Wallstreetcn
2023.11.27 13:55
I'm PortAI, I can summarize articles.

Europe, the "next battleground" for Chinese wind power | Insights from Zhitong Research

Compared to the profitable photovoltaic industry, domestic wind power companies have been facing profitability challenges for many years, which has brought many challenges to the companies. Therefore, entering the high-margin European wind power market has become a strategic choice for many domestic wind power companies. Recently, Europe has released a number of favorable policies for offshore wind power, providing a broader space for the growth of this industry.

Accelerating Offshore Wind Power in Europe

Compared to the highly profitable solar industry, domestic wind power companies in China have been facing profitability challenges for many years, which has brought them numerous difficulties. Therefore, entering the high-margin European wind power market has become a strategic choice for many domestic wind power companies.

Recently, Europe has released a series of favorable policies for offshore wind power, providing a broader space for the growth of the industry. For domestic wind power companies, how to seize the opportunities in the overseas market in the coming years will be an important issue that determines their future development.

Recently, overseas offshore wind power has made significant progress. According to the offshore wind power observation report on November 25th, SSE Renewables (a British public utility company) and its partner TotalEnergies (TotalEnergies) announced that Seagreen, the largest and deepest fixed-bottom offshore wind farm in Scotland, has been fully operational.

Earlier, the British government also released a major positive news, announcing an increase in the maximum auction price for renewable energy. The specific policy states that "the highest execution price for offshore wind power projects announced by the government has been increased from £44/MWh to £73/MWh, an increase of 66%; the highest execution price for floating offshore wind power projects has been increased from £116/MWh to £176/MWh, an increase of 52%. At the same time, the government has also agreed that if the market price is lower than the agreed government price, the government will compensate for part of the difference." According to the UK's offshore wind power development target, by 2030, 50GW of offshore wind power capacity will be achieved.

Why was this policy introduced?

A few months ago, the British government faced the dilemma of no energy companies willing to bid for wind power projects because power generators believed that the government's set electricity price was too low. At the same time, European companies are facing rising costs of steel and labor, making operations more difficult and lacking investment motivation.

In view of this situation, the British government has adopted a policy of raising prices to increase the return on investment in offshore wind power and encourage developers to invest. The implementation of this policy means opening up the growth space of the UK offshore wind power market, which is an important overseas market opportunity for domestic wind power companies.

In addition to the UK, Germany's progress in offshore wind power is also particularly prominent, with leading targets. By 2030, Germany plans to have 30GW of offshore wind power capacity, and it has proposed a plan to achieve 70GW of capacity by 2045.

The overall progress of offshore wind power in Europe is visibly accelerating, and the annual North Sea conference has already stated that it aims to achieve 50GW of offshore wind power capacity.

Although the market's response to wind power news has been relatively muted, the recent series of policies in the European offshore wind power industry have far-reaching implications. Especially the policies in the UK can be said to have demonstrated significant effects on other European countries and the United States, and are expected to form a chain of positive feedback effects.

When considering entering the overseas market, domestic offshore wind power companies are concerned that the European market may not be able to achieve their installation plans due to cost issues. This concern involves the long-term development logic of offshore wind power in Europe. However, the favorable policies recently introduced in the European offshore wind power industry have provided solutions to these concerns, enhancing the confidence of domestic companies in the European offshore wind power market and helping to promote their development and investment overseas.

Going global, Chinese wind power companies have no choice

The performance of wind power companies in the first three quarters of this year has been overall lackluster. Even star segments such as marine cables and industry leaders have generally fallen below expectations. For example, in the third quarter, Oriental Cable's marine engineering declined significantly due to smaller construction volume. Not to mention the complete machine segment, which is already difficult to make money in, has seen even more dismal performance. Goldwind Technology's Q3 net profit attributable to shareholders fell by 98% year-on-year, and Mingyang Intelligent's net profit attributable to shareholders fell by 49% year-on-year.

