WEBVTT - Things to Watch: Wind

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<v Speaker 1>This is Dana Perkins and you're listening to Switched on

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<v Speaker 1>the bn EF podcast. On today's bonus episode about the

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<v Speaker 1>Things to Watch in twenty twenty four, we speak with

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<v Speaker 1>BNF's head of Wind Research, Oliver Metcalf, and he shares

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<v Speaker 1>what we should be thinking about in the wind sector

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<v Speaker 1>in the year ahead. The conversation takes us across the

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<v Speaker 1>world and across the wind value chain. For example, we

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<v Speaker 1>talk about offshore wind and whether twenty twenty four will

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<v Speaker 1>offer stability for wind developers following last year's turbulence. We

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<v Speaker 1>also discuss Chinese manufacturers and whether we can expect another

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<v Speaker 1>year of very low prices and margins for turbines coming

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<v Speaker 1>out of China. And finally we turn to auctions. Following

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<v Speaker 1>some notable flops in twenty twenty three, are we set

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<v Speaker 1>for a more positive twenty twenty four. To access the

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<v Speaker 1>accompanying research note titled wind Ten Things to Watch in

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<v Speaker 1>twenty twenty four, b and EF subscribers can find it

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<v Speaker 1>on BNF dot com and at bnof go on the

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<v Speaker 1>Bloomberg terminal. As always, if you like the podcast, give

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<v Speaker 1>us a review you and subscribe on your device. But

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<v Speaker 1>right now, let's speak with Ali about what lies ahead

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<v Speaker 1>for wind in twenty twenty four. Allie, good to have

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<v Speaker 1>you back on the show today.

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<v Speaker 2>Thanks Dane, No great to be here.

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<v Speaker 1>We are here to talk about the year ahead for wind,

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<v Speaker 1>one of the really central parts of the energy transition

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<v Speaker 1>for renewables. And I want to know how you did

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<v Speaker 1>against your scorecard in twenty twenty three when you last

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<v Speaker 1>took a look at making some predictions.

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<v Speaker 2>Well, we did pretty well, actually, so by our own

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<v Speaker 2>grading that might be a bit of cheating, but we

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<v Speaker 2>had seven predictions that were correct, two predictions we thought

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

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<v Speaker 1>So I actually think you'd be surprised how many of

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<v Speaker 1>the teams, because you know, we're doing a series of

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<v Speaker 1>these shows over the course of this month, and some

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<v Speaker 1>teams were overly optimistic headed into twenty twenty three and

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<v Speaker 1>kind of got knocked back a little bit. But this year,

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<v Speaker 1>would you say that your twenty twenty three predictions were

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<v Speaker 1>optimistic or maybe had kind of a more somber tone,

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<v Speaker 1>Because I'm leading into the fact that what we're going

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<v Speaker 1>to talk about today is largely an optimistic twenty twenty.

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<v Speaker 2>Four I think we were quite optimistic last year. The

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<v Speaker 2>one we did slightly less well on was very much

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<v Speaker 2>too optimistic. We thought that governments around the world were

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<v Speaker 2>going to be really positive and auction off a load

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<v Speaker 2>of seabed areas for floating wind projects. Floating wind is

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<v Speaker 2>a newer technology during twenty twenty three, and actually what

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<v Speaker 2>happened was there were a load of delays. These auctions

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<v Speaker 2>for seabed kind of hit hurdles and it meant that

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<v Speaker 2>there was only one auction in the event last year.

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<v Speaker 2>It was an auction for sites off the coast of

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<v Speaker 2>the UK, and we saw delays for another auction in

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<v Speaker 2>the UK and for an auction in Norway, and we're

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<v Speaker 2>still waiting for Spain and Portugal to set out the

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<v Speaker 2>regulatory process for a floating offshore wind project in those countries.

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<v Speaker 2>So it was not as good a year for the

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<v Speaker 2>floating wind sect as we're predicting in twenty twenty three.

