GE Vernova is changing course to reduce complexity and costs of its wind turbines. What are the effects on the US and international wind turbine markets? Will simplifying the product line bring GE Vernova to profitability in 2023? Phil Totaro of Intelstor.com joins the podcast to hash through the details.
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Uptime 157 Bonus
Allen Hall: Welcome back to the Uptime podcast. This is a bonus episode, and I have Phil Totaro here from Entel Store. Welcome back Phil. Thanks. Y. We are here to talk about GE Renova and GE had a recent investor meeting and GE is essentially two divisions at the moment. GE Aerospace. GE Power, which includes the renewables business and of, of all the businesses that remain within GE until they split up at the end of this year.
The, the aerospace is pretty profitable. The renewables business is one of those sore points. So the Renew renewable business, if you look back in 2022, lost a little over $2 billion. And that was mostly blamed on some warranty claims and complicated turbine designs that really hurt them when they got out in the field.
That is something that GE is looking to change right now, and that investor relations meeting, they got to the point of saying, by the third quarter of 2023, GE renewables, GE Renova will be profitable. And that hasn’t happened in about eight quarter. Did you watch that meeting, Phil? Did you see some of the interaction there?
Phil Totaro: I did Allen, and it was, it was interesting. So there’s, there’s kind of a couple takeaways that I had. One is they’re obviously quite serious about wanting and frankly needing to turn things around because they’re getting so much investor pressure. The other thing is some of the changes that they’ve already made and some of the announcements they’ve already.
Definitely underscore a sea change in their approach. I think in the past, you know, if, if we look back to their most profitable time in, in renewables, for instance after the acquisition of the Enron Wind and Taka assets they went on a tear between 2005 and 2012 ish. Where. O obviously dominated the US market, but they did so with, you know, what they’ve even referred to as their workhorse product.
And, you know, from about 20 14, 20 15 onwards they spent a few years unfortunately I think you know, their, their management just allowed. , you know, their middle management to spread themselves a little too thin, chasing a lot of, you know, potential opportunities and products and services and a lot of things that, that got them away from a core unified focus.
and I think that’s what they’re really trying to do now with, you know, again, bringing back Vic Bait for instance. And some of the other changes that they’re talking about making, this is all geared towards getting back to that, you know, the good old days, so to speak. The, the profitable times when, you know, they had unity of purpose
Allen Hall: and with ab bait coming back into that sort of leadership role for onshore, right?
So he. Taking over the onshore business and there’s the head of GE Vernova. It’s gonna be doing the offshore piece, but let’s just talk onshore for a minute cuz onshore is where GE has been really successful in the past. They have a lot of issues at the moment. Not only do they have turbine issues, design issues, they’re getting a lot of pressure because the PPAs tend to be lower.
The tax credits went away for a couple of years. There was just a lot more competition in the marketplace. So the profit margins got. Plus inflation is hit recently, which is driving up product costs. And then the supply chain has been a disaster the last 12 months, 24 months. So there’s a lot to deal with in that company.
Now, just watching that investor meeting, you got the feeling that GE was really going to. Clean up that business that they had to clean up that business. Because if they’re gonna be a standalone company in nine months from now, roughly, they’re gonna, they need to get to profit very quickly. They don’t have a, a GE bank to rely on anymore.
But they still have to feed the marketplace, right? They have to have a, a broad enough set of products. Fix that, the, the, the turbines that they have, but also sell new products into the marketplace. How does GE. Do that. Like it sounds like they’re gonna try to reduce variables here, like reduce the number of blade designs, reduce your di of turbine designs n cell designs, reduce the number of tower designs, dramatically cut those down.
Can they still have a product line that sort of fits that wider marketplace?
Phil Totaro: It’s a great question and a complicated one. Basically for any oem, not just ge, to, to try and tackle. And I think the, the thing that comes into play with that is they’re in, in serving so many markets globally, you know, they, they.
A lot of companies get convinced that they have to design products that are kind of market specific, but that might have been the case, you know, 10, 15, even 20 years ago. That’s not necessarily the case nowadays with a much more robust design approach that companies could be taking. And not all of ’em unfortunately, are, are implementing that that type of approach.
