around offshore wind financing. So at the
Speaker 2: beginning of last year we predicted that it would be
Speaker 2: a record year of offshore wind financing activity in twenty
Speaker 2: twenty three. Now the offshore wind industry had a really
Speaker 2: tough twenty twenty three. In the end, there was high inflation,
Speaker 2: there was rising interest rates, and that has a disproportionate
Speaker 2: effect for a capex intensive industry like offshore wind. So
Speaker 2: that led to many developers asking governments to renegotiate their
Speaker 2: off take contracts, even canceling projects in some cases, and
Speaker 2: developers were kind of finding out that the finances didn't
Speaker 2: really stack up on those projects. But actually, as we've
Speaker 2: been crunching the numbers at the end of the year,
Speaker 2: we've seen that the industry did in fact hit a
Speaker 2: new financing record outside of China. We're still learning up
Speaker 2: those numbers for inside China, but it's great to see
Speaker 2: that really validates our view that this is a sector
Speaker 2: on an exciting growth trajectory after all, and developers really
Speaker 2: made things work despite a really challenging year last year.
Speaker 1: You had mentioned how inflationary pressure did have an impact
Speaker 1: last year in twenty twenty three, yet the industry still
Speaker 1: made a lot of progress in terms of wind installations.
Speaker 1: As we're still grappling with that this year. What does
Speaker 1: twenty twenty four have in store for wind installations and
Speaker 1: do you have a prediction against that.
Speaker 2: Well, there's a general expectation in the market that will
Speaker 2: begin to see interest rates fall in many countries over
Speaker 2: the course of this year. That's vital for wind developers
Speaker 2: because in the same way that a central bank interest
Speaker 2: rate determines the rate of a mortgage that you might
Speaker 2: pay on your house, it also forms a base rate
Speaker 2: for loans that developers take out to build a wind farm.
Speaker 2: And so those falling interest rates will be crucial for
Speaker 2: new financing activitivity and new investment in twenty twenty four.
Speaker 2: So we're actually expecting the biggest year yet of wind
Speaker 2: installations in twenty twenty four, and a big part of
Speaker 2: that story is about the US and China. So those
Speaker 2: are the world's two largest markets. So China is continuing
Speaker 2: to build these batches of giant projects in the deserts
Speaker 2: in the north of the country, and it's also ramping
Speaker 2: up off your wind bill to hit installation targets that
Speaker 2: are set for the end of twenty twenty five across
Speaker 2: all different provinces. And then in the US last year
Speaker 2: we began to see a lot of progress in defining
Speaker 2: the rules and regulations around the Inflation Reduction Act, so
Speaker 2: that was a big bit of climate legislation that the
Speaker 2: country passed in twenty twenty two. Now that led to
Speaker 2: a boom in turbine orders last year, and we're expecting
Speaker 2: to see some of those projects come online in twenty
Speaker 2: twenty four, So a really good story for onshore wind
Speaker 2: in the US. And the US is also going to
Speaker 2: commission its first two commercial scale offshore wind farms this year,
Speaker 2: So a really positive year for the world's two largest
Speaker 2: wind markets in twenty twenty four.
Speaker 1: So last year did have some delays for wind turbines
Speaker 1: and things were pushed back in some cases by a
Speaker 1: number of months. Do we see I guess the manufacturing
Speaker 1: sector catching up in the year ahead. Are they still
Speaker 1: going to be grappling with what you're pointing out is
Speaker 1: increased demand.
Speaker 2: Well, we're expecting to see the momentum of that strong
Speaker 2: US order intake for turbine makers continue in twenty twenty four.
Speaker 2: Now that's a really really good sign. But we're also
Speaker 2: expecting to see something similar in Europe. So Germany and
Speaker 2: Spain are starting to implement reforms for onshore wind permitting
Speaker 2: and that's boosting the pipeline of projects that are able
Speaker 2: to bid for government subsidies and are able to come
Speaker 2: through that development process. So we're expecting this year for
Speaker 2: kind of European project developers to start putting in more
Speaker 2: and more orders and begin to match some of that
Speaker 2: activity we saw in the US last year. So that's
Speaker 2: a positive thing also for the profitability for some of
Speaker 2: these wind turbine makers that struggled over the last few years.
Speaker 2: These companies have been fighting against negative margins on their
Speaker 2: turbine sales, so this increasing order book is really positive news.
Speaker 2: And we saw Vestus, one of the world's largest wind
Speaker 2: turbine makers, announce a profit in their third quarter of
Speaker 2: last year for the first time in a while, and
Speaker 2: so that's a positive trajectory in terms of Vestas, but
Speaker 2: also some of the other turbine makers that we're siving
Speaker 2: more positive announcements. It doesn't mean that some of these
Speaker 2: companies aren't still subject to global market impacts. So we
Speaker 2: saw new logistics bottlenecks start to arise because of some
Speaker 2: of the disruption that we've seen to shipping in the
Speaker 2: Red Sea. So we track vessel traffic through the Sewerz
Speaker 2: Canal and we saw that plummet since we've seen commercial
Speaker 2: ships being targeted by militants in Yemen, So that means
Speaker 2: that the price of shipping a container from Shanghai to Rotterdam,
Speaker 2: which is a really important shipping route for the wind
Speaker 2: supply chain, that's more than quadrupled since the beginning of
Speaker 2: December last year. So, in general, a positive picture for
Speaker 2: the wind supply chain, but there are some effects that
Speaker 2: are providing new barriers.