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<v Speaker 2>One of my favorite predictions that we actually got right

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<v Speaker 2>last year was around offshore wind financing. So at the

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<v Speaker 2>beginning of last year we predicted that it would be

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<v Speaker 2>a record year of offshore wind financing activity in twenty

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<v Speaker 2>twenty three. Now the offshore wind industry had a really

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<v Speaker 2>tough twenty twenty three. In the end, there was high inflation,

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<v Speaker 2>there was rising interest rates, and that has a disproportionate

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<v Speaker 2>effect for a capex intensive industry like offshore wind. So

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<v Speaker 2>that led to many developers asking governments to renegotiate their

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<v Speaker 2>off take contracts, even canceling projects in some cases, and

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<v Speaker 2>developers were kind of finding out that the finances didn't

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

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<v Speaker 2>been crunching the numbers at the end of the year,

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<v Speaker 2>we've seen that the industry did in fact hit a

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<v Speaker 2>new financing record outside of China. We're still learning up

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<v Speaker 2>those numbers for inside China, but it's great to see

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<v Speaker 2>that really validates our view that this is a sector

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<v Speaker 2>on an exciting growth trajectory after all, and developers really

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<v Speaker 2>made things work despite a really challenging year last year.

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<v Speaker 1>You had mentioned how inflationary pressure did have an impact

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<v Speaker 1>last year in twenty twenty three, yet the industry still

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<v Speaker 1>made a lot of progress in terms of wind installations.

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<v Speaker 1>As we're still grappling with that this year. What does

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<v Speaker 1>twenty twenty four have in store for wind installations and

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<v Speaker 1>do you have a prediction against that.

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<v Speaker 2>Well, there's a general expectation in the market that will

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<v Speaker 2>begin to see interest rates fall in many countries over

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<v Speaker 2>the course of this year. That's vital for wind developers

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<v Speaker 2>because in the same way that a central bank interest

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<v Speaker 2>rate determines the rate of a mortgage that you might

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<v Speaker 2>pay on your house, it also forms a base rate

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<v Speaker 2>for loans that developers take out to build a wind farm.

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<v Speaker 2>And so those falling interest rates will be crucial for

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<v Speaker 2>new financing activitivity and new investment in twenty twenty four.

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<v Speaker 2>So we're actually expecting the biggest year yet of wind

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<v Speaker 2>installations in twenty twenty four, and a big part of

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<v Speaker 2>that story is about the US and China. So those

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<v Speaker 2>are the world's two largest markets. So China is continuing

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<v Speaker 2>to build these batches of giant projects in the deserts

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<v Speaker 2>in the north of the country, and it's also ramping

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<v Speaker 2>up off your wind bill to hit installation targets that

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<v Speaker 2>are set for the end of twenty twenty five across

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<v Speaker 2>all different provinces. And then in the US last year

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<v Speaker 2>we began to see a lot of progress in defining

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<v Speaker 2>the rules and regulations around the Inflation Reduction Act, so

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<v Speaker 2>that was a big bit of climate legislation that the

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<v Speaker 2>country passed in twenty twenty two. Now that led to

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<v Speaker 2>a boom in turbine orders last year, and we're expecting

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<v Speaker 2>to see some of those projects come online in twenty

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<v Speaker 2>twenty four, So a really good story for onshore wind

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<v Speaker 2>in the US. And the US is also going to

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<v Speaker 2>commission its first two commercial scale offshore wind farms this year,

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<v Speaker 2>So a really positive year for the world's two largest

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<v Speaker 2>wind markets in twenty twenty four.

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<v Speaker 1>So last year did have some delays for wind turbines

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<v Speaker 1>and things were pushed back in some cases by a

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<v Speaker 1>number of months. Do we see I guess the manufacturing

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<v Speaker 1>sector catching up in the year ahead. Are they still

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<v Speaker 1>going to be grappling with what you're pointing out is

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<v Speaker 1>increased demand.

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<v Speaker 2>Well, we're expecting to see the momentum of that strong

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<v Speaker 2>US order intake for turbine makers continue in twenty twenty four.

