Miguel, partner since 2022 (Toronto, Ontario)
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Time to accept that wind farm costs are not falling
There has been a consistent narrative that the cost of building new wind farms is falling, with falling subsidy prices being offered as evidence. I have challenged this narrative in the past, pointing out that evidence from the accounts of windfarms themselves does not support this argument, citing the work of Professor Gordon Hughes at the University of Edinburgh, and indeed his work as subsequently been replicated by Andrew Montford of the Global Warming Policy Foundation (“GWPF”). However, there is another big reason to question this narrative: turbine manufacturers are losing money hand over fist.
Falling subsidy prices at the same time as massive manufacturing losses makes no sense and is clearly not sustainable. Of all the projects that secured Contracts for Difference (“CfD”) agreements in the most recent subsidy round, known as AR4, only two have actually taken their Final Investment Decision (“FID”) – ScottishPower’s East Anglia 3 project, and Moray West which is a joint venture between EDP Renewables and ENGIE. Ørsted has warned that Hornsea 3 could be at risk without Government action “to maintain the attractiveness of the investment environment”. It has said it will make its final investment decision later this year.
The Government has said that the CfD is structured to take inflation into account, but other than introducing 100% capital allowances for a limited period in a bid to stimulate business investments in the Spring Budget, it has offered little additional help to renewable developers. “Long-life assets” only benefit from 50% relief, with many commentators believing that wind turbines will be considered to be “long-life assets” – these are typically assets with a life of at least 25 years, which tends to be the upper limit of the life of a wind turbine.
Turbine manufacturer losses began to be commented upon last year, and largely explained away as being a result of supply chain costs increasing due to covid and the Ukraine war. But looking at the figures more closely it is clear that the losses pre-date these events:
Ratings agency Fitch, said that “while turbine manufacturers’ profitability is under pressure due to increased raw material prices, supply chain difficulties and temporarily reduced orders”, the long-term sector fundamentals remain supportive. It pointed to significant cost increases in a market where most customer contracts are fixed-priced putting pressure on OEMs’ (Original Equipment Manufacturers) margins, and while OEMs have increased their selling prices over the past year, the pace of cost growth has been higher, leading to negative margins. Fitch expects margins to recover later in the year as manufacturers adjust selling prices, and raw materials costs fall, however, it says that the rate of new orders has slowed over the past year, due to adverse economic conditions and slow permitting processes in Europe.
Professor of Economics at the University of Edinburgh Gordon Hughes compared actual capital costs with costs reported in public announcements before or during construction – both adjusted for inflation (to 2018 prices). He found that on average, actual costs were 18% higher than reported costs and in a third of cases the cost overrun was at least 30%. Reported capital costs were clearly affected by an “optimism bias”, but even so, there was a large increase in the reported capital cost per MW of capacity for off-shore wind farms over the 20-year period, with the main change being between projects completed up to 2009 and those completed in 2015-2018.
Clean Energy’s Latest Problem Is Creaky Wind Turbines
Siemens Energy fell 36% on Friday morning after the company withdrew its fiscal 2023 profit guidance late Thursday. Components in wind turbines made by its subsidiary Siemens Gamesa are wearing out faster than expected. The news isn’t just a blow for the company’s shareholders, but for all investors and policy makers betting on the rapid rollout of renewable power.
The problem appears to involve critical parts like bearings and blades. The average lifespan of a wind turbine can be up to 20 years, but the wear and tear has been spotted in both newly installed and older turbines.
The creaky components, which affect 15% to 30% of the installed onshore fleet, will be expensive to fix. Management thinks the cost could run upward of €1 billion, equivalent to $1.09 billion, effectively wiping out more than a third of the profit the company is expected to make doing maintenance on wind turbines it has already installed, according to Bernstein analyst Nicholas Green.
Siemens Gamesa has been a problem child for years due to cost overruns and supply-chain challenges. Siemens Energy recently took full control in a roughly €4 billion buyout of minority shareholders to turn it around away from the full glare of the public market—or so it hoped.
One risk for investors is that the same faults crop up at other wind-turbine manufacturers as a result of shared supply chains. Shares in rival Vestas Wind Systems were down 7% on Friday morning.
