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Why Vestas Brought Its Offshore Business In-House

Global turbine leader Vestas has taken sole control of its offshore wind joint venture, a move that says a lot about Vestas’ current standing in the sector and even more about where wind power is headed.

The €700 million ($814 million) all-stock deal revealed last week, will give Mitsubishi Heavy Industries (MHI) a 2.5 percent stake in Vestas, while MHI Vestas will be folded into Vestas immediately. The goal is for Vestas to gain top share in the fast-growing global offshore wind turbine market by 2025, Vestas CEO Henrik Andersen said during a Thursday conference call with investors to discuss the transaction. 

To prize that title away from Siemens Gamesa, Vestas will launch a new technology platform for the next generation of Vestas’ offshore wind turbines. “We won’t achieve market leadership with the current turbine,” Andersen noted. 

Vestas reports its third-quarter results later this week. That conference call will offer a glance at what its investors make of the move, and perhaps some additional detail. 

For those watching Vestas closely, bringing the offshore business entirely in-house was always a possibility given the obvious cost-savings potential. That said, MHI and Vestas previously maintained that the partnership suited them both. So why now?

Good books

Shashi Barla, Wood Mackenzie’s principal analyst for the global wind supply chain, suggests the answer could be rooted in both the past and the future. MHI Vestas was created in April 2014, he pointed out. Vestas posted losses in 2011, 2012 and 2013, with its 2012 loss a staggering €963 million.

Offshore projects are not small endeavors. With a weakened balance sheet, Vestas was better placed to accelerate its offshore business with a partner. Cue MHI.

“Vestas has grown significantly in the last six years and it now has a sizeable balance sheet, they can absorb these projects onto their own books,” Barla explained.

But in its Q2 2020 report, Vestas’ balance sheet was just shy of €15 billion. That strong financial position changes the calculus on its approach to offshore wind.

Now or never

As Andersen said, the current turbines on MHI Vestas’ books aren’t going to get the company into a market leadership position by 2025. A fresh technology platform that leapfrogs the firm alongside, or ahead of, Siemens Gamesa and General Electric was required.

“They have a strong pipeline to execute over the next four years, but beyond 2024, their market share is going to plummet if they don’t introduce the next generation,” says Barla.

Barla suggests that with underwhelming returns from MHI Vestas, JV partner MHI may have decided it wasn’t prepared to assume half the risk associated with developing, testing and launching a new platform. In the last five quarters, MHI Vestas best result has been a profit of €22 million on revenues of €534 million.  

“Mitsubishi will be concerned about pushing the investment button and spending another €400 million or €500 million on ramping up this supply chain,” adds Barla.

Bringing the next offshore turbines in-house means maximizing savings with Vestas and boosting the profitability in the process. As an investor with a 2.5 percent stake and a seat on the board, MHI can still benefit.

Expect the next-gen turbines to be BIG

So, what should we expect to see from the next generation of turbines? Today, MHI Vestas turbines top out at 10 MW with rotor sizes of 164 meters, or up to 174 meters in a 9.5 MW iteration.

GE, meanwhile, shot into offshore contention with its Haliade-X platform with capacities of 12 and 13 MW and 220-meter rotor size. Deliveries to the Dogger Bank project in the U.K could begin as early as 2023.

Offshore market leader Siemens Gamesa, launched a 14 MW turbine with a 222-meter rotor in May this year. Its first order, the 1.4 GW Sofia project in the U.K., will begin construction in 2024.

That’s the competition, and Vestas will need to match it. Barla expects Vestas’ next iteration of turbine to have a rotor size of around 240 meters and a capacity of between 14 and 16 MW. Anything short of that “would be terribly disappointing.”

Offshore business importance on show

Siemens Gamesa and Vestas have been experiencing similar trials, but in opposing verticals — one at sea and one on land. The lengths to which both have gone to develop the three-legged revenue stool of onshore, offshore and services reflects the competitive nature of the wind power business. 

While Siemens Gamesa has enjoyed market leadership in offshore, its onshore business has been making losses, which have ultimately led to an overhaul of the company management. New CEO Andreas Nauen was the head of the successful offshore business unit, and has been moved into the top job in hope that he can replicate that success.

Vestas has been breaking order intake records in concurrent quarters. Its share price rose all summer and hit an all-time record in October of DKK 1,166. Prior to 2020 it had never been above DKK 700. With a solid service revenue backlog as well, the lack of profitability at MHI Vestas, which reports outside of the listed Vestas Wind Systems A/S, was perhaps the only major missing part of the puzzle.  

Growth projections for offshore wind have strengthened through the COVID-19 pandemic. This year the Global Wind Energy Council revised its 2030 cumulative capacity forecast 234 GW, up 15 GW compared to the 2019 view. The U.K. based trade body, RenewableUK, has tracked a 50 percent increase in the offshore wind project pipeline over the course of the last year.

Vestas is now better placed to capture that growth as the master of its own offshore fortunes.  

Source: Greentech Media