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<v Speaker 2>Now that's a really really good sign. But we're also

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<v Speaker 2>expecting to see something similar in Europe. So Germany and

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<v Speaker 2>Spain are starting to implement reforms for onshore wind permitting

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<v Speaker 2>and that's boosting the pipeline of projects that are able

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<v Speaker 2>to bid for government subsidies and are able to come

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<v Speaker 2>through that development process. So we're expecting this year for

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<v Speaker 2>kind of European project developers to start putting in more

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<v Speaker 2>and more orders and begin to match some of that

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<v Speaker 2>activity we saw in the US last year. So that's

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<v Speaker 2>a positive thing also for the profitability for some of

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<v Speaker 2>these wind turbine makers that struggled over the last few years.

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<v Speaker 2>These companies have been fighting against negative margins on their

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<v Speaker 2>turbine sales, so this increasing order book is really positive news.

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<v Speaker 2>And we saw Vestus, one of the world's largest wind

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<v Speaker 2>turbine makers, announce a profit in their third quarter of

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<v Speaker 2>last year for the first time in a while, and

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<v Speaker 2>so that's a positive trajectory in terms of Vestas, but

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<v Speaker 2>also some of the other turbine makers that we're siving

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<v Speaker 2>more positive announcements. It doesn't mean that some of these

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<v Speaker 2>companies aren't still subject to global market impacts. So we

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<v Speaker 2>saw new logistics bottlenecks start to arise because of some

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<v Speaker 2>of the disruption that we've seen to shipping in the

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<v Speaker 2>Red Sea. So we track vessel traffic through the Sewerz

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<v Speaker 2>Canal and we saw that plummet since we've seen commercial

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<v Speaker 2>ships being targeted by militants in Yemen, So that means

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<v Speaker 2>that the price of shipping a container from Shanghai to Rotterdam,

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<v Speaker 2>which is a really important shipping route for the wind

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<v Speaker 2>supply chain, that's more than quadrupled since the beginning of

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<v Speaker 2>December last year. So, in general, a positive picture for

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<v Speaker 2>the wind supply chain, but there are some effects that

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<v Speaker 2>are providing new barriers.

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<v Speaker 1>Okay, we'll have to watch what happens with these supply

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<v Speaker 1>chains and then what does this all mean for costs

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

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<v Speaker 1>I know that contracts are being secured already now for

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<v Speaker 1>next year, but for any new contracts that are being

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<v Speaker 1>secured going forward, will turbine prices likely go up or down?

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<v Speaker 2>The good news is that some of the input costs

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<v Speaker 2>for manufacturing a turbine have started to come down. That's

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<v Speaker 2>part of the story that's helped turbine makers begin to

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<v Speaker 2>move towards profitability again. We're expecting turbine makers to keep

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<v Speaker 2>those prices high though, despite those falling input costs. Not

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<v Speaker 2>so good news for developers, but it's really going to

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<v Speaker 2>help turbine makers return to profitability in the long term,

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<v Speaker 2>and that'll be a good thing for the wind industry

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<v Speaker 2>as a whole.

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

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<v Speaker 1>some parts of the world they're just now starting to

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<v Speaker 1>turn a profit, but in China, the winterbines are actually

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<v Speaker 1>selling for even less. Are they essentially going to raise

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<v Speaker 1>their prices in order to turn a profit or are

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<v Speaker 1>they able to find different cost reductions that are not

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<v Speaker 1>available in other parts of the world.

