Green Economy Journal Issue 57

ENERGY
ENERGY
The future of
ONSHORE WIND
TURBINE SOURCING
Kearney Analysis
Figure 1. Turbine manufacturers are reporting sharp drops in their margins.
Three factors are triggering OEMs’ troubled performance. First,
the historically strong negotiating power of large utilities has been
upholding strong pressure to reduce the levelised cost of energy
(LCOE). Here, their relentless focus on capex reduction and a limited
view on the full potential of project optimisation decreased the
margin of turbine sales to a bare minimum. Second, OEMs are facing
protracted costs of quality issues caused by the high pressure on fast
innovation cycles. Third, the current supply chain issues and sharp
In times of uncertain supply,
setting up an even closer supplier
relationship – a strategic partnership – can
be very attractive for both parties.
rises in raw material costs cause severe troubles. Contracts with
long lead times and often limited contractual inflation clauses make
it difficult for OEMs to fully pass rising costs on to their customers,
pushing the companies into the red.
CHANGES LIE AHEAD
In an oligopolistic market structure, these losses are unsustainable
and limit investments in additional capacity. In a market with
fast-growing demand, this puts the sufficiency of wind turbine
supply in the short- to medium-term future at a heavy risk. Market
fundamentals will shift the negotiating power from the demand
side to turbines suppliers – a process that has already started.
This will impact costs and ultimately capacity access for utilities and
project developers:
• Suppliers will gain more pricing power, driving turbine prices up
beyond the already elevated level of more than 30% year-on-year.
• Suppliers will select their preferred customers, and ill-prepared
customers will find it difficult to place orders at all.
This new paradigm will require a strategic shift in wind turbine sourcing.
CLOSER COLLABORATION
In traditional sourcing approaches, turbines are procured project by
project in individual tenders, sometimes enhanced with bundling of
multiple projects to make use of the economy of scale. This approach
is best used in cases of very large, complex projects where the sheer
size of the projects is enough to entice the OEM to collaborate closer.
However, it fails to unleash the full potential to create value over the
complete pipeline.
Framework agreements create value by standardising procurement
processes across projects and by capturing scale advantages for
large pipelines. Best-in-class framework agreements contractually
stipulate a higher degree of collaboration by the OEM – and in exchange
offer the commitment of projects to be built with the participating
OEM’s turbines.
With bold decarbonisation targets, the demand for renewable energy will skyrocket with an
estimated 2 400GW of new capacity installed by 2030. The strong pressure to deliver against
these targets will escalate demand-side competition.
BY KEARNEY CONSULTING*
At the same time, original equipment manufacturers (OEMs)
for turbines are in financial trouble despite having full order
books and receiving record-level order intakes (see figure 1).
GE Renewables reported a sharp drop in their EBIT margin, from
-5% in the past few years to a devastating -26% in 2022 Q3. Siemens
Gamesa recently announced a layoff of roughly 2 900 employees,
and Nordex and Enercon have been facing financial troubles over
the past few years. Even Vestas, the only profitable large western
OEM up to now, has reported a -11.9% EBIT margin year-to-date.
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