So with ge, , you know, they. , they went off down this path with trying to pursue this Cyprus turbine platform and then even derivatives off that because everybody, you know, was convinced that we have to keep going bigger with turbines because you get certain economies of scale and, and absolutely you do.
The challenge with that though is the, the addressable market goes down as your turbine power rating and rotor size and hub height goes. . So, you know, if we, there’s a lot of people that wanna liken the, the wind industry to automotive and, but if you, what always struck me about that comparison is if you look at automotive, they don’t just, you know, if they spend a year selling a lot of sedans, they don’t just throw that away and shift their entire focus on designing crossover SUVs or trucks or whatever.
The next year you, you still design a sedan, you just spend time designing a better. . And that’s the thing that, that the entire industry doesn’t seem to understand. And it’s, it’s, I think, you know, so going back to wind and ge, you know, why not design a, you know, 2.5 to three megawatt, even a four megawatt platform?
that builds upon what you’ve done before. You don’t necessarily have to have the, the biggest turbine in the world you know, because again, there’s a finite amount of markets where you’re even gonna be able to sell that. But, you know, what’s the problem with, I mean, even with GE in the US market, they’ve been repowering a lot of their 1.5 s.
You know, upgraded gearbox, definitely upgraded blades. And some of those project sites that were GE one, you know, 1.5 70 or 77 are actually operating even more efficiently now with the 87 or the 91 meter rotor. You know, for obvious reasons, they increased the rotor size, but still, I mean, the refurbishment made a differe.
So why is that type of philosophy and approach not being implemented more? You know, when, when a company like GE talks about getting back to doing workhorse products, that’s your workhorse. Like your 1.5, your two megawatt, three megawatt. I mean, if you look at average turbine size in the US market, it’s still, you know, just barely touching three mega watts.
So why is anybody worried about, you know, a five or six or or 10 megawatt onshore wind turbine at at the moment? You know, it’s, it banks want a Financable product and they want GE to focus on. , you know, a core financable capability. And they’ve, look, GEs got, I, I wanna say something like 12 gigawatts worth of order book for the 2.8, you know, 2.5, 2.8 1 27 now.
And that’s great. And that looks like it’s becoming a new, you know, workhorse product for them. But they still need this, you know, three megawatt, one 40. They still need, you know, to be able to incrementally improve on what they already. rather than keep making, you know, huge swings of the bat with much bigger turbines that require significantly different manufacturing tooling.
You know, it, it creates a whole, you know, again, this is what goes back to my comment before the, you know, if you start spreading yourself too thin, chasing too many deals you know, it, it’s you. You’re gonna get away from profitability, you’re gonna get away from economies of scale. You’re gonna get away.
What was working,
Allen Hall: you need to stop selling turbines in groups of 10. You need me selling them in groups of 50 or 100. And the way you do that in the United States and even into Canada, there’s large swaths of land which are pretty flat, pretty simple to get to, and where you can do that. In the United States, it’s a very realizable situation in terms of sales.
If, if you wanna sell a five megawatt turbine on top of mountaintop, you’re gonna sell 10 of those and it, so the quantity doesn’t work out. So lemme give you some numbers here. Where GEs going to reduce, it’s gonna take the number of rotor models down from 15 to four. It’s gonna take the number of ne cells down from nine to four, and the tower models from 40 to nine.
Wow, that is a big re reduction in the variables. And from an engineering standpoint and a production standpoint, it makes life easier because you’re not, as an engineer, you’re not trying to keep up with all the moving pieces of the designs and try to, to have knowledge on each one of ’em. It makes it so hard on engineering and production to do that at the same time.
Get economies of scale cuz you keep buying more of the same parts from your supplier in bulk, right? So that should help push down product costs and maybe that’ll help ’em select more local suppliers, suppliers that are willing to work with them a little bit better on pricing. Again, it, it seems to be going in the right direction in terms of getting to a, a, a profitability standpoint.
It, it’s not gonna be easy of course. I think the, is one of the issues that GE is trying to address immediately, and it has been for the last six months or so, is trying to fix some of the problem turbines out in the market. Right? So they’ve been working on what they call proactive enhancement.
