Source: Bloomberg
(Bloomberg) -- One of the world’s biggest wind turbine makers wants to hold onto recent price gains — rather than pass on savings — as it bids to bolster earnings.
That’s the conviction of Anders Runevad, chairman of Denmark’s Vestas Wind Systems A/S. It’s a clear signal the industry is focusing on turning a profit, not passing on cost cuts to customers, as the wind power sector will need to grow tremendously in the coming years to hit government goals to limit climate change.
“I don’t think that there is a need to lower the prices since we are competitive already,” Runevad said in an interview from his office in Copenhagen. “Wind is cheap enough.”
The wind turbine industry is working its way out of a crisis after soaring prices of key commodities like steel, supply chain bottlenecks and rising transportation costs left manufacturers reeling. Vestas lost over €1 billion ($1.1 billion) in 2022 as the company struggled to keep up with shifting market fundamentals.
To get back on solid financial footing, Vestas raised prices, upending a years-long trend that saw wind power costs consistently decline. The abrupt shift left some customers unable to build projects as they’d already agreed to sell power at a price that would be too low given the new higher costs of equipment.
But for Vestas, it was necessary, and the company managed to eek out a small profit in 2023. This year, it aims to raise its profit margin to as high as 6%, a fourfold increase on last year.
Decent Return
Some important costs have come down. Steel used in turbines is less than half the price it was at the peak in the spring of 2022, although still above pre-pandemic levels. But that doesn’t mean Vestas will start lowering prices. The priority is to reach a profit level that’s high enough to sustain investments that are critical to delivering higher volumes in the coming years.
“All industries have to have a decent return on their investment, a reasonable profitability,” Runevad said. “It is important to prioritize value before volume to make sure that that we grow in a financially sustainable way.”
Runevad first joined the company as chief executive officer in 2013. Back then, the company and its competitors were trying to prove that wind power could get cheap enough to be a viable alternative to fossil fuel-powered plants.
Investments in bigger and more efficient turbines helped the wind industry undercut coal and gas-fired plants in many key markets. Despite the recent cost increases, wind can still be still cheaper than fossil fuels on a levelized cost of energy basis — a measure of the lifetime cost of building and operating a power plant — according to BloombergNEF.
So the main driver of cost cuts that’s left is competition from other turbine suppliers. That doesn’t seem to be much of a factor recently.
Despite raising prices, Vestas had a record number of new orders last year. One of the biggest competitors, the wind unit of Siemens Energy AG, stopped selling onshore turbines last year as it sought to solve a technical issue. With the industry broadly in recovery, there’s little sign of a resumption of the stiff competition that shrunk margins before the most recent crisis.
“Today there is no pressure from a level of cost of energy point of view from fossil fuel on us,” Runevad said. “We just have to make sure that we all behave in the wind industry.”