Speaker 1: Okay, we'll have to watch what happens with these supply
Speaker 1: chains and then what does this all mean for costs
Speaker 1: and essentially wind turbines what they're going to end up costing.
Speaker 1: I know that contracts are being secured already now for
Speaker 1: next year, but for any new contracts that are being
Speaker 1: secured going forward, will turbine prices likely go up or down?
Speaker 2: The good news is that some of the input costs
Speaker 2: for manufacturing a turbine have started to come down. That's
Speaker 2: part of the story that's helped turbine makers begin to
Speaker 2: move towards profitability again. We're expecting turbine makers to keep
Speaker 2: those prices high though, despite those falling input costs. Not
Speaker 2: so good news for developers, but it's really going to
Speaker 2: help turbine makers return to profitability in the long term,
Speaker 2: and that'll be a good thing for the wind industry
Speaker 2: as a whole.
Speaker 1: What's happening with Chinese manufacturers, So you're mentioning that in
Speaker 1: some parts of the world they're just now starting to
Speaker 1: turn a profit, but in China, the winterbines are actually
Speaker 1: selling for even less. Are they essentially going to raise
Speaker 1: their prices in order to turn a profit or are
Speaker 1: they able to find different cost reductions that are not
Speaker 1: available in other parts of the world.
Speaker 2: So for the Chinese turbine makers, that's someway that we're
Speaker 2: predicting a little bit more strain on profitability. So China
Speaker 2: cuts national subsidies for onshore wind at the end of
Speaker 2: twenty twenty for offshore wind at the end of twenty
Speaker 2: twenty one. That put a lot of pressure on developers
Speaker 2: to still deliver projects, and they pass that pressure onto
Speaker 2: their suppliers. Chinese turbine manufacturers like Goldwind Minyang. There's a
Speaker 2: company called Windy, and they're really kind of pushing them
Speaker 2: to cut their prices so that they could make those
Speaker 2: projects work. That's meant that Chinese wind turbine prices have
Speaker 2: hit pretty astonishing load. So in the second half of
Speaker 2: twenty twenty three, we saw that Chinese turbine prices had
Speaker 2: fallen by fifty seven percent compared with the first half
Speaker 2: of twenty twenty and that kind of steady decrease in
Speaker 2: prices has really stressed profitability for some Chinese turbine makers.
Speaker 2: So Goldwin, the biggest Chinese turbin manufacturer, we saw their
Speaker 2: margins for their manufacturing and sales segment decreased from seven
Speaker 2: point two percent in the second half of twenty twenty
Speaker 2: one to minus ten point four percent in the first
Speaker 2: half of twenty twenty three. And similarly, we saw ming
Speaker 2: Yang's margins fall from thirteen point one percent to one
Speaker 2: point one percent over the same period. So we're seeing
Speaker 2: some of this kind of steady decrease in prices start
Speaker 2: to challenge turbine makers, and there's no real indication that
Speaker 2: we'll see prices rise again this year, and so it
Speaker 2: could be another tough year in terms of turbine sales
Speaker 2: profitability for these Chinese turbine makers.
Speaker 1: So last year, one of the things that we saw
Speaker 1: was that even though there were a lot of projects
Speaker 1: that happened, there were a few option flops, and do
Speaker 1: you think governments will be changed essentially some of the
Speaker 1: way that auctions and the off takes work in the
Speaker 1: year ahead in order to stop so many of these
Speaker 1: from happening.
Speaker 2: Yeah. So the UK government held an auction last year
Speaker 2: that had a really low price cap and the sector
Speaker 2: basically complained that that didn't effect didn't account for all
Speaker 2: the cost increases that they've been facing over the previous year.
Speaker 2: So in the event of that auction, there were no
Speaker 2: offshore wind projects that secured a subsidy, So that was
Speaker 2: a bit of a flop that auction, especially for off
Speaker 2: your Wind, And there have been signs that governments in
Speaker 2: the UK and around the world are willing to pay
Speaker 2: a little bit more for off your Wind this year
Speaker 2: and also include more risk sharing mechanisms in the contracts
Speaker 2: that they are offering. So the UK government has boosted
Speaker 2: that price cap for off your Wind for its twenty
Speaker 2: twenty four auction by sixty six percent, and there are
Speaker 2: several states in the US that have introduced some mechanisms
Speaker 2: in their contract to link the prices that developers get
Speaker 2: paid to things like inflation or things like commodities prices
Speaker 2: to better share that risk between the government and the
Speaker 2: off takers. So that's a good sign for the off
Speaker 2: your wind industry going forward. Doesn't apply in all markets,
Speaker 2: and we also saw developers last year rely on corporate
Speaker 2: buyers in markets where there weren't attractive government deals on offer,
Speaker 2: So we're expecting to see more of that in twenty
Speaker 2: twenty four as well.
