Vestas and Gamesa's vicious cost cycle comes to an end

6 MAY 2022 - 07:41CEST

Vestas Wind Systems and Siemens Gamesa Renewable Energy are better at making windmills than money. Despite booming demand for wind farms, the European duo, which has a combined market value of E34 billion, could post losses this year due to the rising cost of raw materials. But now that wind power is cheaper than fossil fuels, at least the price pressure is easing.

For dominant players in such a hot market, their difficulties are strange. Denmark's Vestas, the world's largest manufacturer with a 16% market share, has orders worth 47 billion, including service contracts, as countries accelerate their plans to decarbonize power grids. Siemens Gamesa, a leader in offshore turbines, has an order backlog of 33 billion.

However, the boom does not show up in its income statements. In 2017, Vestas generated E1.2 billion in operating profit on E10 billion in revenue. By 2024, it is expected to generate sales of 17 billion, but the same level of operating profit as seven years earlier, according to forecasts compiled by Refinitiv.

The reduction in margins is largely due to the fact that governments have eliminated subsidies for renewables. However, wind has since shown that it can move forward with its own sails. At E50 per megawatt-hour of electricity, down from E200 a decade ago, its total costs are comfortably below those of power produced with natural gas. Vladimir Putin's invasion of Ukraine has given wind power even more steam.

It's a relief for Siemens Gamesa's new CEO Jochen Eickholt. After four years of stagnant or falling unit prices, the German has managed to drive an average 30% rise in new onshore turbine sales to offset the rising cost of steel, the main ingredient in the giant blades.

The problem is that these improved terms only apply when the turbines are delivered in two to three years' time. In the last comparable quarter, Siemens Gamesa's unit price for onshore turbines was lower than Vestas' by 17%.

However, investors are keeping the faith. Vestas and Siemens Gamesa shares have plunged from their highs in early 2021, but still trade at an enterprise value-to-EBITDA multiple of 21x and 26x, respectively. This reflects the hope that, over time, they will do a better job of converting wind power into cash.

The authors are Reuters Breakingviews columnists. The opinions are their own. The translation, by Carlos Gómez Abajo, is the responsibility of CincoDías

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