Political and regulatory interference in the offshore wind turbine market—at least in the short term—would allow the market to use Chinese-made turbines but also retain European market shares while western OEMs get their houses in order, says Carsten Nielsen of K2 Management
The views expressed are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy
An influx of Chinese equipment into the European market may offer brief respite for western OEMs
Although now a mature industry that has benefitted from invaluable pioneering experience, the European offshore wind sector is at a turning point. A perfect storm of high commodity prices, supply chain shortages and a large backlog of inflexible procurement agreements have resulted in all major European turbine original equipment manufacturers (OEMs) operating at a loss.
Contrast this with the fortunes of the major Chinese turbine OEMs, who, following a year of record installations, are currently able to offer competitive warranty offerings and lower production costs than their European counterparts.
While this turn of events has prompted some commentators to question whether European offshore wind manufacturers will lose their leading position in European markets—in a manner akin to their peers in the solar industry in the 2000s—perhaps we can learn from those lessons and ensure that we manage this competition in order to drive the market to better performance and longer-term stability.
Indeed, many project developers in Europe and Asia will inevitably welcome an increase in Chinese bidding owing to political net-zero aims and a lack of production capacity from the likes of Vestas and Siemens Gamesa.
And a chance to work through order backlogs and reassess supply commitments at uneconomic prices may also offer beleaguered European OEMs an opportunity to consolidate and restructure where necessary, pausing the inexorable drive to ever larger turbines and prototypical equipment at a time of record low auction prices and volatility in the commodities markets. Indeed, a period of restructuring may offer European OEMs the opportunity to return as more competitive entities.
Lastly, in the face of significant rises in European power prices following the invasion of Ukraine, European citizens are becoming increasingly vocal as to the need for secure, and clean, sources of domestic power. Yet, these same citizens understandably do not want to commit to signing up for expensive offshore wind build-out programmes that overcompensate supply chain failures. We must, therefore, balance future job creation with recognising the cost pressures placed on consumers that ultimately pay for project development.
AN UNPREDICTABLE MARKET
While the long-term fundamentals are stronger than ever for European turbine OEMs, they are facing challenges in the near term through the likes of rocketing steel prices and supply chain uncertainty. While global offshore wind growth continues and is largely driven by Asian markets, the International Energy Agency (IEA) recently warned that renewable power growth is set to slow down for the first time in a decade.
And, with European supply chains notably more exposed to international gas prices than their Asian counterparts, this ongoing instability is making it increasingly difficult for European OEMs to accurately price products for new orders during tender processes, with resulting knock-on effects for the likes of marine suppliers and other stakeholders.
Similarly, the risk of maintaining fixed labour contracts in the current market means that European OEMs cannot accommodate price fluctuations as easily as Chinese OEMs who are less burdened by such issues owing to government initiatives to secure favourable prices for raw materials—particularly steel—and a lower cost of labour than western markets.
While developers in the European markets will likely encourage the opportunity for lower prices in turbine supply, the question remains as to the extent that it is right to welcome OEMs from China to make up for the shortfall in offshore wind.
Such has been the focus on the use of domestic supply chains, and the development of European offshore wind as an engine for economic growth, that removing a large part of manufacturing and componentry from European markets, for European projects, could become politically untenable.
Therefore, while Chinese OEMs are in a better place than ever to begin displacing European OEMs in their native markets, a considered response might be the implementation of prudent light-touch political and regulatory solutions, in certain development criteria, across Europe to ensure long-term success and healthy competition.
Far from seeking to entirely cut out Chinese OEMs, sensible lighter touch regulation could look at the total penetration of European OEMs in each native market, set a percentage benchmark for content, and, once this was secured, leave developers with the choices in procuring turbines for future or remaining auctions or tenders.
In reality, the world is not that simple and there would have to be further considerations in the detail, but some form of incremental light protection is perhaps the only way that, in the short term at least, European OEMs will retain market share.
Operating in this way or similar, policymakers should be acting to ensure fair competition, either by keeping rules at a minimal level, or incrementally adjusting regulation to prevent the dominance of one or two manufacturers able to enjoy an unfair advantage.
Policy failure ultimately sees a global dominance by a monopoly or an oligopoly of manufacturers and results in trade wars and tariffs—none of which help with maintaining a levelised cost of energy that is affordable for consumers and fair for manufacturers.
But alongside regulations that seek to apply checks and balances, there should also exist those that open doors to stable long-term industry development.
We know historically that this has been an area that policymakers have struggled with most, but by taking measures such as smoothing the permitting process for offshore wind development, policymakers indirectly provide significant support for beleaguered turbine OEMs.
The REPowerEU Action Plan may afford such opportunities in the coming months. However, permitting reform alone will not guarantee the future survival of European OEMs. In the short term, these manufacturers will need to steer away from a constant push for larger machines and focus on building efficiency in manufacturing processes.
The focus for European OEMs should also shift from competing with Chinese manufacturers to focussing on a set catalogue ensuring a reliable supply of equipment to projects with shifting timelines.
This focus on consistent products could prove beneficial in the short- to medium-term, allowing European OEMs to hone their offerings, automate their factories and reduce immediate costs linked to volatile market conditions.
The uncomfortable truth is that certainly in the short term, the travails of European turbine OEMs are likely to continue. And, commensurately, Chinese offshore turbines will consistently look more attractive.
But to avoid a point of no return for European manufacturers and ultimately trade wars and tariffs, there will have to be some coordinated responses across industry and policymakers.
The former can support suppliers by reducing the pressure for newer, ever-larger turbines. The latter could examine light touch regulation to offer some protection to its longest-served industry pioneers, shoring up opportunities for future stability and growth, but not at the expense of providing future opportunities for more globally diverse product offerings.
The answers are not simple, but as we witness more challenges and complexity in the energy markets than perhaps ever before, it is clear that to protect European jobs and investment policymakers will need to make a choice sooner rather than later. •
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