A fundamental design flaw is an even more worrying possibility. Turbine makers have been under pressure to make bigger, more powerful wind turbines and may have overstretched the technology. When things go wrong with such massive pieces of equipment, they are costly to fix. The nacelle that holds all of the turbine’s generating components can be as large as a house.
This week’s fun finds
EdgePoint Football Club remains undefeated
The only thing that’s slowed the team down so far is the long weekend. A shorthanded roster resulted in a 2-2 tie, bringing the season record to 2-0-1.
A taste of the Ionian sea
For her moai (our version of bringing EdgePointers together for a meal), Florika brought in Albanian food for the internal partners to try.
This Year Might Be the Worst Tick Season Ever. Here's Why
“From 2020 to this year, I would say it’s a 100% increase in the number of ticks humans have encountered,” says Saravanan Thangamani, professor in the department of microbiology and immunology at SUNY Upstate Medical University who tracks ticks and tick-borne diseases across New York. Until recently, Thangamani invited people from across the state to send in ticks they had encountered for identification and counting, but the sheer number of submissions and the lack of operational funds to keep up with them forced him to shut down the program.
As with so much else, climate change is playing a big role in extending ticks’ breeding and biting seasons. Brief, mild winters and long, hot springs and summers are incubators for ticks, especially in the Northeast and the Midwest, which once featured punishingly cold winters, but increasingly do not.
Rising temperatures affect not only the presence of ticks native to a given area, but the migration of new ones. “We’re starting to see southern species of ticks coming north,” says Dina Fonseca, professor and chair of the department of entomology at Rutgers University. “The Gulf Coast tick is now established in New Jersey. Staten Island [New York] has had the Gulf Coast tick for three or four years already, maybe five. It wouldn’t be here if it wasn’t for the fact that it’s warmer.”
In some cases, climate change actually reduces the population of ticks. Fonseca points out that the southwest is getting increasingly dry as climate change-related droughts persist, and that tends to kill off tick populations. The same is true for the plains and the western range. But elsewhere, a warming climate is a boon to ticks.
The black-legged tick—also called the deer tick, which carries Lyme disease, “used to be in the Northeast and now it has moved all the way to Eastern Canada,” says Moulaei.
As for what you can do to protect yourself from any tick bites, the advice remains the same: If you live near an area that has ticks or you venture into forested or grassy parts, tuck your pants into your socks, use insect repellent on yourself and your clothes, do a complete tick check of yourself and your pets when you get home, shower shortly after you conduct your check, and run your clothes through the washer and especially the dryer on high heat, because hot temperatures can kill ticks.
Junk websites filled with AI-generated text are pulling in money from programmatic ads
Over 140 major brands are paying for ads that end up on unreliable AI-written sites, likely without their knowledge. Ninety percent of the ads from major brands found on these AI-generated news sites were served by Google, though the company’s own policies prohibit sites from placing Google-served ads on pages that include “spammy automatically generated content.” The practice threatens to hasten the arrival of a glitchy, spammy internet that is overrun by AI-generated content, as well as wasting massive amounts of ad money.
Most companies that advertise online automatically bid on spots to run those ads through a practice called “programmatic advertising.” Algorithms place ads on various websites according to complex calculations that optimize the number of eyeballs an ad might attract from the company’s target audience. As a result, big brands end up paying for ad placements on websites that they may have never heard of before, with little to no human oversight.
To take advantage, content farms have sprung up where low-paid humans churn out low-quality content to attract ad revenue. These types of websites already have a name: “made for advertising” sites. They use tactics such as clickbait, autoplay videos, and pop-up ads to squeeze as much money as possible out of advertisers. In a recent survey, the Association of National Advertisers found that 21% of ad impressions in their sample went to made-for-advertising sites. The group estimated that around $13 billion is wasted globally on these sites each year.
Now, generative AI offers a new way to automate the content farm process and spin up more junk sites with less effort, resulting in what NewsGuard calls “unreliable artificial intelligence–generated news websites.” One site flagged by NewsGuard produced more than 1,200 articles a day.
NewsGuard says that most of the AI-generated sites are considered “low quality” but “do not spread misinformation.” But the economic dynamic of content farms already incentivizes the creation of clickbaity websites that are often riddled with junk and misinformation, and now that AIs can do the same thing on a bigger scale, it threatens to exacerbate the misinformation problem.