Program and they’re going through the turbines right now. They got about 15% of of the turbines done. They want to get 50% of them covered by 2023. That makes sense too. It seems like because they have so many different mix mixes and matches in terms of turbine design, some of them always didn’t work as well.
Right. So my guess is they’re coming in with software to, to clean those up. That makes sense. Maybe some mechanical fixes to make it more robust. But on the sales side, they’re gonna become more US focused. Right. And that’s where they’re headed because of the IRA bill and because US is sort of, its home turf do you just see them dropping outta some more remote marketplaces over the next year or so?
Well,
Phil Totaro: that’s another great question. They’ve, they’ve already had previously announced that they’re leaving. Which was frankly a, a complicated market for them, particularly with trying to integrate Alstom. . The short answer is yes. I think this could result in them pulling back from some markets where even if they have a manufacturing footprint or partial manufacturing footprint through LM or you know, what have you in these local markets, if they’re just not getting enough volume and they’re not frankly getting enough profitability out of those markets, I think they’re going to have a serious rethink about it.
The, the. Question. I think that remains is, I mean, even if you focus on the United States and to an extension Canada and if Mexico ever decides to get their act together as well you know, you could, you know, can you really run a profitable North American focused operation? And the question is, yes, with sufficient volume.
You know, obviously in the US we’ve got the ira which is helping facilitate that. You know, Canada is starting to see more projects get developed and there’s been recent tenders as well where, you know, presumably GE will end up supplying turbines. The question is in some of the core markets that they’ve had internationally, , are they going to commit to enough?
You know, we’ve, we’ve seen this, this whole dialogue in Europe brought on by the Russian invasion of Ukraine. Presumably that’s instigating, you know, a faster energy transition. Well, we’re all. Waiting with baited breath to see that really come to fruition so that manufacturers like GE can make more of a commitment to, to the manufacturing footprint that they already have and could expand upon.
I think as long as governments are going to. Slow down this process of setting meaningful targets and leave permitting in place that is so complex that it, it basically precludes projects from actually getting built. We need to cut through the red tape for companies to have the confidence to be able to invest.
And this has been the age old question in well any industry you could say, but certainly in.
Allen Hall: Well, in the United States in particular, they’ve already laid the groundwork, like GE has laid the groundwork of the United States in a, in a, in a way in that a lot of a large portion of the United States is readily adaptable to putting new wind turbines in or to repowering, which there’s gonna be a lot of repowering.
So the red tape there. Pretty much goes away versus breaking new territory in a new state or going to a new country. Europe has been very difficult. All the European manufacturers have been complaining about it for at least two years, probably closer to 10. That getting into a specific site, getting all approvals is taking way too long in the American market.
That will not be the case, so that it’s another advantage for ge. Now GE is not, you know, cut, cut, cut at the moment, even though it feels like it. And they are gonna cut still in certain places. They’re gonna reduce the number of design hubs, which is essentially engineers. They’re gonna cut the design hubs down from 20 to four.
So they’re gonna put the engineers in one place and make ’em work together. That makes sense. They’re gonna throw 200 engineers looking at some of the problems out in the field that’s already. Looking to hire about another thousand people and putting about another a hundred million into facilities.
This year they’re putting 20 million into their Neel facility down in, in Pensacola, Florida to, that’s, I think that’s Cyprus. So then you’re gonna get that spooled up cuz I think they’re looking at their opportunity, like if they trim the places in the right places, grow in other places, they can feed that marketplace.
Cuz GE is expecting US entre wind installations with about 10 gigawatt. In 2023. In 2024, figur going 13, 20, 25. It’s gonna go to 14, 20, 26. They’re expecting 19 gigawatts, right? So it’s gonna almost double over the next couple of years. So if they can get their Salesforce in, get the the economy to scale, right, they’ll have a huge marketplace to sell turbines into with every other competitor located outside the United States.