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<v Speaker 2>So for the Chinese turbine makers, that's someway that we're

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<v Speaker 2>predicting a little bit more strain on profitability. So China

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<v Speaker 2>cuts national subsidies for onshore wind at the end of

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<v Speaker 2>twenty twenty for offshore wind at the end of twenty

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<v Speaker 2>twenty one. That put a lot of pressure on developers

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<v Speaker 2>to still deliver projects, and they pass that pressure onto

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<v Speaker 2>their suppliers. Chinese turbine manufacturers like Goldwind Minyang. There's a

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<v Speaker 2>company called Windy, and they're really kind of pushing them

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<v Speaker 2>to cut their prices so that they could make those

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<v Speaker 2>projects work. That's meant that Chinese wind turbine prices have

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<v Speaker 2>hit pretty astonishing load. So in the second half of

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<v Speaker 2>twenty twenty three, we saw that Chinese turbine prices had

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<v Speaker 2>fallen by fifty seven percent compared with the first half

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<v Speaker 2>of twenty twenty and that kind of steady decrease in

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<v Speaker 2>prices has really stressed profitability for some Chinese turbine makers.

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<v Speaker 2>So Goldwin, the biggest Chinese turbin manufacturer, we saw their

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<v Speaker 2>margins for their manufacturing and sales segment decreased from seven

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<v Speaker 2>point two percent in the second half of twenty twenty

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<v Speaker 2>one to minus ten point four percent in the first

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<v Speaker 2>half of twenty twenty three. And similarly, we saw ming

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<v Speaker 2>Yang's margins fall from thirteen point one percent to one

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<v Speaker 2>point one percent over the same period. So we're seeing

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<v Speaker 2>some of this kind of steady decrease in prices start

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<v Speaker 2>to challenge turbine makers, and there's no real indication that

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<v Speaker 2>we'll see prices rise again this year, and so it

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<v Speaker 2>could be another tough year in terms of turbine sales

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<v Speaker 2>profitability for these Chinese turbine makers.

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<v Speaker 1>So last year, one of the things that we saw

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<v Speaker 1>was that even though there were a lot of projects

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<v Speaker 1>that happened, there were a few option flops, and do

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<v Speaker 1>you think governments will be changed essentially some of the

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<v Speaker 1>way that auctions and the off takes work in the

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<v Speaker 1>year ahead in order to stop so many of these

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<v Speaker 1>from happening.

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<v Speaker 2>Yeah. So the UK government held an auction last year

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<v Speaker 2>that had a really low price cap and the sector

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<v Speaker 2>basically complained that that didn't effect didn't account for all

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<v Speaker 2>the cost increases that they've been facing over the previous year.

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<v Speaker 2>So in the event of that auction, there were no

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<v Speaker 2>offshore wind projects that secured a subsidy, So that was

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<v Speaker 2>a bit of a flop that auction, especially for off

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<v Speaker 2>your Wind, And there have been signs that governments in

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<v Speaker 2>the UK and around the world are willing to pay

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<v Speaker 2>a little bit more for off your Wind this year

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<v Speaker 2>and also include more risk sharing mechanisms in the contracts

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<v Speaker 2>that they are offering. So the UK government has boosted

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<v Speaker 2>that price cap for off your Wind for its twenty

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<v Speaker 2>twenty four auction by sixty six percent, and there are

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<v Speaker 2>several states in the US that have introduced some mechanisms

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<v Speaker 2>in their contract to link the prices that developers get

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<v Speaker 2>paid to things like inflation or things like commodities prices

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<v Speaker 2>to better share that risk between the government and the

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<v Speaker 2>off takers. So that's a good sign for the off

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

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<v Speaker 2>and we also saw developers last year rely on corporate

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

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<v Speaker 2>So we're expecting to see more of that in twenty

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<v Speaker 2>twenty four as well.

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<v Speaker 1>So we're spending a lot of time talking about all

0:11:13.000 --> 0:11:15.320
<v Speaker 1>of the new installations that are going to be happening

0:11:15.360 --> 0:11:17.640
<v Speaker 1>in the year ahead and even happened last year, but

0:11:17.720 --> 0:11:21.360
<v Speaker 1>there's a lot of existing installed capacity. Wind farms are

0:11:21.400 --> 0:11:23.800
<v Speaker 1>not a brand new technology, and I want to know

0:11:23.920 --> 0:11:28.360
<v Speaker 1>what the year ahead holds in store for repowering and

0:11:28.520 --> 0:11:30.280
<v Speaker 1>kind of maintaining some of these.

