Our Q3 take on the wind sector: it’s blowing hot and cold

Every three months, and over the course of about four weeks, listed companies release their quarterly results. These help financial analysts and portfolio managers assess if a company is delivering as expected, then work out if it’s still on track.

As specialist climate investment professionals, we couldn’t help but notice the usual suspects’ relative weakness in the wind value chain. Cyclical and policy headwinds as well as other issues all contributed to the most striking development of this earnings season that impacted some key players. Let’s take a deeper look at the results:  

• Orsted (November 3rd) – the largest offshore wind developer experienced much lower than planned wind speeds that cost the company roughly DKK 1 bn of adjusted EBITDA (some 3% below expectations), which led to speculation about how wind speeds could evolve over time.
• Vestas (November 3rd) – the largest onshore wind turbine manufacturer experienced very weak margins due to cost inflation, higher energy costs, logistics challenges and component shortages, along with much weaker than expected order intake. Customers are waiting to better understand how clean energy tax breaks in the ‘Build Back Better’ bill will fare in the House and Congress. Over the past decade, fiscal incentives have been paramount for wind to take off in the US and the lack of clarity is causing a temporary buyers’ strike. 
• SiemensGamesa (November 5th) – the largest offshore wind turbine manufacturer fell in line with Vestas before reporting results that were actually more resilient than feared. Due to its greater exposure to offshore wind, and somewhat smaller exposure to US onshore wind, global investors are most likely to ‘hide’ in SiemensGamesa to retain exposure.
• TPI Composites (November 8th) – this leading manufacturer of wind turbine blades faced much lower margins due to all of the above, including production issues in Mexico and weaker orders, similar to Vestas. 

Q3 2021 results have reminded us all that secular tailwinds can be more than offset for a time by cyclical issues of cost inflation, tight supply chain and logistics constraints. Policy issues like lack of visibility regarding the US PTC extension,  weather issues when the wind doesn’t blow as planned or specific issues like production lines not hitting their nominal cadence can also play a key role. 

None of these companies were in the top 40 equities across our three portfolios as of the end of October. Indeed, our selection in the clean energy space is predominantly through the solar value chain (First Solar, Solar Edge, Enphase) along with onshore wind producers like NextEra Energy. 

Longer term, we remain convinced that wind energy has a key role to play to decarbonise our economies:  

• Despite a mixed result at COP26, more countries made net zero pledges. According to the IEA, reaching net zero by 2050 means installing wind capacity of around 390 GW a year by 2030 (compared to 114 GW in 2020) and needs to stay near this level at around 350 GW to 2050. 
• Wind energy costs have fallen dramatically over the past decade – 50% for onshore wind and 38% for offshore. The secular drivers behind additional cost reduction remain firmly in place: turbine size, capacity factor and lower cost of capital according to IRENA. Costs can drop further with emerging technologies such as floating wind farms that are further offshore and capture higher wind load and speeds.  
• The market structure for wind turbine manufacturers is favourable, with three large international players (Vestas, GE and SiemensGamesa) and two dominant domestic players in China (Goldwind and Envision). This top 5 accounts for  about 65% of the total wind power installed in 2020.