Wind Power Supply Chain in Trouble as Turbine Market Contracts

Global demand for wind turbines is expected to drop by as much as 5 percent this year for the first time since 2004, new analysis has found.

According to a new report from analysis firm MAKE Consulting, the predicted market contraction is due to a “perfect storm” of contributing factors leading to pressure on the wind power supply chain. Increasing competition has resulted in lower profit margins, while declining demand in key markets has forced companies to make capacity adjustments. At the same time, greater investment is required in order to enter emerging markets with local content requirements and to keep up with the industry’s growing demand for larger wind turbines.

Declining demand in key markets can be largely attributed to policy changes and ongoing policy uncertainty, the report found. In the most hard-hit markets – Spain and the U.S. – there have been significant layoffs and facility closures over the past year. In Spain, where the government has suspended all renewable energy subsidies, capped profits and increased taxes, the market contraction is so severe that suppliers must rely heavily on export orders to remain viable, the report said.

MAKE’s analysis of capacity adjustments by Spanish OEMs shows them pulling back in order to concentrate production at Spanish facilities, with a focus on exporting components to North and South America and emerging EMEA markets. And several OEMs have announced that they are even reducing their manufacturing capacity in Spain. The Spanish wind market’s future now looks bleak according to MAKE, which doesn’t predict a recovery until 2017, and a slow one then.

In the U.S., the supply chain has been stressed by slack power demand, the shale gas boom and an ongoing boom-and-bust cycle resulting from continual policy uncertainty. Doubt about the last-minute extension of the Production Tax Credit (PTC) and Investment Tax Credit (ITC) caused a drop in demand in 2013, as developers were unwilling to place new equipment orders without policy certainty. Low order intake since the first half of 2012 has reduced profits throughout the supply chain, resulting in production capacity adjustments across the industry, the report found.

As companies increasingly look away from traditional wind markets for growth opportunities, local content requirements in emerging markets are causing new problems, MAKE said. Manufacturers, many in tight financial situations, are having to carefully weigh the benefits of investing in new production facilities in order to enter these markets.

While the immediate future looks challenging, MAKE’s analysis views the current downturn as a window of opportunity for innovation and the rise of new business models. Traditional OEM procurement strategy uses multiple suppliers, creating competition that controls costs and forces innovation, but during periods of weak demand this model doesn’t work well for second- and third-tier component manufacturers. As vertically integrated wind turbine OEMs consider divesting their in-house supply chain activities, there is an increasing trend toward hybrid sourcing strategies and partnerships, and suppliers are diversifying in order to reduce dependence on new wind turbine demand, the report said.

There is even cautious optimism about opportunities in historical key markets. About the U.S., MAKE partner Dan Shreve told REW that its continuing tepid growth “provides significant challenges to turbine OEMs, but also opportunity for strong differentiation among technology leaders able to reduce their turbine’s portfolio’s levelised cost of energy.”

Lead image:Wind turbine blade via Shutterstock

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