0:11:30.320 --> 0:11:33.240
<v Speaker 2>Yeah, so you're right, Dana. It was the early eighties

0:11:33.280 --> 0:11:36.319
<v Speaker 2>when we first started seeing a lot of grid connected

0:11:36.559 --> 0:11:39.160
<v Speaker 2>wind turbines increase in number, and we're beginning to hit

0:11:39.160 --> 0:11:41.800
<v Speaker 2>the point of critical mass where there are large volumes

0:11:41.840 --> 0:11:43.880
<v Speaker 2>of these turbines that are reaching the end of their

0:11:43.920 --> 0:11:48.080
<v Speaker 2>planned lifetimes. And so many of those early projects were

0:11:48.080 --> 0:11:51.240
<v Speaker 2>built on the absolute best wind sits in a market,

0:11:51.520 --> 0:11:54.400
<v Speaker 2>and so developers are looking at replacing those projects to

0:11:54.440 --> 0:11:57.640
<v Speaker 2>harness those really good conditions and wind speeds again, so

0:11:57.800 --> 0:12:02.679
<v Speaker 2>the wind industry calls that process so that those project replacements,

0:12:02.840 --> 0:12:06.320
<v Speaker 2>and we're expecting to see record replacement activity across Europe

0:12:06.320 --> 0:12:08.880
<v Speaker 2>this year, and especially in markets like like Germany and

0:12:08.960 --> 0:12:12.960
<v Speaker 2>Spain that are those markets that have the largest fleets

0:12:13.000 --> 0:12:15.679
<v Speaker 2>of wind turbines that are over fifteen years old, and

0:12:15.920 --> 0:12:19.880
<v Speaker 2>that's being helped by policy as well. So previously permitting

0:12:20.480 --> 0:12:23.440
<v Speaker 2>a project replacement was was a pretty similar process to

0:12:23.480 --> 0:12:25.760
<v Speaker 2>permitting a brand new project, so you often had to

0:12:25.800 --> 0:12:28.520
<v Speaker 2>restart a really long process that can take five years

0:12:28.600 --> 0:12:30.920
<v Speaker 2>or even more in some cases. Now the EU has

0:12:30.960 --> 0:12:34.959
<v Speaker 2>taken some steps to ease that process, extending temporary legislation

0:12:35.080 --> 0:12:38.400
<v Speaker 2>which streamlines the permitting process specifically for these onshore wind

0:12:38.400 --> 0:12:41.720
<v Speaker 2>project replacements, and some countries are taking that even further,

0:12:42.080 --> 0:12:46.520
<v Speaker 2>exempting some of these repowering projects from repeating some environmental studies,

0:12:46.520 --> 0:12:48.800
<v Speaker 2>for example, especially if they carry them out the first

0:12:48.800 --> 0:12:51.080
<v Speaker 2>time round. So all of that means that we think

0:12:51.120 --> 0:12:53.679
<v Speaker 2>that we'll see two gigawats of projects that come online

0:12:53.720 --> 0:12:56.160
<v Speaker 2>in Europe this year that will be these so called

0:12:56.240 --> 0:12:57.480
<v Speaker 2>repowering projects.

0:12:57.800 --> 0:12:59.440
<v Speaker 1>One of the things that we talked about on this

0:12:59.559 --> 0:13:03.000
<v Speaker 1>show earlier in the year. In twenty twenty three was

0:13:03.040 --> 0:13:06.480
<v Speaker 1>about the US market in particular and some auctions that

0:13:06.559 --> 0:13:09.559
<v Speaker 1>were one and projects that ultimately didn't end up happening,

0:13:09.559 --> 0:13:12.640
<v Speaker 1>and those developers more or less tearing up their contracts

0:13:12.679 --> 0:13:15.120
<v Speaker 1>and starting over what is this going to mean for

0:13:15.160 --> 0:13:17.160
<v Speaker 1>the US and do you think this trend is going

0:13:17.200 --> 0:13:17.960
<v Speaker 1>to continue?

