This is Dana Perkins and you're listening to Switched on the bn EF podcast. On today's bonus episode about the Things to Watch in twenty twenty four, we speak with BNF's head of Wind Research, Oliver Metcalf, and he shares what we should be thinking about in the wind sector in the year ahead. The conversation takes us across the world and across the wind value chain. For example, we talk about offshore wind and whether twenty twenty four will
offer stability for wind developers following last year's turbulence. We also discuss Chinese manufacturers and whether we can expect another year of very low prices and margins for turbines coming out of China. And finally we turn to auctions. Following some notable flops in twenty twenty three, are we set
for a more positive twenty twenty four. To access the accompanying research note titled wind Ten Things to Watch in twenty twenty four, b and EF subscribers can find it on BNF dot com and at bnof go on the Bloomberg terminal. As always, if you like the podcast, give us a review you and subscribe on your device. But right now, let's speak with Ali about what lies ahead for wind in twenty twenty four. Allie, good to have you back on the show today.
Thanks Dane, No great to be here.
We are here to talk about the year ahead for wind, one of the really central parts of the energy transition for renewables. And I want to know how you did against your scorecard in twenty twenty three when you last took a look at making some predictions.
Well, we did pretty well, actually, so by our own grading that might be a bit of cheating, but we had seven predictions that were correct, two predictions we thought were somewhat correct, and then one that didn't go so well.
So I actually think you'd be surprised how many of the teams, because you know, we're doing a series of these shows over the course of this month, and some teams were overly optimistic headed into twenty twenty three and
kind of got knocked back a little bit. But this year, would you say that your twenty twenty three predictions were optimistic or maybe had kind of a more somber tone, Because I'm leading into the fact that what we're going to talk about today is largely an optimistic twenty twenty.
Four I think we were quite optimistic last year. The one we did slightly less well on was very much too optimistic. We thought that governments around the world were going to be really positive and auction off a load of seabed areas for floating wind projects. Floating wind is a newer technology during twenty twenty three, and actually what happened was there were a load of delays. These auctions for seabed kind of hit hurdles and it meant that there was only one auction in the event last year.
It was an auction for sites off the coast of the UK, and we saw delays for another auction in the UK and for an auction in Norway, and we're still waiting for Spain and Portugal to set out the regulatory process for a floating offshore wind project in those countries. So it was not as good a year for the floating wind sect as we're predicting in twenty twenty three. One of my favorite predictions that we actually got right
last year was around offshore wind financing. So at the beginning of last year we predicted that it would be a record year of offshore wind financing activity in twenty twenty three. Now the offshore wind industry had a really tough twenty twenty three. In the end, there was high inflation, there was rising interest rates, and that has a disproportionate
effect for a capex intensive industry like offshore wind. So that led to many developers asking governments to renegotiate their off take contracts, even canceling projects in some cases, and developers were kind of finding out that the finances didn't really stack up on those projects. But actually, as we've been crunching the numbers at the end of the year, we've seen that the industry did in fact hit a
new financing record outside of China. We're still learning up those numbers for inside China, but it's great to see that really validates our view that this is a sector on an exciting growth trajectory after all, and developers really made things work despite a really challenging year last year.
You had mentioned how inflationary pressure did have an impact last year in twenty twenty three, yet the industry still made a lot of progress in terms of wind installations. As we're still grappling with that this year. What does twenty twenty four have in store for wind installations and do you have a prediction against that.
Well, there's a general expectation in the market that will begin to see interest rates fall in many countries over the course of this year. That's vital for wind developers because in the same way that a central bank interest rate determines the rate of a mortgage that you might pay on your house, it also forms a base rate for loans that developers take out to build a wind farm.
And so those falling interest rates will be crucial for new financing activitivity and new investment in twenty twenty four. So we're actually expecting the biggest year yet of wind installations in twenty twenty four, and a big part of that story is about the US and China. So those
are the world's two largest markets. So China is continuing to build these batches of giant projects in the deserts in the north of the country, and it's also ramping up off your wind bill to hit installation targets that are set for the end of twenty twenty five across all different provinces. And then in the US last year we began to see a lot of progress in defining the rules and regulations around the Inflation Reduction Act, so that was a big bit of climate legislation that the
country passed in twenty twenty two. Now that led to a boom in turbine orders last year, and we're expecting to see some of those projects come online in twenty twenty four, So a really good story for onshore wind in the US. And the US is also going to commission its first two commercial scale offshore wind farms this year, So a really positive year for the world's two largest wind markets in twenty twenty four.
