"Get out of wind now" by Irina Slav
"Get out of wind now" by Irina Slav
"Warning: This is not investment advice. This is a reality check."
Photo by Fabian Wiktor | Madeira, Portugal • 26 March 2020
This is a reposting of Irina Slav’s excellent blog. It gives one hope that we will be able to stop the rape and pillage of our precious rural countrysides from the designs of dodgy developers to carpet them with unreliable, intermittent industrial wind turbines which are not clean nor green.
We need more people to wake-up to the reality of the many lies pushed by those who have vested interests in the highly subsidised wind industry and the political rhetoric that is “net zero.”
Get out of wind now
Warning: This is not investment advice. This is a reality check.
By IRINA SLAV • 1 May 2023
“Wind industry and supply chains are challenged. While renewable energy remains a competitive, rapid-to-deploy, and secure solution to Europe’s energy needs, the complex interplay of rising inflation, increasing costs of capital and input, and supply chain and labour challenges have impacted the renewable energy industry just as all other industries.”
This is a paragraph from the executive summary of a paper by Ørsed, the Danish wind turbine major, in which the company outlines “a path to progress” in the energy transition that envisages a massive buildout in — amazingly— wind energy.
It is an interesting paper in that its message basically comes down to urging policymakers to offer greater support for that buildout. Much, much greater support than already provided. Because with the current levels of support — political and financial — wind power is not working as advertised. Shocking, I know.
And it was going to be so easy. Technology advancements made wind turbines more efficient and raw material costs were comfortably low. Government support was booming.
Everyone in forecasting forecast smooth sailing for the wind power industry thanks to its essential role in the transition to total electrification. What everyone in forecasting apparently missed were a few minor details, such as inflation, raw material production trends, and central bank policies.
A famous movie quote states that assumption is the mother of all fuck-ups. It is a paraphrase of an observation made by American political scientist Eugene Lewis Fordsworthe, who, interestingly, later revised it to allow for the possibility that some assumptions lead to positive outcomes.
Not if there are too many of them, it seems, if the latest developments in wind power are any indication.
In January this year, WindEurope, the industry association, sounded an alarm. It said that investments in wind power had dropped sharply in 2022, with new wind turbine orders down by 47% to a meagre total of 9 GW and final investment decisions at just 12 GW.
That’s about a third of what the European Union says it needs to build annually in order to hit its decarbonisation targets and, according to WindEurope, the EU only has itself to blame for falling short of that target. Well, itself and inflation.
Energy Monitor reported in April that wind turbines have seen a cumulative cost increase of 38% over the last two years. It noted that the average price for seven minerals that are critical for the production of wind turbines has gone up by as much as 93% in that period.
“These cost increases are pushing up wind developers’ deployment bids and industry experts are calling on European governments to raise ceiling prices for renewable energy auctions in response. Some countries, such as Germany, have started to do so,” the report noted.
Who could have anticipated that raw material prices could ever go up again, especially with plans in place by governments to essentially plant a demand bomb under these raw materials by demanding a huge boom in wind turbine deployments within a relatively short timeframe?
Nobody, it appears, except marginal transition sceptics like yours truly and many much smarter people who kept warning that if demand for metals and minerals booms, prices will follow because supply is already inadequate and about to become more so.
Because of raw material inflation, in other words, wind power generators are not making money and this is pushing away investors who are key for the massive buildout planned by the EU.
Yet raw material inflation is only one part of the depressing puzzle. The other part, as already mentioned, is government policy. And it is a much bigger part. It’s government policies that will make or break the wind industry, and while officials give the impression that they are in full make mode, behind the scenes it seems a lot of breaking is in progress.
WindEurope again reported last year that Europe’s five biggest wind turbine makers were operating at a loss. That was despite the surge in natural gas prices that prompted a literal windfall for the wind industry thanks to the way the EU prices its electricity: price is based on the last-to-call generator, which is gas, for reliability reasons, so the more expensive gas is, the more money cheaper generators make.
Anyway, this didn’t help those turbine makers because of — in addition to commodity prices — slow permitting, low auction prices, and competition from China. According to the industry body, the length of permitting for new wind farms is discouraging investments; government auctions have caused “a race to the bottom” up to and including negative price offers; and cheaper Chinese turbines are undermining local output. What’s the EU going to do about this?
