As companies and developers rush to take advantage of the US Production Tax Credit, which could lead to over 23 gigawatts (GW) of new wind capacity in 2019 and 2020, there is the risk that unforeseen supply chain bottlenecks could lead to project cancellations and postponements, significantly hampering otherwise explosive growth.
This is the primary conclusion from a new study published by Wood Mackenzie Power & Renewables which analyzes the potential of supply chain constraints for the US wind energy industry which, if unaddressed, would put as much as $2.1 billion of revenue at risk. Specifically, according to the report’s author, many of the large players in the US wind energy industry have not properly prepared for the rapid growth expected to take place in the next two years, spurred by deadlines to qualify for the Production Tax Credit (PTC).
“Between 2019 and 2020, we anticipate strong growth in wind energy installations as the industry rushes to meet deadlines for US Production Tax Credits (PTCs),” said Dan Shreve, head of global wind research at Wood Mackenzie Power & Renewables. “However, increased demand for transportation capacity due to growth in partial repowering activity, logistics requirements, and competition from other industrial sectors could severely hamper the transportation segment’s ability to ship components.”
“These supply chain constraints will escalate deployment risks for all wind energy participants — increasing the likelihood of higher costs, missed deadlines, lost production, and fewer PTCs if projects can’t be commissioned in time,” Shreve added.
Directing much of the logistics press is the existing seasonal volatility that is inherent in the US wind energy industry. A combination of bad weather, wind speed restrictions during turbine erection, and the cyclical nature of PTC legislation have reliably caused the fourth quarter to be the busiest time for wind turbine construction and commissioning.
US Wind Capacity Installations, 2010-2020E*
As such, given that wind turbines are usually transported immediately before a project starts construction, peak wind turbine transportation for large components occur in the third quarter of the year. This, in turn with the fourth quarter backloading, puts tremendous negative pressure on the entire value chain, according to Wood Mackenzie, and if the US wind industry is to avoid bottleneck issues in the next three years caused by increased demand, immediate collaboration is necessary.
Interestingly, one of the differences (for example) between 2020 and 2012 is the simple fact that wind turbine blade lengths have increased. In 2012, the average blade length was 44 meters and, as such, the requirements needed to transport a blade were less demanding. Fast-forward eight years, however, and the average blade length is now over 55 meters, increasing the difficulty of moving them and requiring special trailers, more experienced drivers, special escorts, all of which cause to average a lower miles-per-day rate.
“While we’ve seen upticks in demand put pressure on transportation capacity in the past, the total level of effort required from logistics providers this time around will be substantially higher than during past peaks,” said Shreve. “New turbine technology is producing higher-capacity turbines, but this results in further strain on the supply chain, as components are larger and heavier, and more component shipments are needed per turbine. This, in turn, increases requirements for highway escorts, reduces transportation equipment cycle times, and increases demand for larger cranes.”
In the end, if this multitude of potential supply chain constraints remain unaddressed, developers could be risking over 23% of the wind energy installations expected in 2019 and 2020. Turbine installations could decline by 1.1 GW — 366 megawatts (MW) in 2019 and 720 MW in 2020 — representing a loss of more than $800 million in turbine sales. Impacts imposed by the Production Tax Credit could represent lost revenue of up to $1.3 billion over the 10-year tax credit period.
According to the study, while there is some measure of preparation underway for expected growth in the next two years, it is not to the level required, given that many companies have not anticipated the sheer magnitude of the supply chain constraints and the potential financial losses that could be caused as a result. The report outlines several collaborative actions that could help better prepare companies, including:
- Shift installation schedules and transport deliveries to minimize quarterly peaks
- Establish forward storage sites to pre-position component inventories near wind farms
- Prepare transload and wind farm sites to accept early deliveries
- Prioritize shipments to the most efficient sites and wind farms
- Communicate these findings and develop action plans now
“Aggressive action by supply chain participants is needed now to solve this impending supply/demand gap and reduce or eliminate the demand shortfall and the $2.1 billion revenue at risk,” said Shreve. ”A different mode of operation will be essential in 2019 and 2020, requiring an immediate and broad-based collaborative effort.”
”The industry should also seek public policy relief to allow PTC extensions to 2021 and beyond, which would support the wind energy industry’s efforts.”
Given that 2019 is already upon us, I asked Dan Shreve, Head of Global Research at Wood Mackenzie, whether there is time to scale up the necessary collaboration: “There is time to address the issue, although it is fair to say the greater impact may be for 2020 versus 2019. It also should be noted that the collaborative actions that are being recommended are not necessarily capital intensive, which allows the pertinent member of the value chain to make changes quickly.
“The MAKE (now Wood Mackenzie) team has flagged this risk for almost two years now in our regional reports and a number of conference presentations,” Shreve added. “I feel the issue has been surfaced effectively but action has been slow to develop due to some of the financial pressures associated with delivery levelization.”
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