So last year did have some delays for wind turbines and things were pushed back in some cases by a number of months. Do we see I guess the manufacturing sector catching up in the year ahead. Are they still going to be grappling with what you're pointing out is increased demand.
Well, we're expecting to see the momentum of that strong US order intake for turbine makers continue in twenty twenty four. Now that's a really really good sign. But we're also expecting to see something similar in Europe. So Germany and Spain are starting to implement reforms for onshore wind permitting and that's boosting the pipeline of projects that are able to bid for government subsidies and are able to come
through that development process. So we're expecting this year for kind of European project developers to start putting in more and more orders and begin to match some of that activity we saw in the US last year. So that's a positive thing also for the profitability for some of these wind turbine makers that struggled over the last few years. These companies have been fighting against negative margins on their turbine sales, so this increasing order book is really positive news.
And we saw Vestus, one of the world's largest wind turbine makers, announce a profit in their third quarter of last year for the first time in a while, and so that's a positive trajectory in terms of Vestas, but also some of the other turbine makers that we're siving more positive announcements. It doesn't mean that some of these
companies aren't still subject to global market impacts. So we saw new logistics bottlenecks start to arise because of some of the disruption that we've seen to shipping in the
Red Sea. So we track vessel traffic through the Sewerz Canal and we saw that plummet since we've seen commercial ships being targeted by militants in Yemen, So that means that the price of shipping a container from Shanghai to Rotterdam, which is a really important shipping route for the wind supply chain, that's more than quadrupled since the beginning of December last year. So, in general, a positive picture for the wind supply chain, but there are some effects that are providing new barriers.
Okay, we'll have to watch what happens with these supply chains and then what does this all mean for costs and essentially wind turbines what they're going to end up costing. I know that contracts are being secured already now for next year, but for any new contracts that are being secured going forward, will turbine prices likely go up or down?
The good news is that some of the input costs for manufacturing a turbine have started to come down. That's part of the story that's helped turbine makers begin to move towards profitability again. We're expecting turbine makers to keep those prices high though, despite those falling input costs. Not so good news for developers, but it's really going to help turbine makers return to profitability in the long term, and that'll be a good thing for the wind industry as a whole.
What's happening with Chinese manufacturers, So you're mentioning that in some parts of the world they're just now starting to turn a profit, but in China, the winterbines are actually selling for even less. Are they essentially going to raise their prices in order to turn a profit or are they able to find different cost reductions that are not available in other parts of the world.
So for the Chinese turbine makers, that's someway that we're predicting a little bit more strain on profitability. So China cuts national subsidies for onshore wind at the end of twenty twenty for offshore wind at the end of twenty twenty one. That put a lot of pressure on developers to still deliver projects, and they pass that pressure onto
their suppliers. Chinese turbine manufacturers like Goldwind Minyang. There's a company called Windy, and they're really kind of pushing them to cut their prices so that they could make those projects work. That's meant that Chinese wind turbine prices have
hit pretty astonishing load. So in the second half of twenty twenty three, we saw that Chinese turbine prices had fallen by fifty seven percent compared with the first half of twenty twenty and that kind of steady decrease in prices has really stressed profitability for some Chinese turbine makers.
So Goldwin, the biggest Chinese turbin manufacturer, we saw their margins for their manufacturing and sales segment decreased from seven point two percent in the second half of twenty twenty one to minus ten point four percent in the first half of twenty twenty three. And similarly, we saw ming Yang's margins fall from thirteen point one percent to one
point one percent over the same period. So we're seeing some of this kind of steady decrease in prices start to challenge turbine makers, and there's no real indication that we'll see prices rise again this year, and so it could be another tough year in terms of turbine sales profitability for these Chinese turbine makers.