That doesn’t have the, the home advantage like Vestus has a home advantage in Denmark. Clearly. Clearly they do. GE has an advantage in the United States. Does that then because of that projection of the number of, of installations and gigawatts that are going to go in, even though GE may just say, GE makes a dollar, GE Renova makes a dollar in 2023, they’re profitable.
Is it such that when they get out in, in the open stock market by the. Those projections are going to keep them alive. They’re gonna boost their stock, make them something that the average consumer would want to buy in terms of an investment.
Phil Totaro: You know, that’s, that’s a really good analysis. And I think the challenge that they face is, I’m not quite sure if they’re going to see the level of profitability that they need to as a standalone company fast enough.
They will get there and. The question is, you know, are they really gonna show, you know, profitability by the third or fourth quarter this year? Are they gonna see that dollar? I, I’m, I’m. , cautiously optimistic to be perfectly blunt, because, you know, they already had late last year they had some, you know, slowdowns in their, their factory production.
They’re now starting to get things turned back on in, in full again. And even, you know, their competitors are, are staffing up again at, at their factories as well. Are they really gonna be able to recognize enough revenue this year to show a profit for the renewables in the Renova business unit? Mm.
Maybe, but it’ll be close. It, it’ll be, it’ll, like you said, it might only be a dollar to be perfectly blunt. It, it’s gonna be close. That dollar will be hung
Allen Hall: on the wall.
Phil Totaro: Yeah. Framed and . Next, next to Edison’s portrait. Now the question longer term for investors is how is GE positioning themselves? to capitalize on what should be increased demand.
Okay. We, you know, you’ve mentioned the projections that they, they think exist and that was probably, you know, an aggregate of, of a bunch of different market research firms, you know, estimates. That said, the general trend is that it’s going. in the future, and it’s largely being instigated by the I R A.
And the reason why that’s noteworthy is that, you know, if you look at a lot of the projects that have been repowered and will be repowered, You know, you’re talking about more than 14 gigawatts worth of, you know, GE 17 or I’m sorry, 1.5 77 s. You’ve got you know, several gigawatts worth of, you know, 1 6, 100, 1 7, 100 s that are gonna come up for at least a 10 year plus repowering.
And, and frankly, even some of these newer, you know, or relatively newer models, by the time you reach. You know, 2026, in addition to 19 gigawatts of potentially new capacity, you’re also potentially gonna be repowering, you know, if GE gets the Repowering contract on, on sites where it’s their own turbines you’re, you’re potentially talking about, you know, well over 20, close to even 25 gigawatts worth of capacity that they’re gonna be manufacturing.
So, You know, they’re, I mean, to be blunt, yeah. I, I think they are gonna, and by the way, they’re, they’re, they are doing both the 2.8 1 27 platform and some of the Cyprus technology in Pensacola. But I think, you know, if they’re not gonna be pursuing as much of the Cypress platform, at least domestically you know, that gives them the opportunity to do more.
N Cell completions in in Florida. It could even necessitate expanding the factory footprint in the us. , and again, a lot of this is being instigated by the ira, by the fact that companies are gonna be developing new greenfield sites and the repowering of the existing sites, taking advantage of the preexisting electrical system infrastructure, the tower, the foundation, et cetera, and reblading and reselling those, those turbines.
is allowing companies to requalify for the production tax credit that is based on all the financial analysis we’ve ever done. Incredibly powerful. I mean, you’ve got companies like NextEra that have generated more than $8 billion just on wind energy, PTC revenue alone. So that is going to be a huge driver for everyone and will be to the benefit of.
So
Allen Hall: there’s two, there’s two other touch points I want to get to here and, and you mentioned the first one, which is the IRA Bill ge in the investor presentation was, Trying to look at the future and to see when those revenues are gonna come in. They felt like they had a lot of orders that were tentative that the operators didn’t want to announce them until they had the rules from the i r s.
So the IRA bill threw a whole bunch of work on the i r s to come up with the rules on how you’re gonna get the tax abatements, tax rebates for all, everything that’s in that bill. It’s gonna take ’em a while to do. As soon as those rules get released, I think you’re gonna see a flood of operators.
Book and sales, right? Because now they know what the implications are. They can finish their Excel spreadsheets and, and get to those numbers. So there’s a lot of pressure on the i r s to finish up their work. Right.
