Wind margin pressures shift from turbines to service market

Intense competition is slicing wind operations and maintenance (O&M) prices, lowering margins towards turbine margin levels and attracting a new type of service provider, Oliver Metcalfe, wind power analyst at BloombergNEF (BNEF), said.

European and North American wind installations are set to surge in 2019-2020 as falling costs and U.S. tax credit deadlines stoke project demand.

In Europe, wind installations are set to hike from 8.4 GW in 2018 to 13.9 GW in 2019 and 11.6 GW in 2020, according to BloombergNEF (BNEF). In North America, installations are forecast to rise from 8.3 GW in 2018 to 10.8 GW in 2019 and 11.9 GW in 2020.

Increasing price competition has squeezed the margins of turbine suppliers and spurred market consolidation. The top 10 turbine manufacturers increased their global market share from 70% in 2015 to 85% in 2018, BNEF data shows.

Turbine prices have fallen 55% over the last 10 years and recent tariff bids by developers show further price reductions are expected from 2020 onwards, Metcalfe told the Wind O&M EU 2019 conference on February 27.

"We might really start to see those turbine margins squeezed again," he said.

Falling margins have prompted turbine suppliers to expand in the O&M market, where margins have remained higher.

For the major suppliers, margins for services are reportedly above 20% while margins for turbine supply are below 10%, BNEF studies show. However, the latest data shows this gap is narrowing.

"O&M prices have begun to fall in the same way that turbine prices have," Metcalfe said.

"If this trend continues we can expect to see those high service margins begin to thin out in the same way as we have seen for turbines," he said.

Falling prices

In the O&M market, original equipment manufacturers (OEMs) compete against independent service providers (ISPs) and operators' in-house O&M teams.

These companies are using economies of scale, improved spare parts strategies and the latest data analytics technologies to reduce O&M costs. The trend towards larger, higher efficiency turbines is also reducing O&M costs on a cost per megawatt (MW) basis.

Global prices for initial full-service contracts have fallen from an average $26,400/MW/yr in 2016 to $18,100/MW/yr in 2018 according to BNEF's Wind Operations and Maintenance Pricing Index. In some markets, contracts are trading at far lower levels, BNEF data shows.

Growing turbine capacities will mean that fewer turbines are required to achieve capacity targets, which will impact the size of the O&M market going forward, Metcalfe warned.

In 2018, O&M costs for turbines of capacity 3 to 4 MW were significantly lower than for 1 to 2 MW turbines, on a $/MW basis, Metcalfe said.

"Due to the fact that we will be installing larger turbines and fewer turbines, means the O&M space could shrink," he said.

As the removal of wind tariffs exposes more projects to wholesale prices, operators are also looking to transfer more production risk to O&M providers.

Wind farm owners are switching from time-based availability guarantees to performance-based guarantees, including energy-based guarantees where the service provider takes on wind resource risk.

Service charge

Increasing competition is seeing a new class of speciality O&M supplier emerge, according to U.S. market research conducted by BNEF.

These speciality companies typically focus their services around a certain major component, such as gearboxes, generators or blades, and they are starting to supply their services direct to asset owners, Metcalfe told the conference.

The emergence of these firms allows asset managers to sign a lower cost O&M contract and call on the specialist maintenance groups to perform major component work when necessary, Metcalfe noted.

"This means that if you are an asset manager, you can optimize your operations and maintenance strategy according to your desired level of risk," he said.

As operators continue to seek lower prices, new service market offerings combined with data driven advancements will continue to disrupt the O&M market, Metcalfe said.

"We are really standing at a pivotal moment in the onshore wind O&M space today...The whole structure of the market is changing," he said.

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