So last year, one of the things that we saw was that even though there were a lot of projects that happened, there were a few option flops, and do you think governments will be changed essentially some of the way that auctions and the off takes work in the year ahead in order to stop so many of these from happening.
Yeah. So the UK government held an auction last year that had a really low price cap and the sector basically complained that that didn't effect didn't account for all the cost increases that they've been facing over the previous year.
So in the event of that auction, there were no offshore wind projects that secured a subsidy, So that was a bit of a flop that auction, especially for off your Wind, And there have been signs that governments in the UK and around the world are willing to pay a little bit more for off your Wind this year and also include more risk sharing mechanisms in the contracts
that they are offering. So the UK government has boosted that price cap for off your Wind for its twenty twenty four auction by sixty six percent, and there are several states in the US that have introduced some mechanisms in their contract to link the prices that developers get paid to things like inflation or things like commodities prices to better share that risk between the government and the off takers. So that's a good sign for the off
your wind industry going forward. Doesn't apply in all markets, and we also saw developers last year rely on corporate buyers in markets where there weren't attractive government deals on offer, So we're expecting to see more of that in twenty twenty four as well.
So we're spending a lot of time talking about all of the new installations that are going to be happening in the year ahead and even happened last year, but there's a lot of existing installed capacity. Wind farms are not a brand new technology, and I want to know what the year ahead holds in store for repowering and kind of maintaining some of these.
Yeah, so you're right, Dana. It was the early eighties when we first started seeing a lot of grid connected wind turbines increase in number, and we're beginning to hit the point of critical mass where there are large volumes of these turbines that are reaching the end of their
planned lifetimes. And so many of those early projects were built on the absolute best wind sits in a market, and so developers are looking at replacing those projects to harness those really good conditions and wind speeds again, so the wind industry calls that process so that those project replacements, and we're expecting to see record replacement activity across Europe this year, and especially in markets like like Germany and Spain that are those markets that have the largest fleets
of wind turbines that are over fifteen years old, and that's being helped by policy as well. So previously permitting a project replacement was was a pretty similar process to permitting a brand new project, so you often had to restart a really long process that can take five years
or even more in some cases. Now the EU has taken some steps to ease that process, extending temporary legislation which streamlines the permitting process specifically for these onshore wind project replacements, and some countries are taking that even further, exempting some of these repowering projects from repeating some environmental studies, for example, especially if they carry them out the first
time round. So all of that means that we think that we'll see two gigawats of projects that come online in Europe this year that will be these so called repowering projects.
One of the things that we talked about on this show earlier in the year. In twenty twenty three was about the US market in particular and some auctions that were one and projects that ultimately didn't end up happening, and those developers more or less tearing up their contracts and starting over what is this going to mean for the US and do you think this trend is going to continue?
Well, the bad news is that the year kicked off with something a bit less positive. So BP and Equinor canceled their one point three gigawatts Empire Win two project in the US. But despite that, we predict that there are going to be fewer cancelations in the rest of
twenty twenty four. So the projects that are at most risk that we saw getting canceled last year are those that have locked in their offtake contracts, so locked in the price they're going to get paid for their generation, but haven't yet secured all of their supply chain contracts and reached a final investment decision that kind of final
go ahead for the project. So we went through an exercise where we basically categorized all the projects in the global pipeline in terms of whether they're at high risk, medium risk, or a low risk of cancelation, and the good news is that we identified only three gigawatts that
fitted into that highest risk category. So those are projects that still hold fairly low priced contracts, that don't have contractual protection from inflation in their off take contracts, and are also projects that are due to deliver sooner, so projects that have less time to wait for interest rates and equipment costs to ease. So that the fact that's only three gigawats, that's only one percent of our total offshore wind forecast from twenty twenty four to twenty thirty five.
So again that's another bit of evidence that the troubles that the sector faced last year were a bit more of a bump in the road rather than an existential threat to the offshr wind industry as a whole.
Excellent, Ali, thank you very much for sharing your thoughts on the year ahead. You've got an optimistic view, but it's grounded in fact, because, let's be honest, last year you also had a really good run of accuracy on what you were thinking about.
Well, fingers crossed for this year, thanks Dana.
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