By Gordin Hughes. Source here: Wind costs will remain high (netzerowatch.com)
The share price crash of Siemens Energy has strikingly exposed a problem with wind energy costs that colleagues and I have been investigating for more than a decade. The painful facts are that (i) wind power generation, both onshore and offshore, is more expensive than we’re told and (ii) wind turbine performance tends to deteriorate as they age, largely because of the type of failures Siemens Energy has been identified. There is strong evidence to support these conclusions, which has been presented in reports published by the Renewable Energy Foundation in 2012 and in 2020 for the UK Denmark, with updates from the Global Warming Policy Foundation and Net Zero Watch .
The news about Siemens Energy evokes a strong tendency to say ‘you were warned’. Their trials, however, are a symptom of a more widespread disease, affecting all of us, either directly through the cost of electricity or indirectly as wind farm owners (through pension funds and other investment vehicles). Siemens Energy’s share price decline is dramatic, but that can be written off as a temporary market reaction to disappointed expectations. We need to dig a little deeper to understand the reasons for the disappointment and their implications for the outlook for wind energy.
The announcement by Siemens Energy targeted higher-than-expected failure rates for their onshore turbines. These were attributed to problems with key components, but newspaper reports suggest more systematic design flaws in recent generations of large turbines. Previous announcements have focused on problems with offshore turbines, and the market reaction suggests that few believe the current problems are limited to onshore turbines. Further, while each of the major turbine manufacturers has its own specific issues, Siemens Energy is not alone in facing high warranty costs due to higher-than-expected failure rates.
In ascending order of importance, there are three aspects to pay attention to:
(a) Siemens Energy and other manufacturers have made warranties of performance that will not be met due to higher failure rates. They will incur additional costs, either to replace components or to compensate wind farm operators for any resulting underperformance. Those costs are the basis for the depreciation that Siemens Energy had to take. Investors will be painfully aware that the company is declaring profits on wind turbine sales, but without making adequate provisions for future warranty repair costs. In accounting terms, this is known as recognizing future profits for new business. When it becomes clear that the contracts will be less profitable, the company has to write off the value of previously reported profits and therefore the value of the assets on its balance sheet. In fact, though perhaps wholly unknowingly, the company has misled investors about its past and present profitability. Senior managers should feel very uncomfortable about their position as the problem was predictable (and predicted).
(b) Warranties have a limited period – often 5 to 8 years – but the higher failure rates will persist and affect performance over the remainder of the life of the wind farms where the turbines are installed. Their future operating costs will be higher than expected and their output will be significantly lower. This will shorten their operational life, which is determined by how the margin between revenues and costs changes as wind farms age. Lower revenues and higher costs bring forward the date when replacement or repair is required. These changes will often significantly reduce the returns of the financial investors – pension funds and others – to whom operators sell most of the shares in wind farms after a number of years.
(c) Siemens Energy and other manufacturers can claim that they can – over time – solve the component and design problems that lead to high failure rates. They could be right. The history of power engineering is littered with examples of new generations of equipment that encountered major problems when first introduced, but were eventually resolved. Many companies have run into serious financial difficulties or even went bankrupt due to these “teething problems”. The mistake in this case was to pretend that wind turbines were immune to such disturbances. The whole justification for the falling cost of wind generation rested on the assumption that much larger turbines would produce more output at a lower cost per megawatt, without the high cost of generation change. Now we have confirmation that such optimism was completely unjustified – the whole development process was a case of too far, too fast. Again, this was both predictable and predicted.
The idea that wind turbines are immune to the factors that influence other forms of power engineering has always been absurd. As a result, both capital and operating costs for wind farms are not falling as fast as claimed and may not fall significantly at all. It follows that current energy policy in the United Kingdom, Europe and the United States rests on quicksand – naive optimism reinforced by enthusiastic lobbying detached from technical reality.
In the longer term, (b) and (c) are the big story. With regard to (a), serious analysts have long recognized that claims about future wind costs and performance by the wind industry should not be taken seriously. It is clear that they have been fooling themselves and their investors since the last 2010s. Unfortunately, we are now bound by a future with high energy costs, with all the consequences for the economy and living standards.
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