Siemens Energy’s Wind Woes
Since spinning off from Siemens Group in 2020, Siemens Energy has struggled to make consistent profits. However, the challenges have nothing to do with its core Gas and Power (GP) business.
Siemens Energy owns 67% of Siemens Gamesa Renewable Energy (SGRE), a manufacturer of wind turbines and provider of onshore and offshore wind services. SGRE continues to lose money and drag down the broader Siemens Energy business. In hindsight, Siemens Energy overpaid for its initial two-thirds stake in SGRE. Despite the struggles of SGRE, Siemens Energy announced in November 2022 that it is moving forward with a decision to buy the final third of SGRE for around US$4.05 billion in the hopes that the wind energy industry’s profitability will improve with time. The larger stake in SGRE puts pressure on GP to continue posting strong results.
The good news is that there are plenty of opportunities for GP’s established products and services, as well as growth potential in the decarbonization of legacy industries. For example, Siemens Energy has a comprehensive portfolio of compression solutions, such as single-shaft centrifugal compressors, pipeline centrifugal compressors, integrally geared centrifugal compressors, reciprocating compressors, single-stage compressors, hydrogen compressors, carbon dioxide (CO2) compressors, expansion turbines, and compressors services. This portfolio is mainly suited for the integrated oil and gas value chain, chemical, and other industrial processes. However, Siemens Energy could stand to benefit as compression applications grow for renewable natural gas, renewable diesel, hydrogen, and other use cases.
Reading Between The Lines
GP’s business boomed in fiscal 2022, posting a 28.7% increase in orders and an adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of US$633 million, a 75% increase compared to fiscal 2021 despite just a 4.8% year-over-year increase in revenue. GP also reported a 72% increase in free cash flow (FCF), earning US$2.354 billion in fiscal 2022 compared to US$1.369 billion in fiscal 2021.
Meanwhile, SGRE suffered 4.8% lower orders in fiscal 2022, a 3.8% decline in revenue, a US$663 million adjusted EBITDA loss compared to a US$296 adjusted EBITDA loss in fiscal 2021. It also reported negative US$809 million in FCF compared to a FCF gain of US$227 million in fiscal 2021. SGRE’s performance would have been even worse if it weren’t for an asset sale. On September 1, 2022, Siemens Gamesa completed the sale of its South European renewable development assets to SSE for US$613 million in cash, which significantly contributed to SGRE’s full-year FCF.
All told, Siemens Energy grew orders by 16.1% in fiscal 2022, earned 2.5% less revenue, and reported an adjusted EBITDA loss of US$75 million as gains in GP weren’t enough to offset losses in SGRE. In terms of revenue, GP makes up about two-thirds of Siemens Energy, while SGRE makes up the final third. “Unfavorable geopolitical and macroeconomic factors continued to impact Siemens Energy’s business,” said Siemens Energy in a statement. “Despite these headwinds, GP once again experienced strong demand and demonstrated resilience in its business due to rigorous project execution and stringent execution of measures taken in context of its operational excellence program.”
The performance of GP relative to SGRE offers an excellent glimpse into the health of the global energy sector through fossil fuel power generation and renewable power generation, as well as the industrial economy through midstream transmission and compression, liquefied natural gas (LNG), onshore and offshore production, and cybersecurity. For example, Siemens Energy reported more than 20% higher order volumes in Europe, the Middle East, and Africa (EMEA) and the United States while Asia and Australia orders were up less than 1%. All told, EMEA made up more than half of all orders while the Americas contributed more than 30% of all orders.
GP services revenue made up 41% of total GP revenue compared to 59% for new units, which was about the same distribution as fiscal 2021. However, transmission revenue grew by 9%, industrial applications grew by 8%, and GP power generation revenue slightly declined. Meanwhile, wind turbines revenue for SGRE, which makes up 78% of total SGRE revenue, declined by 8% but SGRE services revenue rose by 14%. Weakness across both renewable and nonrenewable power generation paired with a strong performance across transmission and industrial applications is telling of the state of the global economy. In sum, the oil and gas industry, materials sector, and industrial sector are doing very well relative to the rest of the economy. A lack of new unit installations in renewable power generation indicates the damage that rising interest rates are having on the profitability of wind megaprojects that depend on scale and time for their profitability. “In a challenging year we managed to again deliver solid results in our GP segment, while SGRE did not meet expectations,” said Christian Bruch, Siemens Energy president and CEO. “At GP, our operational excellence program is showing results. It was also important that we aligned our group structure with future needs. We will provide more transparency about business performance and flatter hierarchies give us the ability to take decisions faster. The integration of SGRE will help improve profitability from our wind business and allow it to deliver to its full potential.”
