The recent Intergovernmental Panel on Climate Change report is another harsh wake up call. We are eight years away from the deadline to halve global emissions, and the world is currently in the grip of an energy price shock.
Weaning energy systems away from Russian gas and oil is one thing, building out viable, net-zero energy systems is another task altogether. As policy makers scramble to find a way forward, the spotlight on the renewables industry has intensified.
And rightly so. Wind energy has proven its ability, time and again, to keep electricity prices down. Innovation has driven huge leaps forward in the technological capabilities of turbines. The potential to reduce energy import dependency, combined with forecasts around job creation, economic growth, environmental benefits all point towards renewables as the key to unlock a brighter future.
According to several market forecasts, 2024 will mark an inflection point for global energy. Renewables are set to come out of a period of stagnation, and jump into a rapid growth trajectory where annual installations are set to grow by three to five times.
There’s just one problem. To reach these output levels, the renewables industry must build more maturity, and more sustainable profitability. Auctions are forcing developers to compete for limited volumes by submitting low or even negative bids. This leads to pressure on turbine suppliers to cut prices to ensure the viability of a project. Post-Covid inflation, exacerbated by the Russian invasion, has inflated transport and raw material prices to crippling levels.
And underneath it, renewable energy suppliers are struggling to capture enough value to invest back into maturing what is still a young industry. At this rate, many renewable energy companies won’t make it to 2024, let alone arrive ready to support the necessary ramp-up of production.
Preparing for the growth trajectory is critical. If renewables can’t find a pathway to sustainable profitability by mid-decade, there will be no viable business case for the energy providers relying on them to produce zero-carbon energy. And if there’s no viable business case for energy providers, a net-zero future is out of the question. Renewables need to find more profitable models across their value chain.
Time for a more collaborative approach
Manufacturing is an important place to look. Renewable technology companies are prone to guarding their footprints closely, operating their own factories, transport, and construction. As business expands, and local content requirements are introduced, their footprints expand. And when there’s a lull in demand, manufacturing sites or transportation pathways become idle. This creates volatility across employment, and on profit margins, serving as an Achilles’ heel in an otherwise robust and resilient footprint. As the industry pushes to service more markets, with more technologies, this approach won’t work.
If we are to grow profitably, renewables need to find a way to make their footprint work smarter. This means operating manufacturing or design processes that can bend with the fluctuations in demand, at a global level.
If we are to grow profitably, renewables need to find a way to make their footprint work smarter.
As new markets get activated, and new projects arise, industry players should collaborate more, leveraging the setup of another player where it’s needed. The wind industry is a great example here. When demand is high in a specific market, suppliers will need to ramp up the production of a specific turbine variant. If a footprint already exists in this market, with the facilities, and the employees necessary to drive assembly, why not activate this existing setup?
There are of course good reasons why. Standardising manufacturing processes is an investment. But a more collaborative model would help the industry streamline its production activity, minimise inefficiencies in the supply chain and encourage a more standardised approach to design and then manufacture. Both of these factors would enable scalability.
Until now, the industry has been reluctant to collaborate more closely across direct competitors because of concerns around competitive differentiation, but these boundaries are shifting. In a future where the renewables value chain will exponentially diversify, moving to include more energy sources and more technologies, the value proposition of solution providers will also need to expand.
To differentiate, the OEMs of the past will need to become solution providers, ensuring value creation across this expanded value chain. This will mean focusing on system integration across flexibility solutions. Storage solutions, batteries and Power-to-X are just some of the areas where the right level of expertise will make a huge difference. And to provide this support, technology providers will need to rely on a more scalable supply network behind them.
This collaborative model could extend beyond manufacturing. If we can all agree that the ambition is a more standardised, more flexible approach to building hardware, why can’t we collaborate on designing assets, as well as building them? Expanding collaboration to more parts of the value chain will only allow the industry to mature faster, and eliminate inefficiency in the supply chain. An example of this, is Vestas’ recently announced partnership with LM Wind Power on blades for the Brazilian market.
In this more streamlined and collaborative future, we can free up more resources to focus on larger challenges and improve profitability. Accelerating a circular economy, or driving more innovation around automation and industrialisation.
Wherever we choose to place our collective focus, we must agree that the time for an inflexible, siloed approach is behind us.
Tommy Rahbek Nielsen is chief operating officer of global wind power group Vestas