Well, they’ve already done some things, such as shortening the permitting process for both wind and solar as part of their latest push forward with the transition targets. They are also overhauling electricity market mechanisms to stimulate more wind and solar. Here’s how, per Reuters:
“All customers will have the right to request fixed-price long-term contracts and utilities and other suppliers will have to manage price risks and hedge part of their supply portfolio against potential wholesale price spikes. To aid suppliers, national governments will have to ensure they have access to market-based guarantees that address the credit risk of buyers.”
The market-based guarantees appear to come down one of two options: power purchase agreements and contracts for difference.
PPAs are the equivalent of long-term offtake deals for LNG developers. They offer buyers a fixed price over the long term and sellers a long-term revenue guarantee — at that fixed price. Contracts for difference are similar, only the revenue guarantee comes from the state rather than business buyers.
Per one virtual power plant operator: “The operator promoted by this support mechanism feed their electricity into the grid as usual. If the price they achieve on the exchange is below the amount that was specified in the auction, the operator receives the difference from the fixed subsidy amount.
If the price is above this reference price, the operator has to pay the difference to the contracting party. In contrast to the German market premium model, this subsidy model is also described as a symmetrical market premium model.”
For an informative three-minute video from the UK’s CfD handler, click here. Basically, wind (and solar) generators bid at an auction, and if they win, they get guaranteed revenues over the long term — guaranteed but adjustable on a regular basis.
These revenues, however, depend on short-term electricity price fluctuations. If the electricity price is lower than the price set in the CfD, the governments pays the difference to generators. If the price goes higher, generators pay the difference to the government with a view to protecting consumers from excessive prices.
So far so good, if a little bit questionable with regard to free market principles, which appear to be becoming obsolete by the day. Wind developers — and their prospective investors — have the certainty of PPAs from companies eager to reduce their carbon footprint and from CfDs with governments no less eager to reduce their carbon footprint. So what happens when the wind stops blowing?
Well, it wouldn’t be news for you if I say that nobody appears to think about that. Wind developers can happily bid for CfDs with the respective government based on their levelised cost of electricity and equally happily get their deals. Same with PPAs.
And when the wind stops blowing and gas and coal need to step in, at a higher prices because they have been made non-competitive by all the wind subsidies, well, the price goes up and wind developers have to pay that difference and hope wind starts blowing again soon.
The assumption is that it will. The other assumption is that there will be no load-shedding for reasons of excessive wind power output during a time of low demand. A third assumption is that transmission infrastructure will catch up fast, so the risk of load-shedding becomes even smaller. Assumptions, assumptions…
So, governments are doing everything in their powers to ensure the fast buildout of wind power capacity by guaranteeing demand and revenues. What governments cannot guarantee, however, are profits. Because of those other petty details I mentioned earlier — inflation and interest rates.
What’s more, under the CfDs that governments offer as a way of subsidising wind power, wind developers commit to certain capacity-building milestones, at least in the UK. If they can’t get to those milestones — because of, I don’t know, a molybdenum shortage — they don’t get the money. And they are already having trouble turning in a profit.
Per this enlightening Oilprice article, building wind turbines is no cheap business and developers have in recent years been engaged in something like an arms race to build taller, bigger turbines whatever the costs because costs were low. Now that they aren’t, the commercial case for those taller, bigger turbines is fizzling out and bottom lines are dipping into the red.
“The wind energy market is stuck in this very strange paradox right now… We have the best long-term climate policy certainty ever, across all the largest markets, but we’re struggling through a period where the whole industry, particularly the supply chain, has been hit by issues that have culminated in destroying profit margins and running many of the top OEMs [original equipment manufacturers] and their component vendors into negative profitability territory,” said a wind industry analyst from Wood Mackenzie quoted in the above article.
This is the assumption that is breaking rather than making the wind power industry — the assumption that the supply chain is static, that raw material costs are static, and that there is no such thing as economic cycles. Quite massive, as far as assumptions go.
The wind industry, then, relies entirely on government policies for its continued existence and I mean that literally. It is government regulators that can — and do — force industrial electricity consumers to sign PPAs with wind generators. It is government-owned companies that are in charge of those CfDs that should lure investors into wind power development.
Meanwhile, no new copper mines are coming online any time soon. Molybdenum mine capacity is even worse. China can cut off rare earth exports whenever it feels like it. Not that it will, but it can. Just how long can governments support an industry entirely reliant on that support and facing high inflation winds (not sorry)? Well, I guess we’ll see but I suspect it would be better to watch events unfold from the stands.
P.S. In a further completely unexpected twist, reports are emerging that the wind industry is not delivering on government promises for tens of thousands of new jobs. Those doing the promises probably assumed no one would ever wonder about those jobs.
This is Irina’s original post:
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