Last week, GE brought suit against Vestas in a U.S. District Court, alleging that Vestas is infringing on the 705 patent, which governs GE’s intellectual property pertaining to zero-voltage ride through.
The 705 patent is historically significant. It was one of the GE patents that contributed to the collapse of Mitsubishi Heavy Industries’ (MHI) onshore wind business.
For nearly five years, GE and MHI traded blows in a costly litigation battle that ended with both parties agreeing to a non-disclosed cross-licensing agreement. GE won the day, as the IP infringement undermined MHI’s U.S. wind business by introducing IP infringement risk to asset owners during a time when new orders were most critical, following the passage of the American Recovery and Reinvestment Act in 2009. ARRA introduced a three-year PTC extension that enabled a massive build-out of nearly 25 gigawatts from 2010-2012. Sounds eerily familiar, doesn’t it?
GE bristled at another multinational power conglomerate entering the wind sector, especially as MHI’s 2.4-megawatt turbine platform gained acceptance amongst a limited pool of major asset owners. MHI was picking up steam, with localization efforts underway to further reduce landed cost and increase market share in GE’s home court.
Fast-forward to today, and we find GE up against a far more daunting opponent, with Vestas posing a sustainable threat to GE’s U.S. market leadership. Vestas turbines assembled in the U.S. have a higher percentage of domestic content than GE and Siemens Gamesa Renewable Energy and an extensive turbine portfolio spanning both 2-megawatt and 3-megawatt offerings.
Firm and conditional orders of over 7 gigawatts since 2016 with some of the nation’s largest asset owners speak to Vestas’ competitive positioning, all of which is far superior to MHI’s positioning back in 2009.
Why did GE wait so long?
MAKE is forecasting in excess of 45 gigawatts of new unit installations over the next five years, and a virtual dead heat between GE and Vestas for market leadership. The stakes are extremely high, which raises the question: Why did GE wait so long to introduce this lawsuit?
This move would have held massive strategic value to GE had it been executed in the 2015-2016 timeframe. One could make the argument that amid the Alstom and LM acquisitions there was enough churn and distraction to put this issue on the back burner. MAKE’s assertion is that GE carries some scars from the MHI battle, and thus the risk to GE’s U.S. wind business needed to be substantial enough, and the case clear enough, to go back and open Pandora’s box.
Within the complaint, it states: "Defendants’ infringement of at least claim 1 of the '705 patent is willful and egregious. As described in paragraph 29, Defendants have had actual knowledge of the ‘705 patent since September 14, 2011, including the knowledge that the ‘705 patent covered a method of providing zero-voltage ride through capability for wind turbines."
GE obviously has been preparing this action for some time, and considering the language in the complaint, seems confident it has the legal precedence to prevail. However, GE’s nuclear option opens the door for yet another multi-year, multimillion-dollar legal battle, and more importantly introduces the potential of countersuits brought by Vestas against GE for similar infringements.
Vestas boasts a substantial portfolio of patents in numerous geographies, and is most certainly poring over those disclosures to find leverage to bring to bear on GE. An IP arms race will do more harm than good to both parties, as well as the U.S. wind market as a whole.
What comes next?
The path of least resistance would be for Vestas to participate in a license agreement (as many other OEMs already do) in exchange for royalty payments. An MHI-style prolonged legal battle could upend Vestas’ best opportunity to overtake GE in the U.S. market.
MAKE is quite confident that GE/Vestas will indeed come to some sort of settlement. But just in case the two biggest kids on the block decide to duke it out, what happens in the near term?
GE Renewables: Strong positioning, getting stronger
GE maintained its leadership position by the slimmest of margins in 2016, and is breathing a sigh of relief after inking a 2-gigawatt mega-deal with long-time client Invenergy last week. MAKE estimates ~22 gigawatts of installs for GE over the next five years, not including much of an extensive repowering program that takes advantage of the PTC’s 80/20 rule.