0:13:18.280 --> 0:13:21.080
<v Speaker 2>Well, the bad news is that the year kicked off

0:13:21.120 --> 0:13:24.240
<v Speaker 2>with something a bit less positive. So BP and Equinor

0:13:24.400 --> 0:13:27.560
<v Speaker 2>canceled their one point three gigawatts Empire Win two project

0:13:27.640 --> 0:13:29.960
<v Speaker 2>in the US. But despite that, we predict that there

0:13:30.040 --> 0:13:32.440
<v Speaker 2>are going to be fewer cancelations in the rest of

0:13:32.440 --> 0:13:34.880
<v Speaker 2>twenty twenty four. So the projects that are at most

0:13:34.960 --> 0:13:37.600
<v Speaker 2>risk that we saw getting canceled last year are those

0:13:37.640 --> 0:13:40.160
<v Speaker 2>that have locked in their offtake contracts, so locked in

0:13:40.200 --> 0:13:42.200
<v Speaker 2>the price they're going to get paid for their generation,

0:13:42.400 --> 0:13:45.240
<v Speaker 2>but haven't yet secured all of their supply chain contracts

0:13:45.400 --> 0:13:47.800
<v Speaker 2>and reached a final investment decision that kind of final

0:13:47.880 --> 0:13:49.960
<v Speaker 2>go ahead for the project. So we went through an

0:13:49.960 --> 0:13:53.280
<v Speaker 2>exercise where we basically categorized all the projects in the

0:13:53.280 --> 0:13:56.000
<v Speaker 2>global pipeline in terms of whether they're at high risk,

0:13:56.280 --> 0:13:59.040
<v Speaker 2>medium risk, or a low risk of cancelation, and the

0:13:59.080 --> 0:14:01.880
<v Speaker 2>good news is that we identified only three gigawatts that

0:14:02.000 --> 0:14:05.760
<v Speaker 2>fitted into that highest risk category. So those are projects

0:14:05.840 --> 0:14:09.079
<v Speaker 2>that still hold fairly low priced contracts, that don't have

0:14:09.240 --> 0:14:13.080
<v Speaker 2>contractual protection from inflation in their off take contracts, and

0:14:13.160 --> 0:14:15.880
<v Speaker 2>are also projects that are due to deliver sooner, so

0:14:16.160 --> 0:14:18.640
<v Speaker 2>projects that have less time to wait for interest rates

0:14:18.800 --> 0:14:21.800
<v Speaker 2>and equipment costs to ease. So that the fact that's

0:14:21.840 --> 0:14:25.040
<v Speaker 2>only three gigawats, that's only one percent of our total

0:14:25.040 --> 0:14:28.640
<v Speaker 2>offshore wind forecast from twenty twenty four to twenty thirty five.

0:14:29.000 --> 0:14:31.840
<v Speaker 2>So again that's another bit of evidence that the troubles

0:14:31.840 --> 0:14:34.280
<v Speaker 2>that the sector faced last year were a bit more

0:14:34.320 --> 0:14:37.160
<v Speaker 2>of a bump in the road rather than an existential

0:14:37.200 --> 0:14:39.160
<v Speaker 2>threat to the offshr wind industry as a whole.

0:14:39.560 --> 0:14:42.120
<v Speaker 1>Excellent, Ali, thank you very much for sharing your thoughts

0:14:42.160 --> 0:14:44.280
<v Speaker 1>on the year ahead. You've got an optimistic view, but

0:14:44.320 --> 0:14:47.640
<v Speaker 1>it's grounded in fact, because, let's be honest, last year

0:14:47.760 --> 0:14:51.680
<v Speaker 1>you also had a really good run of accuracy on

0:14:51.720 --> 0:14:52.760
<v Speaker 1>what you were thinking about.

0:14:52.960 --> 0:15:01.200
<v Speaker 2>Well, fingers crossed for this year, thanks Dana.

0:15:03.600 --> 0:15:06.720
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