Renewable Energy: Wherever the Wind Blows

By: Marcus Chu

Investment Analyst – Industrials

The world’s transition away from fossil fuels toward renewable energy is encouraging, led by a growing supply of renewable energy sourced from hydro, solar and wind. As countries pursue carbon neutrality over the coming decades—with the EU and US aiming for carbon neutrality by 2050 and China targeting zero carbon emissions by 2060—we believe wind power could emerge as a strong growth segment within the renewable energy space.

The Carbon Neutral Era is Here: What’s Next?

International coordination among large emission-emitting countries and pressing policy targets have provided a significant number of opportunities in renewable energy, particularly in wind-generated power. As countries race to build more capacity to source electricity from these alternative energy sources, we believe wind power is set to play a crucial role in the global renewable energy mix.

Global developments on harnessing wind as an alternate energy source has on the whole been quite positive, with offshore wind procurement in the US, plans to increase wind farm capacity in Europe, along with better-than-expected clean energy project procurement efforts from China in 2021. Notably, China’s latest renewable energy project unveiled at the UN biodiversity event in October 2021 is set to rival all the wind and solar power in India.1

While wind power comes naturally and is emission free, harnessing the wind’s kinetic energy is not as simple as planting wind turbines in areas subject to gale-force winds. Each renewable energy source has its own specific geographical requirements, so countries have to pursue different paths. For instance, large-scale wind and solar farms require acres of flat land, high levels of wind and sunshine and coast lines for offshore wind farms—all crucial factors when countries consider how they will reach carbon neutrality. Wind turbine installation and operation is supported by many top global players such as Vestas, General Electric, Siemens and a global supply chain.

Overall, wind-generated energy is a well-established operation that has grown 17% by 275 terawatt-hours (TWh), significantly higher than 2020 levels.2 It is expected that for the remainder of 2021, China and the United States will generate 600 TWh and 400 TWh respectively, representing more than half of global wind output.3

Despite “Free” Source, Cost Inflation Brings Challenges

Offshore wind farms are not too dissimilar to land-based wind farms, and can often generate more energy since offshore wind speeds tend to be faster than on land. Proximity to a main power grid can often mean shorter transmission times too.4

However, wind farms are becoming increasingly complex. As countries expand offshore wind farms and wind turbines increase in size to meet electricity demand, there is a growing demand for raw materials and a need for the global supply chain to support and source the relevant components. Any raw material price inflation, higher shipping costs and supply chain tightness could lead to margin pressures or production disruption. Increased demand also poses logistic challenges involved with transporting bulky support structures, rotator blades and a multi-ton base that is often made from concrete or steel.

A global, coherent effort in clean energy and therefore wind installation puts pressure on component suppliers, since demand surpasses the supply of components and leads to cost inflation pressures. And, unlike solar or distributed solar projects, wind schemes typically require a longer deployment period which include obtaining various approvals, the availability of skilled workers and installation.5

Technological Innovation an Essential Driver for Industry Growth

Renewable energy has evolved. Most recently, we’ve observed an industry-wide effort to build larger-scale wind turbines to meet electricity demand. For example, China is aiming to install 5-6 megawatt (MW) wind turbines, building upon existing technology that could previously process 3MW. With new developments in wind turbine technology it is now possible to produce twice the output at a higher cost of 1.5-1.6 times the raw material input. While component supply can often be considered as a global effort, China’s home-grown efforts to localize and develop its own wind turbine components could also bring cost-competitive advantages, in our view. Despite the headwinds the industry faces with cost inflation, we’ve seen a gradual shift towards the localization of wind turbine component production to keep supply chain costs low from a project profitability lens. Turbine installations are sourced locally from a strong logistics connection and a supply of skilled workers.

With demand for offshore wind technology driving innovation, firms are developing and installing larger, floating wind turbines that deliver optimal power production. These turbines are designed to float in the water as a semi-submersible turbine or as a buoy, where sea levels are too deep to install a fixed, grounded base.

Why It Matters Wind Power is Achieving Grid Parity

The completion of China’s onshore wind turbine subsidy program last year was a positive development for costs associated with installation and turbine manufacturing. Furthermore, the carbon trading green certificate scheme has provided much support for the wind industry.

As demand for project installations rise, the country’s progress in wind project procurements in 2021 was a positive development for onshore wind power projects, some of which had achieved grid parity.

Alternative energy generated at a levelized cost of electricity that’s equal to, or less than the price of buying power from the electric grid is a crucial step as renewables become equally-priced competitors to traditional fossil fuels.

Ultimately, this achievement strengths the debate over renewable energy that has often been cited as “unaffordable”, and widens the gap between wind-generated power and traditional energy, on the back of the increased coal prices in China along with the inflated gas prices in Europe.