After nearly a year of decline, offshore wind power has seen a turning point since October this year. Before the National Day holiday this year, issues that had previously hindered the progress of projects in major offshore wind provinces such as Jiangsu and Guangdong have gradually been resolved. For example, Jiangsu Guoxin Dafeng's 850,000-kilowatt offshore wind power project has obtained approval; the feasibility report for the Qingzhou 57 offshore wind project has been submitted; and Longyuan Power's 1GW offshore wind project in Jiangsu's Sheyang has officially obtained approval from the Jiangsu Development and Reform Commission.

Most market views believe that offshore wind power has bottomed out and the turning point for wind power is imminent.

According to the latest wind power installation data for October, from January to October 2023, China's newly installed wind power capacity reached 37.31GW, a year-on-year increase of 76%. In October alone, the newly installed capacity reached 3.83GW, a year-on-year increase of 102% but a month-on-month decrease of 16%. It can be seen that both the monthly installation volume and the cumulative scale are far better than last year, which indirectly confirms that China's wind power sector may have reached a turning point.

Although it seems that the darkest moment for offshore wind power has passed, the survival environment for domestic wind power companies remains challenging. Especially in the complete machine segment, the price war has been going on for several years, and the difficulty of profitability is an issue that companies cannot avoid.

Since the rush to install onshore wind power in China in 2020, the installation of wind power in 2021 and 2022 has experienced a phase of decline, with a cumulative decrease of 34% in 2021 and 21% in 2022. With the decline in installation volume and the intensification of the price war, life has naturally become more difficult for complete machine manufacturers. The revenue scale of leading complete machine manufacturer Goldwind Technology has been continuously declining since 2021, and its profit performance in the past two years has also worsened.

European and American wind turbine manufacturers are facing serious challenges, including supply chain issues, cost increases due to inflation, high labor costs, and quality problems. These factors have led to widespread losses in the European and American wind power industry. Take Siemens Gamesa as an example. The company has incurred losses for three consecutive years from 2020 to 2022, with losses of 918 million euros, 627 million euros, and 940 million euros respectively. Although the latest financial report released by Siemens Energy shows that the losses have not further expanded, it is expected to still face a loss of about 2 billion euros this year.

China's wind power capacity is currently mainly supplying the domestic market, but there has been an oversupply situation. Therefore, for domestic wind turbine companies, "going global" may be the key way to improve profitability. In addition, Chinese wind power companies have a well-established supply chain and lower cost advantages, which makes them more competitive in competition with their European and American counterparts.

According to the business layout of Goldwind Technology, it can also be seen that the proportion of overseas business has increased from 9.23% last year to 13.68% in the first half of this year. The layout is clearly accelerating.

In addition to complete machine manufacturers, it is also urgent for component manufacturers to go global. Tower production capacity is relatively scarce in Europe, and domestic tower companies have a market in Europe due to cost advantages, with companies like Dajin Heavy Industry being typical examples.

Dajin Heavy Industry has the largest number of overseas offshore orders in the European market. The gross profit margin of Dajin Heavy Industry in Q3 is also higher than that of other peers, mainly because it focuses on overseas offshore projects, and last week, Dajin Heavy Industry delivered all the large-scale single-pile projects in the UK as scheduled.

In terms of submarine cables, companies like Zhongtian Technology have won overseas offshore wind power projects such as Denmark and the Baltic Sea in Germany, and have become suppliers in the high-end submarine cable market in Europe. Orient Cable has currently obtained a 350 million yuan order for the Baltica 2 offshore wind power project 66kV submarine cable, and the signing of the supply contract for the Inch Cape offshore wind power project 220kV 3×2000mm2 export cable is expected to be officially signed at the end of the year.

Faced with the fiercely competitive domestic wind power environment, going global is both an opportunity and a necessary choice for companies.

Summary

The favorable offshore wind power policies recently announced in Europe provide important market opportunities for Chinese wind power companies. In the face of fierce competition and difficulty in raising prices in the domestic market, expanding into the European market will be the key to improving profitability. For Chinese wind power companies, the enhancement of internationalization capabilities will be the decisive factor in achieving excess returns.