Siemens Drops Gears in Offshore Wind Battle With Vestas

Siemens AG (SIE) is betting it can sell an unproven wind turbine that uses rare-earth metals from China to cement its lead over Vestas Wind Systems A/S in an offshore power market that’s forecast to be worth $50 billion by 2020.

Germany’s largest engineering company is developing a machine with fewer moving parts to be used at sea, saying the design offers simpler maintenance and improved reliability. Denmark’s Vestas, the world’s biggest supplier for land-based wind farms, is sticking with its existing technology.

With winter gales exceeding 90 miles (145 kilometers) an hour and waves topping 15 feet at prime sites in the North Sea, the thousands of turbines planned must be rugged enough to avoid a maintenance disaster that could sour the offshore fortunes of either supplier. While Siemens’s “direct-drive” design eliminates gears that are a major cause of outages in current turbines, the novelty may be its main drawback, analysts said.

“We do not have experience so far with a direct-drive machine offshore,” Birger Madsen, director of industry research house BTM Consult ApS, said in a telephone interview from Ringkoebing, Denmark. “The technology is unknown and there is the potential risk that something will surprise you.”

The windmills, whose blades sweep an area bigger than a football field, are competing as the centerpiece of offshore renewable-energy spending that the U.K. Carbon Trust said may grow to 33 billion pounds ($53 billion) by 2020, about eight times its 2010 level. Britain is the world’s largest offshore market, with more than 1.3 gigawatts of the total installed base of about 3 gigawatts at the end of 2010.

‘Devil You Know’

Randers-based Vestas is offering a traditional turbine design that employs gearboxes to convert the slow rotation of blades into faster revolutions to drive an electrical generator. That approach may attract financing more easily, analysts in London at Commerzbank AG (CBK) and Barclays Capital said.

“It’s the devil you know rather than the devil you don’t know,” Ben Lynch at Commerzbank said in a telephone interview. “Banks are going to want to reduce the risk, and technology is one of those risks. At the moment they’ll favor the known technology, which is the Vestas route.”

Munich-based Siemens’s machine is gearless, with the blades linked to a generator’s rotor so they spin at the same pace. To generate power from a slower rotation, the device needs a larger diameter and more magnets made from rare-earth metals. Tests on a 6-megawatt prototype will start this year, said Torsten Wolf, a Siemens spokesman.

“All of our turbines undergo extensive testing before market release,” Wolf said. “We installed gearless test turbines in 2007 and operated them under real-life conditions.”

Siemens’s stock has lost 2.5 percent this year, compared with a 3.1 percent decline in the Bloomberg Europe Manufacturing Index and a 1.8 percent decline in the Bloomberg Wind Energy Index. Vestas shares have slid 16 percent.

Enercon’s Success

Rupesh Madlani at Barclays Capital in London, said the Vestas approach at sea is “more proven and financeable relative to direct drives.” Siemens does offer for sale two geared turbines for offshore wind: a 2.3-megawatt model and a 3.6- megawatt device.

Germany’s Enercon GmbH is the only company to succeed with a direct-drive turbine so far and has installed them only on land, said Commerzbank’s Lynch. That means “the jury’s out” on using the technology offshore, where harsher conditions can hinder access to a faulty turbine.

Northern Europe, with access to the relatively windy and shallow North Sea, has been a testing ground for the technology, and BTM Consult forecasts it to capture 52 gigawatts of a predicted 75 gigawatts in total global installations by 2020, with 20 gigawatts going to Asia, and 2 gigawatts to the U.S., where the developer of the country’s first planned offshore wind farm, Cape Wind Associates LLC, said it’ll use Siemens turbines.

Siemens, Vestas Dominate

Vestas and Siemens dominate offshore projects: Of 2,935 megawatts of installed sea-based wind capacity in Europe at the end of last year, 1,385 megawatts were from Vestas while Siemens had 1,346 megawatts, New Energy Finance data show.

Siemens, whose products range from trains to hearing aids, is pulling ahead with 4,688 megawatts of announced contracts through 2015, all so far for its older gearbox turbines, versus 925 megawatts for Vestas, according to New Energy Finance. Both companies declined to disclose offshore wind revenue or profit.

The two established players will face growing competition from companies such as Areva SA (CEI), Bard Holding GmbH, Gamesa Corp. Tecnologica SA, Repower Systems AG (RPW) and General Electric. Co., according to BTM Consult. Fairfield, Connecticut-based GE plans to introduce a 4-megawatt direct-drive turbine in 2012, the company said last year.

“The market is too big for Vestas and Siemens,” BTM’s Madsen said.

2015 Take-Off

Siemens is “convinced of the upcoming importance of offshore wind-power generation,” the company’s head of renewable energy, Rene Umlauft, said in an e-mail. Umlauft told investors last year Siemens aims to “strengthen our No. 1 position,” and build a new 6-megawatt direct-drive machine aimed at the U.K. market for 2014.

It’s from around 2015 that the European market will really take off, as up to 32 gigawatts projects from the U.K.’s third round of licensing begin to be built, said Fraser Johnston, an analyst at New Energy Finance.

“Virtually all the projects in round 3 will have to be project-financed because of the scale and cost,” Johnston said. “Banks will probably look at the Vestas turbine and think it’s a safer bet.”

Siemens and Vestas have announced plans for U.K. factories. Vestas on March 30 said its new turbine will measure 164 meters from blade-tip to blade-tip and sweep an area three times the size of the soccer field at London’s Wembley stadium.

Rare-Earth Ingredient

Using proven technology removes risk from the customer’s business case, Vestas’s head of technology research, Finn Stroem Madsen said in an interview in London. The Danish company will require a tenth of the rare-earth metals needed to make the magnets in a direct-drive turbine of the same size, he said. China controls more than 90 percent of the global market for the metals and in December cut export quotas by 35 percent.

“If you need spare parts for the direct-drive generator in five or 10 years and you cannot get it, that’s a totally different risk scenario,” Stroem Madsen said.

Wolf at Siemens said the German company buys the magnets rather than the raw materials from China, so they aren’t affected by the export quotas.

Siemens has yet to announce the first commercial offshore installation of its 3-megawatt direct-drive turbine that went on sale in April 2010. The device has 500 fewer moving parts than an equivalent geared turbine, cutting servicing charges by 20 percent, according to Umlauft.

Dong Energy A/S, the biggest offshore wind developer, in December said it will test two of the new 6-megawatt Siemens turbines. In March, it signed a letter of intent to test one or more of the new Vestas machines.

Siemens moved into wind energy in 2004 by acquiring Bonus Energy A/S, whose turbines were installed in Vindeby, the world’s first offshore wind farm off the coast of Denmark.

To contact the reporter on this story: Alex Morales in London at amorales2@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

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