Profits Starting To Wind Down: A Setback for Wind Turbines?

Cost reductions in wind power are shrinking profits for wind turbine manufacturers.

The price of wind power is dropping fast, and it’s closing in on the price of fossil fuels around the globe. [1] While this is good news for households, wind turbine suppliers, like Denmark-based Vestas Wind Systems, are facing falling revenues and sinking share prices. [2] The lower price in wind energy has predictably increased the demand for wind turbines, consequently spurring intense competition between supplier rivals and driving down margins in sales.

In the last year, Vestas triumphantly surpassed General Electric (GE) in market share and became the number one manufacturer of wind turbines, but there was little occasion to celebrate as Vestas also reported a 6% drop in revenue and 20% plummet in share prices in its third quarter. [3] Despite a nearly 50% increase in orders from 2016, production disruptions and delivery delays have created a backlog, further exacerbating losses. [4]

While Vestas foresees mounting challenges, the company is taking measures to address these challenges. In the short term, Vestas is increasing contracts for high-margin maintenance services with current customers. [5] The company has been manufacturing turbines for 40 years and continues to develop relations with a much broader range of customers than competitors GE and newly merged Siemens Gamesa, who both depend on orders from a small number of big customers. Additionally, Vestas CEO Anders Runevad continues to aggressively expand into the United States: “We have widened the customer base quite substantially…we have managed to penetrate further into the big U.S.-based utilities.” [6] Vestas has recently announced a plan to innovate in energy storage, seeking projects that can increase the supply of consistent power in an industry where wind can fluctuate by season and geography. [7] In this partnership, Tesla Inc. will provide the battery storage, and Vestas will provide wind turbines to supplement solar panels for Kennedy Energy Park in Queensland, Australia. This project, set to be complete by the end of 2018, would be the “first wind, solar and storage hybrid generator connected to the Australian national electricity network via a single connection point.” If successful, the potential for a stable energy source with potential for high penetration could be a game changer in reliable, low-cost renewable energy. [8]

Vestas continues to search for new markets, with China and India crucial to its medium term strategy. China continues to increase capacity for wind turbine installations with new goals in place for 2020, and India has started a program to build capacity for wind generation by 2022. Vestas is capitalizing on these opportunities by opening its first blade factor in India and expanding its business presence in China. [9]

Vestas should continue to innovate and seek cost-saving strategies, but it’s important to keep an eye on competition. GE is making major investments in R&D, while Vestas is reducing spend in this category and instead focusing on product development. [10] [11] As a company with an extremely low debt to equity ratio, Vestas should also invest more money in R&D and focus on improving technology to drive down costs. [5] Furthermore, large turbine vendors have been purchasing rivals as a tactic to increase its strategic position and market share, such as Siemens’ recent merger with Spanish company Gamesa, the Spanish wind and renewable energy group. Other players have acquired companies “upstream in the value chain,” which is exemplified by GE’s April 2017 acquisition of LM Wind Power, the world’s largest turbine blade manufacturer. Vestas would be well served to consider forming partnerships with other industry players in not only wind, but also other renewable energy assets around the world. Government-controlled Chinese companies, like its largest hydropower plant, China Three Gorges, has become an international player by acquiring German offshore wind park Meerwind. [12] [13]

In this vein, it is also important for the firm to carefully track competing forms of renewable energy, like solar and nuclear power, and anticipate additional energy cost reductions as more countries gravitate to auction-based contract awards. The auction victors are the suppliers of the cheapest electricity, and Vestas can win if it keeps its costs low. [5] Unlike GE and Siemens Gamesa, since Vestas currently focuses solely on production of wind turbines, it should continue to capitalize on economies of scale as an advantage towards cost reduction.

As the future of renewables continues to evolve, some questions are worthy of consideration:
(1) How important is speed to market in emerging markets, like India, that don’t yet have a well developed power grid in place?
(2) What will be the role that solar power plays in the innovation of wind power, as technology continues to improve? (764 words)



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Student comments on Profits Starting To Wind Down: A Setback for Wind Turbines?

