Replacing Russian gas with Chinese wind turbines: the challenge faced by Europe’s energy sector

Recent weeks have seen a spate of announcements about huge offshore wind turbines being developed in China. Dongfang Electric Corp has unveiled a 26-MW offshore wind turbine and three other Chinese companies – Goldwind, Shanghai Electric and CSSC Haizhuang – announced plans for 25-MW offshore wind turbines, not long after Sany Renewable Energy put into operation a facility capable of testing turbines of up to 35 MW. 

And as Chinese companies develop ever-larger turbines, so their ambitions in the export market have aroused concerns about the effect they may have on the European supply chain. Some argue without Chinese turbines and Chinese manufacturing capability, Europe may not be able to meet emissions targets; others that Chinese turbines could take over the market, as happened in the solar energy market; and the recent selection of Chinese offshore wind turbines for a high-profile German offshore windfarm ‘should set alarm bells ringing.’ 

But how likely is it Chinese manufacturers will gain a significant share of the market in Europe? If they do, how long might that take? And are Chinese turbines really less expensive than European ones in the long run, when insurance, financing and O&M costs are taken into consideration?

Energy analyst and founder of US-based IntelStor, Philip Totaro, believes Chinese turbines in European markets will be just as expensive to own and operate as turbines made by Western OEMs. This is because of O&M costs, insurance premiums to a developer or owner as well as finance costs, he says.

Mr Totaro tells OWJ, “Although O&M costs for a turbine would be similar for a Western turbine versus a Chinese one, the O&M cost may become a challenge because of a lack of availability of spares for Chinese models. In addition, if import duties are applied to spare parts, that could drive the O&M costs much higher than it would be sourcing from a European supply chain.” What is more, he says, insurance companies will make assumptions about risk premiums based on failure rates that are likely to be higher than turbines from Western OEMs.

Then there is the cost of financing a Chinese turbine. “Finance costs will make the total price to the developer pretty much the same as if they were financing Chinese turbines through Western banks,” says Mr Totaro, “assuming Western banks would finance the deals at all. Western banks are going to offset the cheaper capex of a Chinese turbine with a higher finance rate, so the net amount a developer pays for Chinese turbines will be almost equivalent to the price paid by developers had they chosen Western turbines instead. However, if a Chinese OEM were able to arrange partial project finance through a Chinese bank or institutional investor, this could lead to more market penetration of Chinese OEMs in Europe. That practice is part of the investigation by the EU competition commission,” he says.

Green Giraffe energy transition financial advisor Clément Weber believes using Chinese turbines could be more expensive than using Western turbines, because investors and banks will view the risk – and therefore the cost of financing projects – as higher. “These costs could reduce the financial benefit of using them,” he tells OWJ.

Aegir Insights vice president engineering, Katherine Dykes says scaling up from a 10-MW Western turbine to a 20+ MW turbine certainly has potential benefits but believes there is still a lot of uncertainty around how great they might or might not be. She says the benefits that accrue from larger turbines are not yet fully understood. She agrees Chinese turbines are less expensive, but says the big question is how that cost delta will translate in the European market, even if Chinese OEMs start producing turbines in Europe. 

Asked how significant he expects Chinese penetration of the European offshore wind market to be five years from now, Mr Totaro says a lot will depend on Chinese companies’ willingness to establish a manufacturing footprint. “If they build factories, they increase the chances their market share could be 2-3% in five years,” he says. “If they attempt to import a significant volume of equipment from China, then they will see increasing import duties applied which would restrain their near-term growth.”

Mr Totaro believes China’s long-term ambition is to capture 25-35% of the European market but says this will take a long time to achieve and may not be possible without production in the EU. In the near term, despite Mingyang Smart Energy’s proposal to manufacture turbines in Italy, he does not expect Chinese turbines to be manufactured in Europe. But in the medium term, he says they will be.

“Keep in mind an MoU like the Italian one isn’t usually binding,” he says. “Mingyang has not made any commitment financially or otherwise and is not liable to invest capital in a factory until it receives a firm commitment from the Italian government on things like taxes, and some firm orders for projects in Italy. If we use the deal Luxcara made with Mingyang in Germany as another example, this is still a conditional order. Until they can confirm things are unconditional, there are no obligations, but the customer, Luxcara, has indicated they cannot build the project without using Mingyang turbines. Broadly speaking, developers who are looking at Chinese turbines may be doing so for the sake of being able to build a project, because high interest rates may preclude Western OEMs from lowering prices. Their best bet is to either have a Western OEM as a backup if a Chinese contract cannot be fulfilled or run the risk of not building a commercially viable project.” 

Mr Totaro also believes although major offshore developers such as Iberdrola and RWE have indicated a willingness to consider Chinese equipment, they are really using doing so as ‘leverage’ to get Vestas or Siemens Gamesa to reduce their prices. “All of the parties involved know they would never be able to finance a project with Western banks if they chose Chinese turbines,” he says.