Outsized profits at GP relative to only a slight increase in revenue was impressive considering GP endured sizeable global supply chain disruptions and had to combat rising material costs. Regardless, the segment demonstrated pricing power and was more than able to pass along costs to willing customers benefiting from growth in the energy, industrial, and materials sectors. However, Siemens Energy doesn’t expect its business to meaningfully improve in fiscal 2023, as the company is guiding for revenue growth of just 3% to 7%. “We expect the global economy to grow at a subdued pace in the coming year and global supply chains to continue to be disrupted, impacting our business activities especially in the first half of our fiscal year,” said Siemens Energy in a statement. “Nevertheless, we are confident that our strategic and operational measures will further strengthen Siemens Energy’s resilience and will lead to stronger growth in comparable revenue and higher profitability for Siemens Energy compared to fiscal year 2022.”
Opportunities For Hydrogen Gas Compression
Siemens Energy has more than 2500 operational hydrogen compression units with an installed capacity of more than 2.5 million hp (18.6 million kW). As the hydrogen industry grows, new compression will be needed to move and store hydrogen. Turbines will also be needed to power hydrogen applications. Replacing coal-fired power plants with natural gas or hydrogen is a multi-decrease opportunity being explored by Siemens Energy.
Siemens Energy is working on a pilot project with electric services company EnBW that is tasked with lowering emissions from the Stuttgart-Münster, Germany, power station. The power plant is expected to replace coal with natural gas in three years. After that, Siemens Energy and EnBW want to take it a step further by replacing natural gas with hydrogen. “Hydrogen-fired gas power plants have an important role to play in the future energy mix,” said Siemens Energy Managing Board Member Tim Holt. “Hydrogen makes it possible to store energy generated by wind and solar farms, transport this energy, convert it back into electricity, and use it where it’s needed. Our hydrogen-capable turbines give our customers the greatest possible flexibility when it comes to choosing their fuel while also protecting their investment.”
Siemens Energy is installing two 62-MW SGT-800 gas turbines that were packaged and sealed on November 17, 2022. The two turbines replaced three coal-fired boilers. The power plant takes hard coal and cofires it with municipal solid waste. Work is expected to begin in the Q1 2023. “Residual waste is and will remain the most important energy source in Münster,” said Siemens Energy in a statement. “The city recycles approximately 496,040 tons [450,000 tonnes] of this waste every year and converts it into electricity and heat. Together with the new gas turbines, the location will continue to form the backbone of the power and district heating supply system in the central Neckar region, along with the power plants in Stuttgart-Gaisburg and Altbach/Deizisau. After the fuel switch in Münster and its sister project in Altbach, energy will no longer be generated from coal in the Stuttgart region starting in 2025/2026.”
Siemens Energy said its two turbines will be able to process up to a 75% hydrogen admixture once they are shipped in 2025. The package is expected to be able to process 100% hydrogen over time. “The fuel switch from coal to gas in Münster is an important building-block that will allow us to continue to have sufficient power generating capacity in the coming years,” said Georg Stamatelopoulos, EnBW managing board member. “This is the only way we can support the expansion of renewable energy. Today’s agreement shows that we’re taking the next step very seriously. Over the medium term, we’ll be replacing gas as a fossil fuel with hydrogen. We’re already laying the groundwork today. This contributes to our goal of first significantly reducing our company’s CO2 emissions and then becoming climate-neutral by 2035.”
EnBW is reportedly looking at a timeline of 10 to 12 years for complete hydrogen conversion. “Pipelines, control systems, and boiler technology also have to be converted as quickly and easily as possible when green hydrogen is available,” said EnBW Engineer Diana van den Bergh.
“We can’t yet reliably predict when green hydrogen will be available in sufficient quantity and at affordable prices,” said Stamatelopoulos. “But the technology should be in place by that time. We’re not going to put the cart before the horse. Which, by the way, is the objective in all our fuel switch projects.”
Siemens Energy Sets The Tone For Industry Trends
Given Siemens Energy’s broad portfolio and services offering, both in terms of applications and geographical reach, the company can be seen as an industrial bellwether that acts as a yardstick for several industries. The company’s performance illustrates the strength of legacy industries and the ongoing challenges with wind energy. However, many of Siemens Energy’s new products in its GP segment are tailored toward emissions reductions and the growth of LNG and hydrogen. GP’s success proves that specialty industrial machinery companies and original equipment manufacturers don’t have to diversify their products and services toward renewables to unlock growth. This silver lining offers a compelling opportunity for lowering emissions in legacy industries by retiring coal plants, ramping up the role of natural gas in the global energy mix relative to coal and oil, advancing the economies of energy dependent nations through LNG, and investing in the long-term growth of hydrogen production and end-use cases.
