Developers in the burgeoning US offshore wind sector may have to scramble for new turbine supply options in the aftermath of a ruling that will likely block GE Renewable Energy from offering its flagship Haliade-X machine in its key home market and have far-reaching consequences for the industry.
While the final ruling has not been made yet, the judge in the patent litigation has indicated he is leaning towards at least a partial injunction which would preclude sales of its turbines, with a carve-out expected for turbine supply contracts in Massachusetts and New Jersey which have already been executed.
This would be quite an important win for Siemens Gamesa Renewable Energy in its ongoing patent litigation, amounting to a bit of a coup in a market environment where SGRE was poised to have a healthy – but not necessarily a leading – US share, perhaps surprisingly to some.
Unlike the dominant position it enjoys globally for offshore wind turbine supply, SGRE only had, according to IntelStor's calculations, about 6.9GW worth of firm and potential turbine supply contracts lined up for projects that are in the Bureau of Ocean Energy Management (BOEM) consenting queue in Connecticut, Maine, Massachusetts, Rhode Island, New York, New Jersey, Maryland, and Virginia.
By contrast, prior to this, GE had a little more than 11GW of both firm and potential orders lined up for the US market, again according to IntelStor, with the 12MW Haliade-X or derivative products with a larger rotor and higher power rating.
Such an outcome of patent litigation between GE and SGRE is certainly to the benefit of Vestas as well as SGRE itself. Both companies are more than capable of offering products which are competitive with the Haliade-X, and they will happily take orders away from GE whenever they can.
But any restrictions on available products calls into question the impact of this patent ruling to the wider US market. The consequence to the entire industry would be two-fold. First, fewer turbine makes and models being offered for sale constrains the market by artificially inflating prices and introducing a restraint on price competition.
An injunction in place barring GE from selling its Haliade-X product until design modifications are made would come at a critical juncture of growth in the US offshore industry, where GE would need to secure sales to demonstrate the operational track record of its product for developers, financiers, and insurance carriers alike.
The Haliade-X is a fully designed and commercially available product. The cost to re-design could run into the tens of millions.
Losing early sales and customers now may permanently hamper GE moving forward as Vestas and SGRE will undoubtedly become more entrenched. This could even open the door for Asian wind turbine OEMs to offer offshore supply in the US market.
As an aside, it is also important to note that the Haliade-X turbine is a fully designed and commercially available product. The cost to re-design the drivetrain architecture and bearing structure will not be cheap, with costs potentially running into the tens of millions. This is also an ancillary hit to Timken, which has recently announced a deal to supply GE with drivetrain bearings for the Haliade-X platform in the US.
Secondly, higher costs instigated by intellectual property (IP) royalties necessarily makes the industry look less competitive to potential investors, causing constraint of cash flow into the sector.
Even though SGRE or GE singularly gains royalty income from its patent enforcement activity, GE shareholders lose because their patent enforcement activity – and the subsequent consequences of SGRE’s counter-suit – comes at the expense of the entire industry’s growth where they are unable to supply turbines until they undertake expensive design changes or pay hefty royalty fees.
GE patent strategy used against it
But this outcome may have been a long time coming. It is certainly a situation where GE’s typical strategy in generating IP royalties or enjoining competitors from competing in the market has now been turned back against it due to the counter-lawsuit from SGRE.
Germany’s Enercon and GE have been two companies who have historically taken the enforcement of IP rights to a bit of a concerning place for the wind energy sector over the past 20 years or so.
GE has been undertaking a patent enforcement and licensing strategy since days after the acquisition of Enron Wind assets in the early 2000s. Back then, the IP catalogue was flagged as a huge opportunity to extract royalty income from competitors or even block them from selling their products.
For GE’s part, it was successful in out-licensing its IP portfolio or excluding competitors from being able to successfully compete in the US onshore wind market. Starting in 2004, GE has put a license agreement in place with Senvion, Nordex (pre-merger), Acciona (pre-merger) as well as Vensys and a smattering of other minor companies in the industry.
These companies were effectively compelled into licensing from GE or face lengthy and expensive IP litigation. Those IP royalties have generated approximately $250–300m in royalty income for GE in that timeframe, according to the market analytics of the installed base for each make and model globally from IntelStor, as well as public references for typical licensing fees paid at the time.
The long and figuratively bloody battle with Mitsubishi which started in 2005 and culminated in a settlement in 2013, saw Mitsubishi leave the onshore wind energy sector entirely. The publicity of the litigation with GE had limited their ability to sell their products in the US, caused by fear amongst the US customer base that any projects which used a Mitsubishi turbine might be subject to an injunction and operational shutdown.
By early 2014, Gamesa (pre-merger) and Vestas were the only major western wind turbine OEMs left who had not taken a license in GE’s IP portfolio. Siemens Wind (pre-merger) did have some cross licenses in place on electrical systems, converters, and generators, but after GE acquired Converteam most of those deals were phased out.
GE set about Vestas first by triggering a litigation in 2017 attempting to compel a settlement, which they signed in 2019. The combined SGRE was then the final meaningful target to put a license agreement in place during the timeframe when the patents were still active and in force.
But SGRE’s majority parent company, Siemens, is well practiced in capturing IP, as well as defending itself against an onslaught of litigation. To date, SGRE is the only company to have successfully stood up to any sort of intimidation campaign resulting from enforcement patent licensing.
'Fences and consequences'
Patents are often looked at by corporations as fences meant to protect their product investments, and the intellectual capital they have cultivated. Their IP is what gives them a competitive advantage and helps them grow, so giving it away for free or allowing others to copy what they are doing is seen as disastrous for their company, given the level of investment made in R&D to develop that IP.
But building enormous fences also has a consequence, because it can shut everyone else out from enjoying the full splendour of what is inside, or else enables a company to charge too high of a price premium to enjoy it.
A film which premiered in 2017 entitled The Current War perfectly encapsulates this notion with an exchange of dialogue towards the end between Thomas Edison and George Westinghouse. The film portrays the story of how the two were embroiled in a monumental struggle to develop the basic technology and tenets of electrification in the late 1800’s.
Thomas Edison: “Don't you think a fence is a unique creation? Your neighbour puts one up, and suddenly one becomes two. You also have a fence. There's only one problem. You see, one person on one side of the fence designed it, one person on one side built it, and one person paid for it, and yet the other person receives a fine, free fence. You know, I think the solution is... to divide the cost of the fence.”
George Westinghouse: “Or you cannot build a fence at all. Your garden would be twice as big. Wouldn't it, Tom?”
Even though this dramatised dialogue is unlikely to have been spoken between Edison and Westinghouse in history, this nevertheless underscores an important lesson for those involved in IP. It is also indicative of the position which GE has long held regarding the creation of IP as well as its position regarding the cost allocation of its investments for such an expansive patent portfolio.
While companies still have a right to capture and protect their IP, hopefully they will learn to appreciate that allowing the industry to flourish facilitates more revenue growth than what they gain from IP enforcement. Driving up costs for the industry and excluding others from competing should never be the outcome.
Philip Totaro is CEO of renewable energy analyst firm IntelStor and a specialist in intellectual property in the industry