Wind Turbine Makers Face a Growing Threat to Lucrative Service Deals: Their Customers

Wind turbine manufacturers are fighting to retain lucrative service contracts as project consolidation makes it more economical for asset owners to bring services in-house.

As the wind industry has matured, turbine makers have become "much more competitive" with independent service providers in chasing operations and maintenance deals, said Bruce Hall, CEO of Onyx InSight, an O&M systems and services supplier.

As that competition intensified over the past 10 years, original equipment manufacturers (OEMs) slashed the cost of servicing from $50,000 to around $15,000 per megawatt-hour of turbine capacity per year, Hall told GTM.  

These days, however, the bigger concern for turbine suppliers is that a growing number of their customers are bringing servicing in-house as their portfolios of wind farms reach a critical mass. Once an asset owner has built up 2 gigawatts or so of wind capacity, it generally makes sense to self-perform maintenance, Hall said.

Shashi Barla, principal analyst for global wind supply chains and technology at Wood Mackenzie Power & Renewables, said OEMs have increasingly focused on service revenue as a way of shoring up earnings before interest and taxes (EBIT).

“The product EBIT margins for pure-play, publicly listed OEMs is declining,” Barla said in an interview. “Service EBIT margins are on an increasing trend. Today all the turbine OEMs are cognizant of the services business because that’s the money-minting model going forward.”

The OEM early movers: Vestas and Gamesa

Two turbine makers in particular have moved early to capitalize on the services opportunity. Vestas of Denmark and Gamesa of Spain — before it merged with Siemens’ turbine business — both started building important services around a decade ago, just as auctions began to gouge into turbine margins.

Vestas claims to service a global portfolio of wind turbines totaling 104 gigawatts today. Siemens Gamesa Renewable Energy (SGRE), meanwhile, has kept 62 gigawatts of its 100-gigawatt installed base under service contracts; it also services another 10 gigawatts of third-party machines.

Both companies have extended their third-party footprints through acquisitions. Vestas bought the U.S. independent service provider UpWind Solutions at the end of 2015. Earlier this year, SGRE completed the acquisition of Senvion’s European service assets and intellectual property, picking up contracts for an 8.9-gigawatt fleet spread across 13 countries.

The Senvion acquisition, which Wood Mackenzie analysts Leila Garcia da Fonseca and Daniel Liu described as “a sound commercial strategy,” holds further promise for SGRE. There are around 18 gigawatts of Senvion turbines in operation, according to WoodMac, and SGRE is now well placed to pick up service contracts for the machines it does not already look after.

This month, for example, SGRE added 200 megawatts of Senvion turbine service bookings to its roster after winning a contract to provide full-scope services for five years at Trianel Windpark Borkum II, Germany’s newest offshore wind project. Wins such as these have helped SGRE edge ahead of Vestas in terms of third-party service contracts, said Mark Albenze, SGRE’s head of service business.

SGRE continues to look out for strategic acquisitions that could further bolster its service revenue, but “there’s not a lot left,” said Albenze in an interview. “I’m not saying that Senvion was the last opportunity, but it was a good fit for us. [...] If we found that elsewhere around the world, I think we would invest in it.”

A smaller slice of a growing pie?

When it comes to servicing, OEMs benefit from an intimate knowledge of their own machines (and increasingly those of others), plus a robust supply chain for spares.

But even allowing for strategic acquisitions, the turbine makers may find it hard to increase their share of the lucrative services pie. Barla said OEMs’ share of the service market is expected to decline from 64 percent in 2018 to 50 percent by 2028.

This loss of market share will mostly come from wind farm owners taking on more in-house maintenance, Barla said. Self-performing maintenance is only just beginning to take off in massive Asian markets such as China and India. And “any shift in the behavior of the Chinese asset owners would tilt the O&M dynamics,” said Barla.

With no end in sight for new wind turbine installations around the world, there is plenty of room for OEMs to grow their service business even while their market share diminishes.

“The overall pie is going to get bigger,” said Hall. “There will be enough there for everybody. The OEMs are going to seek to retain the turbines for a longer period. They will do it by locking the turbines in early on or by buying independent service providers. I think we’ll see more of that.”