Speaker 1: So we're spending a lot of time talking about all
Speaker 1: of the new installations that are going to be happening
Speaker 1: in the year ahead and even happened last year, but
Speaker 1: there's a lot of existing installed capacity. Wind farms are
Speaker 1: not a brand new technology, and I want to know
Speaker 1: what the year ahead holds in store for repowering and
Speaker 1: kind of maintaining some of these.
Speaker 2: Yeah, so you're right, Dana. It was the early eighties
Speaker 2: when we first started seeing a lot of grid connected
Speaker 2: wind turbines increase in number, and we're beginning to hit
Speaker 2: the point of critical mass where there are large volumes
Speaker 2: of these turbines that are reaching the end of their
Speaker 2: planned lifetimes. And so many of those early projects were
Speaker 2: built on the absolute best wind sits in a market,
Speaker 2: and so developers are looking at replacing those projects to
Speaker 2: harness those really good conditions and wind speeds again, so
Speaker 2: the wind industry calls that process so that those project replacements,
Speaker 2: and we're expecting to see record replacement activity across Europe
Speaker 2: this year, and especially in markets like like Germany and
Speaker 2: Spain that are those markets that have the largest fleets
Speaker 2: of wind turbines that are over fifteen years old, and
Speaker 2: that's being helped by policy as well. So previously permitting
Speaker 2: a project replacement was was a pretty similar process to
Speaker 2: permitting a brand new project, so you often had to
Speaker 2: restart a really long process that can take five years
Speaker 2: or even more in some cases. Now the EU has
Speaker 2: taken some steps to ease that process, extending temporary legislation
Speaker 2: which streamlines the permitting process specifically for these onshore wind
Speaker 2: project replacements, and some countries are taking that even further,
Speaker 2: exempting some of these repowering projects from repeating some environmental studies,
Speaker 2: for example, especially if they carry them out the first
Speaker 2: time round. So all of that means that we think
Speaker 2: that we'll see two gigawats of projects that come online
Speaker 2: in Europe this year that will be these so called
Speaker 2: repowering projects.
Speaker 1: One of the things that we talked about on this
Speaker 1: show earlier in the year. In twenty twenty three was
Speaker 1: about the US market in particular and some auctions that
Speaker 1: were one and projects that ultimately didn't end up happening,
Speaker 1: and those developers more or less tearing up their contracts
Speaker 1: and starting over what is this going to mean for
Speaker 1: the US and do you think this trend is going
Speaker 1: to continue?
Speaker 2: Well, the bad news is that the year kicked off
Speaker 2: with something a bit less positive. So BP and Equinor
Speaker 2: canceled their one point three gigawatts Empire Win two project
Speaker 2: in the US. But despite that, we predict that there
Speaker 2: are going to be fewer cancelations in the rest of
Speaker 2: twenty twenty four. So the projects that are at most
Speaker 2: risk that we saw getting canceled last year are those
Speaker 2: that have locked in their offtake contracts, so locked in
Speaker 2: the price they're going to get paid for their generation,
Speaker 2: but haven't yet secured all of their supply chain contracts
Speaker 2: and reached a final investment decision that kind of final
Speaker 2: go ahead for the project. So we went through an
Speaker 2: exercise where we basically categorized all the projects in the
Speaker 2: global pipeline in terms of whether they're at high risk,
Speaker 2: medium risk, or a low risk of cancelation, and the
Speaker 2: good news is that we identified only three gigawatts that
Speaker 2: fitted into that highest risk category. So those are projects
Speaker 2: that still hold fairly low priced contracts, that don't have
Speaker 2: contractual protection from inflation in their off take contracts, and
Speaker 2: are also projects that are due to deliver sooner, so
Speaker 2: projects that have less time to wait for interest rates
Speaker 2: and equipment costs to ease. So that the fact that's
Speaker 2: only three gigawats, that's only one percent of our total
Speaker 2: offshore wind forecast from twenty twenty four to twenty thirty five.
Speaker 2: So again that's another bit of evidence that the troubles
Speaker 2: that the sector faced last year were a bit more
Speaker 2: of a bump in the road rather than an existential
Speaker 2: threat to the offshr wind industry as a whole.
Speaker 1: Excellent, Ali, thank you very much for sharing your thoughts
Speaker 1: on the year ahead. You've got an optimistic view, but
Speaker 1: it's grounded in fact, because, let's be honest, last year
Speaker 1: you also had a really good run of accuracy on
Speaker 1: what you were thinking about.
Speaker 2: Well, fingers crossed for this year, thanks Dana.
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