VWSYF - Vestas: Breakthrough On Turbine Recycling And Japanese Offshore Developments

Summary

• Vestas, Danish researchers, Stena Recycling and Olin Epoxy solve a major problem for recycling wind turbines.
• The process breaks down Epoxy materials to their components, allowing old turbines to be recycled. The process is simple and scalable for immediate adoption.
• Offshore wind in Japan is ready to take off; Vestas has a relatively new JV with Mitsubishi Heavy Industries.
• Vestas is well-positioned to benefit from the above developments.

When thinking about key drivers for investment, there are a limited number of ways that a stock can be revalued. Cost savings is a way that the financial outlook can change for the better, but this is rarely a transformational change. Another way that the value of a stock can shift is that the market can change how it values the business that a company operates in. I've been tracking the wind industry in general and Vestas Wind Systems ( VWDRY ) in particular. Here I suggest a couple of big changes in Vestas' fortunes that have become public recently, but I'm not convinced that the market "gets" how important they are. These changes relate to Vestas' discovery with key partners of a means to recycle wind turbines that has large implications for both Vestas and the industry. Secondly, I see evidence that the market is changing positively towards the adoption of offshore wind turbines, and Vestas is in the vanguard of this shift. These issues make Vestas worth relooking to take advantage of the reshaping of global energy generation.

Vestas and teams discovery means old turbines can be recycled

When considering recycling, a big issue is that if new (recyclable) materials are needed to replace old (not-recyclable) materials, then recycling starts only from turbines with the new materials. Vestas and partners have broken through with this issue by finding a way to make existing epoxy-based turbine blades recyclable. This has the additional benefit that new turbines can still be produced with existing materials. This is a big deal.

Here is how Lisa Ekstrand (VP & Head of Sustainability, Vestas) described the breakthrough:

"Until now, the wind industry has believed that turbine blade material calls for a new approach to design and manufacture to be either recyclable, or beyond this, circular, at end of life. Going forward, we can now view old epoxy-based blades as a source of raw material. Once this new technology is implemented at scale, legacy blade material currently sitting in landfill, as well as blade material in active windfarms, can be disassembled, and re-used. This signals a new era for the wind industry, and accelerates our journey towards achieving circularity" .

The above discoveries came from Vestas working with Danish researchers, Stena Recycling (headquartered in Sweden), and global epoxy manufacturer Olin. Olin is the world's number 1 supplier of epoxy materials (after acquiring Dow's Epoxy business in 2015). The process is amenable to scale-up, which is a good thing because by 2025 WindEurope anticipates that 25,000 tons of blades will reach the end of their operational life annually.

Warranty issues with new blades

A problem with fast-moving innovation is that it takes time for possible defects to be recognized, so stocks of new turbines may have costly warranty issues if defects appear. Siemens Gamesa Renewable Energy ( GCTAF ) seems to be particularly affected , with warranty issues that are relatively long-lived.

The outlook for offshore wind

The above commentary about recycling issues and warranty provisions go towards issues about the profitability of turbine manufacture, which is a key issue. The other side of the story is what is happening with the wind market, especially for offshore wind, where I think massive expansion is coming.

Offshore wind: lots of talk, but clearly it is starting to happen

An explainer from the World Economic Forum recently provided a simple summary concerning issues around offshore wind, and the World Economic Forum provided an update on how offshore wind production can be ramped up in 2023. In my last article concerning Vestas, I discussed how Vestas' CEO Henrik Andersen argued that wind turbines have reached an optimum ((HUGE)) size and now is the time to scale up. An additional issue with offshore wind discussed by the World Economic Forum was the need for floating wind technology to be implemented, as fixed bottom offshore turbines are limited to waters ~60 meters deep. Things get interesting in deeper waters for a number of reasons as discussed by the World Economic Forum.

The explainer mentioned above gave some statistics about offshore wind, stating that, as of October 2022, only around 50 floating offshore wind turbines had been commissioned. The suggestion was that global offshore wind stock was expected to exceed 5 GW by 2030 and 25 GW by 2035.

