US industrial conglomerate General Electric (GE) will this year intensify efforts to turn around its money-losing renewables business in a challenging near-term market as part of a recently announced plan to split the group into three separate public companies by early 2024.
“We do have work to do and we’re on it,” GE CEO Larry Culp told analysts after the company disclosed its renewable energy unit’s loss widened to $795m in 2021 from $715m the previous year.
Free cash flow was negative $1.2bn, a glaring contrast to $8.5bn in GE’s other core aviation, healthcare, and power businesses – a trend indicative of a financially stronger company with “real momentum and opportunities for sustainable, profitable growth”, as Culp noted.
Last November, GE announced it would restructure into three separate public companies: aviation, healthcare, and power, which will include renewables, grid software/solutions, and gas and steam turbines. Healthcare will be spun off first in early 2023 with power 12 months later.
Culp, who took over in 2018 as the first outsider to run the financially troubled US industrial giant, outlined various actions his management team is taking to transform the renewables business into an “investment grade industry leader”.
Scott Strazik will now head up all of GE’s energy operations. A prime focus for Strazik, a rising star under Culp who turned around the GE Power division as CEO, is onshore wind, by far the biggest component of the renewables business.
“We believe this will be a growth business that delivers high single-digit margins over time,” said Culp. “First, the demand is there. Onshore wind is a critical component of the energy transition. We have leading products and a strong services franchise, but we do face near-term challenges.”
Among them is the US, easily GE’s largest onshore wind market, where 2022 installations are set to plunge by one-third or more amid uncertainty if Congress will renew the federal production tax credit (PTC), the industry’s main fiscal incentive, which expired the end of last year.
Fourth quarter orders declined 21% for wind turbines and related equipment versus a year earlier, highlighting GE’s longstanding over-reliance on US onshore sales.
President Joe Biden is in talks with Democratic leaders in the House of Representatives and Senate over new legislation that would include a multi-year extension of the PTC and other clean energy tax credits, but a path forward is unclear.
“We’re monitoring policy proposals and see strong and diverse interest in continuing tax credits for wind,” said Culp. In the meantime, Strazik will attempt to build on last year’s improvements in onshore wind margins in the US where operations returned to profitability.
The story is very different globally where onshore wind is bleeding red ink. Culp said GE is addressing a range of issues in multiple ways, including operational, productivity and supply chain improvements, reducing inventory, and “enhancing the customer experience with better design and testing and quicker response to field issues”, with the CEO noting that services work is growing by double digits.
Another key focus is becoming more disciplined in the projects that GE chooses to underwrite in the broader markets where it participates, what Culp calls “commercial selectivity”.
“This means lower volume with lower risk today, but better margins and less risk over time,” said Culp. “It’s ok not to compete everywhere.”
GE is addressing inflation, which it expects to continue through at least first half 2022, by implementing price increase for products and services for onshore wind and its fast-growing but still small offshore business.
Culp said GE has 7GW of global commitments for its 12-14MW Haliade-X offshore turbine with deliveries to begin this year. “Offshore wind demand continues to significantly increase across the world,” he said, but did not indicate when the business will become profitable.
GE has also created a new, dedicated management office that will focus on “work strength planning and execution to deliver critical value drivers,” said Culp, which range from optimizing renewables’ operating model to its capital structure.
Culp is confident his team can get renewables back on track and profitable over the next two years. “Renewables is a terrific business,” he said.