  1. This piece illustrates a very important question for solar and wind manufacturers: how to preserve value as renewables become increasingly commoditized. Renewables costs have fallen dramatically over the last 10 years, through economies of scale and more competitive policy measures (the shift from direct subsidies to auctions). Turbine manufacturers need to find ways of generating greater value to survive in the more competitive landscape. The piece talks about several options: providing operation & maintenance services, opening up new markets and investing in R&D. The companies could go further. First, increasing activities in offshore wind (typically larger, higher value projects with fewer existing competitors). Second, providing more broader energy services. Wind companies have partnered with battery providers to provide less intermittent energy. But by owning project development of the batteries themselves, these companies could provide a higher-value service to the grid. This could be a more attractive opportunity than similar companies providing solar with storage as costs of wind energy tend to be slightly lower than solar (depending on how good the resources are).

  2. Interestingly, many experts have only limited enthusiasm for the future of on-shore wind power, that is, by comparison to their enthusiasm for wind power generated over deep ocean waters. There are several reasons for this: one, “wind speeds can be as much as 70% higher [over ocean waters] than on land,” and two “the potential energy that can be extracted over the ocean, given the same area, is at least three times as high” [1]. The science behind the increased productivity of off-shore wind farming is somewhat complicated, but the bottom line is that with so much untapped potential, it is likely that in the mid to long-term wind energy production will shift increasingly off-shore. Given this, it makes sense for a company like Vestas to double down on R&D to advance this technology while there is still ample regulatory support for innovation and implementation in renewable energy. In addition, emerging markets, like those the in certain parts of India, would be prime targets for Vestas deploy existing wind power technology, as well as launch innovative off-shore wind energy production technology.

    1. Mooney, C. (2017, Oct 16). Ocean WINDS ‘could power the WORLD’; deep water next step for technology. National Post Retrieved from

  3. Great article highlighting the double edged sword that is renewable energy price improvement. While I completely echo the points Kieron makes, a question I have is if one particular source of renewable energy is more likely to succeed in the long term. Till date, wind has held a slight edge over solar due to lower costs and more reliable supply (sunlight is only available for about 30-40% of the day and battery technology has only recently improved). This is likely to change in the future as prices of solar panels and batteries continue to drop, while wind may have reached a plateau.

    Solar is also just as adaptable to dense urban landscapes as it is to large solar farms in rural regions. Unsurprisingly, rooftop solar has been one of the most rapidly growing market segments in the energy industry of the last few years. The potential of offshore wind farms is quite interesting and could be a avenue for Vestas to explore.

    I believe renewable energy providers will have to be clearer about their distinctive value proposition as we move into a (promising) era where renewable energy sources are no longer PR stunts and experiments, but compete with conventional fossil fuels at a market level.

  4. I believe wind turbine manufacturers are going through the same restructuring solar panel companies experienced a few years ago due to strong Chinese competition [1]. While it is a pity to see pioneer wind turbine companies such as Vestas currently fighting for survival, I see this as a positive development because end users can benefit from cheaper energy sources. Indeed, the full transition from fossil energy to renewables can only happen with the commoditization of wind turbines and solar panels, leading to competitive renewables energy costs.

    Regarding Vestas, I would challenge the view that they could strongly benefit from the Chinese market as it is mostly a captive market, dominated by local firms [2]. I agree with you that Vestas should focus on R&D and production yield improvement in order to drive down cost per MW and remain competitive. However I believe that competition, especially from Chinese companies, will eventually catch up on technology and in the long-term, Vestas will have no choice but to further consolidate in order to achieve economies of scale and survive.


  5. I was surprised to see that the net result of lower wind energy prices would be negative pressure on profitability for turbine manufacturers like Vestas, given that the expectation would be the lower prices would increase demand for the product and thus be supportive for volume growth. While it’s reasonable to think stronger demand would lead to increased competition, I would have expected the percentage change in volumes to outpace any potential price pressure, especially if the major suppliers were collectively operating near capacity (in which case there would be no reason to see deflationary price competition).

