How the wind industry will navigate unprecedented times ahead
Published on 23rd of March 2020
President of Sales and Service in the United States and Canada at Vestas
It sounds cliché to say, but there is no getting around it: We are living in unprecedented times. The world is facing a growing pandemic, the likes of which we have not seen in modern history. The impact will be felt heavily throughout every industry in the global economy. And the impact will also be felt in every home and at every dinner table as we all make sacrifices to fight this disease. The objective for everyone moving forward is going to be perseverance and a focus on recovery.
For the wind industry – this is not the first time we’ve faced difficult times. We will ultimately overcome this challenge, and the tools we have at our fingertips will keep us going now and into the future. But let this be a reminder about the importance of long-term planning and mitigating risk in order to achieve success. Wind’s future success will rely on three fundamental ideas our industry has already established. We thrive when we work together to innovate technology advancements, improve development processes, and create better service structures.
It is true that the clean economy has the technology necessary today to solve the climate crisis. But that doesn’t mean we should stop improving wind turbine technology. In fact, in a post-PTC landscape, there will be an even bigger emphasis on deploying improved turbines that increase project revenue.
For years, Vestas has ensured that we’re investing in the technology that will not only better position our company for the future, but the entire industry. Vestas spent almost $400 million in total research and development in 2019 alone. And Vestas, along with other companies such as Nordex, Siemens, and GE, have spent nearly a combined $3.6 billion in R&D between 2015 and 2018.
The resulting gains in turbine efficiency are considerable. Over time, the industry has produced bigger, longer blades that capture more wind, increasing the geographical range of where wind projects can be developed. When we compare a turbine from 2015 (V110-2.0) to a 2019 turbine (V150-4.2) at the same height and wind speed, we see an energy output gain of 100 percent from 9.0 GWh to 18.0 GWh. Without even considering advances in tower technology that could add another 15 percent in energy output, our new turbines are capturing 100 percent more energy in five years than older turbines.
According to calculations by the Vestas Americas Market Intelligence Team, gains in energy output from improved turbines undoubtedly equate to gains in revenue. Without the PTC, a one percent increase in annual energy production increases energy revenue per machine by around one percent. Our team looked at a 250 MW, land-constrained windfarm located within the U.S. wind belt and found that with improved turbines, LCOE improved by 14 percent, and gross profit increased by 20 percent.
Years ago, there was pretty much one primary consideration in siting a wind project: What areas have the best conditions? Kansas or Oklahoma would come to mind. Of course, wind developers are still looking for optimal wind conditions today. But our industry has gotten smarter about where the best spots for projects are, and it doesn’t always mean where it is windiest.
The industry has moved to smarter siting of wind projects by developing projects closer to load. Developers have the capabilities to build optimal projects across the country using a combination of tools. Advances in turbine technology mean developers can design sites that minimize wake losses and maximize output in diverse locations. And as we see more turbine manufacturers and developers work together, we see LCOE improvements and market-led technology pipelines develop.
We also have new offtake structures that look significantly different than they did years ago. The result is an overall healthier financing environment for the wind industry. It used to be that only utilities bought wind from developers with 30-year offtake agreements. This narrowed the pool of potential off-takers because all the project performance risk related to power price fluctuations and weather was placed on the off-taker. Smaller retail suppliers and commercial and industrial customers (C&I) weren’t able to wear that risk like large utility companies.
But in the last five years, the demand from C&I customers has risen. This new type of customer has different needs than utilities. They want shorter-term contracts and want those risks to be shared. As a result, offtake structures have evolved that enable better project risk sharing. We’ve moved to better equilibrium by transferring some risk back to the developer. Now, more players can participate in offtake, including smaller commercial and industrial customers. The new approach to financing and developing projects has undoubtedly had a significant impact on the demand for wind development, which will continue to drive the industry in the years ahead.
Some asset owners within the wind industry believe they are better off self-performing on their wind farms. Austin Schroll, Head of Service and Aftermarket Sales at Vestas, has written extensively on why that’s not the case. As Austin outlined, Vestas has moved to longer-term service agreements because it is ultimately better for individual customers and the economics of the industry.
Longer-term service agreements allow the OEM and developer to most efficiently service turbines and adequately plan for future component replacements in a way that self-performers cannot. Because of an OEM’s scale of operations, purchasing power, project data, modeling capabilities, and labor force, we can better service projects to avoid component failures. That ultimately means more power, less downtime, and better bankability for customers. Our longer-term service agreements are, in many ways, the “preventative medicine” of the wind industry, helping avoid emergency service situations. And we need to prevent emergency repairs throughout the industry as much as possible to maintain strong economics.
In addition to longer-term service agreements, the industry is developing creative solutions for repowering older projects. There is an addressable market of 30 GW of operating turbines that are due for new components. Projects constructed between 2011 and 2015 will be reaching repower opportunities between 2021 and 2024. Successfully repowering and subsequently servicing those turbines and towers means building the bridge to a stronger future for the wind industry.
Winning the future
Even though the story of the American wind industry is a story about incredible success, at our core, we are the underdogs. For years, critics and naysayers have falsely claimed that our growth hinged entirely on the PTC. But we know otherwise.
Our Market Intelligence team recently took a look at third-party wind market forecasts. They compared these forecasts from April 2016 right after the PTC was extended in December 2015 to forecasts from November 2019, right before the PTC was extended again.
This chart clearly shows that market projections grew and that analysts underestimated the might of American wind power. Industry efforts at all levels of the wind value chain—not a PTC extension—helped grow these numbers both in forecasts and reality.
The world is in a sea of uncertainty at this moment. Even though this is in many ways an unprecedented moment in history, our industry knows the recipe for success now and into the future: technology innovation, advances in development, improved service, and the great people who push this industry forward every day