Phil Totaro: There is, and it’s, it’s interesting because. The, the uncertainty is exactly what slows down the sales process or any kind of process around capital allocation.
Right. You know, we talked a little bit before about how governments can create uncertainty for, you know, companies like GE wanting to invest in factories. Well, they also can’t. Commit to orders or can’t get orders, their orders committed to by project developers who don’t have certainty around how those rules are gonna play out.
What does it mean when they have to have a prevailing wage for, for all the site technicians? You know, some of those, some of the little nuances around that are still uncertain. And with certainty. Comes financial commitment because whatever the certainty is, you know, you can call it good, bad, or indifferent, but as long as there’s certainty, people will invest, people will be willing to pull the trigger because at least they can project.
With more accuracy what the future’s gonna look like with uncertainty, how can you get your wallet out if you don’t know whether or not you’re gonna make a profit on this thing in 10 years or 15 or 20 years? If you’ll recall some. You know, when I’ve been on before, I’ve been talking about the fact that.
Asset payback timeframes are skyrocketing right now. They used to be somewhere in the order of like 12 years to see a net positive return on capital, on a wind asset. Going that’s going back, you know, 10 or so years ago nowadays. . Even with repowering, you’re still seeing some projects because their CapEx cost is so high, their PPA is so low.
And with all these increasing, you know, commodity costs for turbines and, and more expensive turbine o and m that a lot of long-term service contracts are necessitating. It’s, it’s just creating this situation where, you know, repowering might be necessary during an multiple repowering might be necessary during an asset lifetime in order to see profitability.
So having rules around what is the PTC. How are you gonna requalify for it? You know? Is there still a certain amount of, you know, repowering on an asset or refurbishment on an asset that you need to do to hit a minimum qualification for getting the PTC again after 10 years this is going to play into.
A lot of project developers, you know, wanting to, to see that certainty so they can pull that trigger on, on turbine supply contracts and long-term service contracts. And the,
Allen Hall: the US Labor force should be pushing the IRS in the same, in the same manner that a GE is and all the operators are, right?
And it, there’s a lot of jobs that are sitting there waiting to, to kick into action for some bureaucratic, the IRS to push out some rules. Let’s go. That needs to happen now for every, every OEM that needs to get clarified. Now, even if it came out and staged, at least it felt like something was moving.
Right? Right now it feels like nothing is moving. I, I want to get onto one more touchpoint here, which is, Rosemary and I were talking about in a bonus episode recently about getting into wind energy and wind and how to do that. And, and one of the ways that she mentioned was you probably ought go to work with one of the larger companies, learn the ropes, understand what’s happening, get an understanding of the business, and then from there you can develop your career.
This is an opportunity with. Because GE is going to be super aggressive. And this is some of the, I always found in my work experience, some of the more stressful times. But one of the opportunities to learn a lot about the business, because you’re gonna put a lot on your plate as an engineer. You have to be fixing problems, come with new ideas working with customers, working with sales.
Everything is in play and you can. Have a lot of freedom, weirdly enough, in these stressful situations like GEs, and you can have a lot of freedom to learn and to become powerful in this business. And then if you wanna stay, stay if you don’t, you are really powerful in a growing industry that is going to almost double over the next five years.
That seems like a good play if I’m a young engineer. That’s something that I would do. I’m not a young engineer anymore, , so I have had a lot of things in my life, but if I’m 23 years old and I don’t have a lot of overhead in my life, that’s what I’m doing. So it it, it is just a really interesting time for ge and I know Phil, you and I are gonna continue to, to monitor this.
This has been a a, a GE episode. We’re not saying that all these predictions are obviously not gonna come true, and we’re not downplaying that Vestus and Siemens. don’t exist. They do exist and GEs gonna have a hard time. Fighting against them and, and competing against them cuz those are two strong companies and they do deliver a lot of great products.
So there’s a lot more to come here. Phil, thank you so much for coming into this bonus episode. I really appreciate, appreciate you having you on. Everybody connect with Phil Totaro at intelstor.com or reach out to him on LinkedIn.