    This analysis leads me to believe that profitability is not suffering from increased supply competition, but rather from Vestas’s ability to efficiently scale their own production from an operational standpoint. It’s important to remember that failing to meet contracted production milestones for a manufacturer like Vestas can be incredibly costly, since utilities have usually already agreed to sell the expected energy production to local governments under long-term power purchase agreements (PPAs), and turbine manufacturers like Vestas generally agree to pay the generation company’s penalties if the power cannot be produced due to the manufacturer’s inability to meet the agreed upon timeline. I believe a few of the facts provided in your memo would support this interpretation – A) Vestas has chosen to invest in product development rather than R&D, and B) the commentary from management indicates that profits were hurt by production delays and increasing backlogs.

    If the above is the case, then I actually believe that spending additional investment in R&D would not be the best solution. Rather, Vestas should spend money analyzing their own production process and identifying any structural flaws that would prevent them from growing production at a fast enough rate to keep pace with growing demand.

  6. I would agree with Alexandre — while the company is facing headwinds from a margin and competition standpoint, the net result for end consumers (and humanity in general) is positive as cost per megawatt-hour of clean wind power comes down. The real question to me is the extent to which government subsidies and/or a flood of venture money into the space historically skewed economics in the space. Government incentives subsidized the clean energy industry when there wasn’t much competition and while costs to end consumers were high. Similarly, venture funding allowed companies to operate with potentially less efficient business models than would have otherwise been required. Cleantech VC investing has dropped from a high of over $7B in 2011 to $5B in 2016 [1]. As venture funding / incentives drop, these companies will have to reckon with marketplace adjustments. That’s not necessarily a bad thing and in the end, we will benefit from more resilient companies / business models supplying the world with clean energy.


  7. The question of expanding into adjacent industries (e.g. battery storage, maintenance services, etc.), raise by both Michelle and Kieron, is an interesting one not just because those adjacent industries are high margin, but because they have significant externalities on Vestas’ core business of creating wind turbines. In the overall supply chain of providing energy to consumers, the supply chain partners include the wind turbine manufacturer, operator, distributor, and others. Just like in the Beer Games where our objective was to reduce overall supply chain costs, so too here is there an opportunity to reduce overall costs by thinking think about the supply chain holistically and the inter-dependencies of different suppliers. For instance: turbine operators cannot access customers without good power transmission, and as wind turbines begin to be located further from urban centers (e.g. offshore) any reduction in the power lost per mile on of transmission will be increasingly important. As another example, as wind energy becomes a larger portion of the overall grid, it will become more difficult to manage intermittency without energy storage (e.g. batteries). Vestas should consider partnering with “supply chain partners” like these not only because their businesses are higher margin, but because doing so will increase the margins of Vestas’ core business as well.

  8. Thanks for writing this piece, Michelle. It is an exciting time to see the entry of renewables in markets such as India and China. As Nate alluded to, it would be interesting to analyze the effects of government policy, particularly in the instance of a subsidy scheme. For instance, the government of Spain heavily subsidized the renewables sector to meet some of its clean energy goals in 2009. The underlying economics of the scheme were not economic to begin with. As the government aided the companies to develop the clean technology infrastructure via loans and tax breaks, much of the higher operating expenses were passed on to businesses and consumers. This resulted in making energy-intensive industries much less competitive.

    I also wonder how public opinion could affect project sanctioning. Public opinion of nuclear energy undergoes a massive step change any time an accident happens. Are there PR risks with wind farms that operators need to consider?

  9. Thank you for writing about such an important topic. I see the challenge here as a double-edged sword; on the one hand, decreasing prices cuts margins for wind turbine manufacturers (companies we’d ideally like to see succeed), but we also want to foster competition to ensure best practices rise to the top with the lowest costs emerging into the market. I think another challenge here is the actual tie of wind turbines to the grid. In what is usually a lengthy process (assuming it gets past design, approval, regulatory agreements, “not in my backyard”-ers, and so on), interconnecting a wind farm to the electric grid is challenging but also an opportunity. If these wind turbine companies create partnerships with members along that supply chain–especially the utility–I think they could see more success and start to overcome the incumbent types of power plants. For example, if the wind energy company formed an alliance with a local utility, then perhaps the utility would be more incentivized to figure out how to best incorporate wind into the energy mix. Increasing demand in this way may help companies become more profitable. I think the challenges here would be in the regulatory space, but given regulators’ recent pushes for clean energy and zero emissions goals, lobbying for some type of alliance in this way may just prove successful. Thanks for sharing your article!

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