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GE Is Likely to Keep Getting Windburned on Renewables

NEW SHOREHAM, RI - SEPTEMBER 22: The GE-Alstom Block Island Wind Farm stands 3 miles off of Block Island, Rhode Island on September 22, 2016. The five 6-megawatt wind turbines are the first marine-based wind farm in U.S. and are expected to produce more eletricity than Block Island needs. (Photo by Scott Eisen/Getty Images) (Photographer: Scott Eisen/Getty Images North America)

General Electric Co. plans to spend $600 million to try to right the ship at its wind-energy business, which is clearly the biggest drag on profits. Don’t expect this to be the last time this business will need fixing.The overhaul, disclosed when the company announced its third-quarter results on Tuesday, is aimed mostly at the production of onshore wind turbines and is expected to result in $500 million of annualized savings. The onshore wind business has sales of about $9 billion a year and accounts for most of the losses at the renewables segment, which were $934 million in the third quarter. Unreliable wind turbines that result in warranty payments to customers are the root cause of most of the red ink. This is Chief Executive Officer Larry Culp’s main focus with the new spending.

The plan makes sense. Culp wants to produce a few standard wind models — what he calls workhorse products — that will eliminate the complexities of making too many variations for different customers. This will streamline manufacturing for GE and suppliers and provide higher quality while reducing costs. With a simplified, more reliable wind turbine, the warranty costs will drop. For those already in operation, GE is considering corrective measures to reduce the percentage of downtime into the low single digits.This is all good on paper, but GE has been talking about blade-failure problems and addressing them with AI-enhanced inspections and preventive maintenance for almost two years. Losses since then have only deepened. Through the first nine months of this year, the renewable energy unit bled $1.8 billion. In the third quarter, the renewables unit had $500 million of higher warranty and other reserves because of wind-turbine performance.Culp has drawn a line in the sand, saying the onshore wind business will become profitable in 2024. This leaves little margin for error because GE plans to spin out Vernova, an energy company that consists of GE’s renewables and the traditional gas-power business, that same year as part of a plan to split into three companies (the other two are aerospace and health care). The goal for profitability at renewables has already been pushed back by a year. The task of simplifying manufacturing is difficult because the technology continues to change rapidly.

Where GE is likely to incur more restructuring costs is at the offshore wind unit, which also loses money. That business is expected to become profitable in the mid-2020s, Culp said. He intentionally left that date a bit vague because of the problems plaguing offshore wind. One of those problems, which Culp didn’t address, is a lawsuit by a unit of Siemens AG.A Massachusetts jury in June decided that GE’s design for its Haliade-X offshore turbine infringes a Siemens patent. GE is now trying to reduce a royalty rate that would put $30,000 per megawatt in Siemens’s pocket and is also pushing for a design change that would work around the patent, according to Bloomberg Law. 

The wind business is also highly dependent on government subsidies. When the production tax credit was phased out completely for wind projects at the end of last year, orders plummeted. They were down 41% to $3.7 billion in the third quarter, but GE attributed part of that drop to a large order from the period a year earlier.

This year’s Inflation Reduction Act, which reinstates those tax credits, will boost wind power. Overall, the bill will provide $370 billion of tax credits over the next decade, but it will start impacting orders at the end of 2023. Culp said he’s not counting on those tax credits to return the onshore wind power business back to black ink. As part of the plan to save $500 million a year at onshore wind, Culp will reduce the workforce by a fifth. He’ll also focus on fewer, more profitable markets and seek more equipment-only projects, he said.  

Renewables is clearly sucking the most wind at GE. Sales dropped 43% in the quarter from a year earlier. Aerospace is riding a rebound of commercial airline travel, and organic sales jumped 25% with profit margins climbing 3.4 percentage points to 19.1%. The health-care business is ready for its spinoff, boasting segment profit margins of 15.4% and organic sales growth of 4% in the quarter. Power, which will be the other piece tucked into Vernova, isn’t a stellar performer. Sales dropped 12% in the quarter to $3.5 billion, and segment profit margin was 4%, down from 5.1% last year.

Even with a turnaround at wind power, Vernova will still be the laggard among the three pieces into which GE is being broken up. Expect more pain and even more delays before this combination of renewable energy and gas power will be launched as a separate company. It’s better to be surprised if Culp can pull it off by 2024 than to be disappointed — again.

More From Bloomberg Opinion:

• California’s Solar Problem Gets Offshore Wind Fix: Liam Denning

• We Need a War Effort on Wind Turbines: Chris Bryant

• Texas May Get to Carbon-Free Power Before New York: Justin Fox

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Thomas Black is a Bloomberg Opinion columnist covering logistics and manufacturing. Previously, he covered U.S. industrial and transportation companies and Mexico’s industry, economy and government.

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