GE’s acquisition of LM was a bold move, and coupled with relentless product evolution, the company has outpaced the rest of the market in its quest to lower levelized cost of energy and maintain profitability in the process. However, GE may not have many arrows left in its quiver, and if its next-generation 2.X turbines blow though the 200 w/m2 barrier while its supply chain begs for mercy, it's unclear what else can the company can do to beat back Vestas.
Vestas: Strong positioning, placed on the defensive and likely to weaken
Vestas came within a percentage point of overtaking GE in the United States last year. A seemingly never-ending barrage of new unit sales announcements bolstered its backlog and underlined its intentions to remain at the top of the market share charts for the foreseeable future. Vestas has managed to lower costs through clever product design, deft manipulation of its global supply chain, and enhancements to its aftermarket services portfolio.
Vestas’ first order of business is to jump into damage control mode with its existing clients, especially those with long-term frame agreements with the Danish OEM. MHI’s business imploded as its client base no longer had certainty on project costs, or worse, whether the U.S. court system would force an all-stop on the manufacture/import of MHI turbines.
MAKE contends that Vestas has options to address the IP concern, but farm-level hardware (DVAR or STATCOM) adds cost and can extend and complicate permitting. As prices for wind turbines have plummeted, turbine OEMs need every cost advantage they can muster, and being handicapped with high-cost, large-scale electrical hardware diminishes Vestas’ competitive positioning. At a minimum, Vestas will need to ensure buyers they are fully indemnified against any fallout from the IP litigation.
Other turbine OEMs: Mired in integration, some potential to regain lost ground
The mergers of Acciona and Nordex, and then Siemens and Gamesa, were excellent transactions that MAKE believes were necessary for those groups to remain relevant on a global scale. Nordex in particular has benefited from Acciona’s continued competitiveness and successful bids for large-scale projects in the United States, and is on pace to have a record year for new-unit installs in 2017. Yet, the AW3000 is one big machine, and loses some competitiveness the further inshore a project may be.
Siemens' and Gamesa’s integration is just beginning, but needs to accelerate if the companies want to take advantage of the current Vestas and GE legal battle. Siemens is finally executing a more global supply chain strategy in a bid to lower its capital cost structure, but even with the introduction of its SWT2.5-120 turbine, it finds itself staring down the barrel at new GE and Vestas turbines with higher capacity factors.
Gamesa’s combination of low-cost turbine architecture and supporting supply chain may provide a similar boost to Siemens as Acciona has to Nordex, but the G126 and G132 have not gained any significant commercial traction as of yet.
Developers: Caught off-guard and stuck between a rock and a hard place
Developers such as EDF, BHE, Enel and Xcel that made big agreements with Vestas have the most to lose. PTC guidance allows developers to switch turbine OEMs at any time after projects meet safe-harbor requirements, but doing so may not be feasible given the limited execution window in which developers must bring their wind farms on-line.
Further, some turbine OEMs included exclusivity arrangements in their safe-harbor contracts to guard against such a switch. Contractual damages or permitting changes may prove costly and drive owners to stay the course, especially if Vestas opts to take whatever actions are necessary to maintain the project pro-formas of these strategic clients.
Power prices in the United States have dropped precipitously, especially in high development regions like Texas and Oklahoma, where PPA pricing has dropped into the teens. The margin for error on some projects is extremely thin, and any added risk that impacts the cost of capital for Vestas clients could cause those projects to go underwater or be abandoned.
Developers still have buyer power in this situation and may pressure Vestas to reach a settlement in the best interest of all parties.
In summary, MAKE expects GE/Vestas to come to a settlement, especially as news of the litigation spreads and more articles emerge highlighting just how bad this could be for the industry. The question remains as to how confident Vestas really is that it can prevail in this legal battle, and whether the company is willing to take GE to the mat and draw a line in the sand.
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Dan Shreve is a partner with MAKE Consulting, a leading wind consultancy that is now part of the Wood Mackenzie/Greentech Media family.