I suggest that these figures are likely to be quickly overtaken. Consider just the Australian offshore wind market (there isn't one yet), with a change of Government there is massive interest in offshore wind developments, including floating offshore. Last week, French nuclear energy giant EDF purchased a massive (up to 10 GW) proposed floating offshore wind project off the coast of NSW. The plan is to align staged construction of the offshore wind farm with closure of aging coal-fired power plants in NSW, most of which (if not all) will be closed before 2030. There is a similar offshore wind project (Star of the South) proposed off the coast of Victoria (size up to 2.2 GW) to replace aging Victorian coal-powered infrastructure. And the Star of the South is just one of a number of possible projects to exploit offshore wind capacity (mixture of fixed and floating projects) of 75 GW in Bass Strait off the southern coast of Victoria. The Victorian Government has offshore wind targets of 2 GW by 2032, 4 GW by 2035, and 9 GW by 2040.

Similar stories can be told about just about any country with a coastline.

Offshore wind in Japan

It is always interesting to look for signs of change, and at the beginning of February, there was one for the offshore wind industry in Japan. The nuclear disaster at Fukushima in 2011 was for me a signal for the end of the nuclear industry as a big player in decarbonizing the world's power production. Tokyo Gas ( TKGSY ), the largest gas utility in Japan, has announced a partnership with Shinobuyama Fukushima Electric Power Co. to explore establishing a 30 MW wind farm off the coast of Fukushima using floating turbines. This is an early indicator of a massive move offshore. Such developments require Government involvement to enable development in Japan's EEZ (Exclusive Economic Zone) as has been done in Europe and is happening in China and South Korea. Japan is moving to build substantial capacity, with a goal of 45 GW of offshore wind by 2040. This would substantially replace the Japanese nuclear capacity. The significance of this for major global wind suppliers such as Vestas is obvious. Vestas has a JV with Mitsubishi Heavy Industries ( MHVYF ), MHI Vestas Japan, which was established in 2021 after a relationship which started in 2014. A big focus of this JV is offshore wind.

Conclusion

Recycling often gets a yawn from dollar-focused investors, or worse, a negative reaction because it often means increased costs. I see the announcement by Vestas of a breakthrough in recycling wind turbines in a different light as this relieves anxiety about the need for a whole new process to be developed with new (recyclable materials). A new process inevitably involves innovation, new workflows, and chemistries which all mean additional cost and also a continuing problem with recycling existing turbines. I suspect that part of the current cost-based malaise about the wind industry might involve anxiety about these issues. Here I've summarized a breakthrough by Vestas and partners which solves the existing problem of a large stock of legacy turbines that need to be recycled and also avoids changes in existing turbine manufacture. This must have a positive impact on the cost structure for turbine manufacture and recycling going forward. Of course, this is an advance that will assist the whole wind industry, but being ahead of the game must provide Vestas with an advantage that must impact its business positively.

At the same time long-term investments by Vestas, especially in Asia, are now showing signs of beginning to bear fruit, with a JV with Mitsubishi Heavy Industries coming at a critical time for the emergence of an offshore wind industry in Japan.

I've been tracking Vestas stock for some time now, and late last year , I wrote a contrarian article concerning Vestas' prospects. When I wrote that article in October 2022, the Vestas share price was $5.94 and Seeking Alpha's Quant rating was a "hold" and had a Warning about high risk of dividend cut. Today it is $9.77 and since the start of this year it has hovered around $10, but Seeking Alpha's Quant rating system still has a hold and warning about the risk of a dividend cut. Clearly, it is a tricky time in the market, but I don't think that the developments I mention here, which impact both costs and also emerging markets, have yet been factored into the Vestas' share price.

I am not a financial advisor, but I follow closely the massive changes underway as the world begins to decarbonize energy production through solar PV and wind power. I hope that my comments are useful as you and your financial advisor reflect on investment opportunities in the renewables space.

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