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GE looks like sticking on renewables path

The world and his dog have an opinion on GE, but here at Rethink Energy we have only espoused one on its renewables business, which initially to us looked like half-hearted support, likely to cave in. This article is about revising that opinion somewhat.

When you are on the side of renewables, you tend to not be on the side of fossil fuels, and GE gets more of its revenues from those, than from renewables and the two sides do not sit well together.

If petroleum stops being a mainstay of automobile fuel by say 2035, and instead electricity is, then GE wants to have moved into making eMobility solutions, instead of supporting the exploration industry for oil and production for its products. If airplane engines by 2040 no longer burn fossil fuels, but instead work off electricity, then an entire eco-system of how that works needs to be put in place and GE needs to be in it. If instead that is replaced by Hydrogen, then GE needs to be in the business of making electrolysis engines to produce that hydrogen, and any other parts of the eco-system that are tough to make.

Renewables are for the long haul, but we have seen time and time again that fossil fuel businesses, judge renewables purely on profitability, and not on their eventually profitability at maturity.

We have friends who have met the new CEO, and say that he will “sort out the mess” that is GE. Until now Larry Culp looked like a turnaround artist without a vision, but perhaps that’s because we were convince by the way the company had behaved in Europe, that it was about to get out of global wind turbines and retrench back into the US and into global reach on gas turbines only. It’s results came out this week, and as always the devil is in the detail, but there was one stand out detail, and that is the order book for wind turbines is swelling considerably, and the gamble with its Haliade-X and other products appears to be paying off.

Culp took a special moment to address the renewables business in the results event, and his story was simply that he was undoing a lot of harm that had happened to GE in the purchasing of Alstom, and that if you looked beyond that to the renewables business without that acquisition, it was essentially flying, and the results will come through in 2020 and 2021.

The quarter had revenues of $28.7 billion, down 4% as reported, but up 4% if you take each product line organically the growth was in Renewables and Power, despite all the order book shenanigans we heard about the aircraft industry over the previous month or so.

But in Power orders of $4.9 billion are down 22% as reported, but up 2% organically and the company has a stronger gas order book up 27%. GE booked 4.6 GW on 16 heavy-duty gas turbines and the Gas Power backlog, is up 5% to $71 billion. That’s a healthy backlog for an industry that we all hope will be dead in under ten years.

GE has quite rightly thrown Grid Solutions into Renewables and that business is up 25%. Renewables orders of $3.7 billion were up 35% with onshore wind up 87% mainly driven by the US. And that’s the important number. This essentially means that the $500 million gamble GE took on a new supersize Haliade-X is working its magic on their order book.

Culp claims that he is seeing pricing stabilization, and he has said this before and we think it is a forlorn hope. But elsewhere in this issue we have covered Suzlon, the Indian wind turbine maker who is virtually bankrupt with no new product like the Haliade-X on the horizon. Onshore wind orders were also up 81% reported, that’s not he Haliade-X, but the Cypress, a 5 NW onshore device.

Although the business had an operating loss of $184 million, down $269 million versus last year and margins were negative, a large part of this is being put down to higher losses in Grid Solutions, hydro and offshore wind as GE began fully consolidating legacy Alstom JVs in the fourth quarter of 2018.

It then cites legacy contracts, and challenging onshore project execution in Asia Pacific, and increased R&D investment for the Cypress and Haliade-X, as well as tariffs and constant pricing spirals. But it is in the wind game, it is staying and its order book is growing and it can see the light of day.

What we now need to hear loud and clear is that Culp doesn’t see that as a great reason to exit the renewables business, and focus on what’s really important – fossil fuels.

But he still has plenty of problems, and we don’t want to add to them. It gets easy to convince yourself that the decline of airplane engines, gas turbines and the rest will go on forever, and that you should encourage that. When what you need is inspirational leadership, design in cost spirals, and reducing CO2, and prepare for a graceful exit in plenty of time while they are still worth something.

What most CEOs of fossil fuel businesses fail to realize is the enormous opportunities there are providing the replacement systems – EVs, their infrastructure, renewables, pumped water storage, batteries, brand new home heating systems, hydrogen generation facilities – and stop getting worked up about what “used to be highly valued” in the past.

He even said that onshore wind in the quarter and year-to-date was actually profitable and that his top priorities were quality and delivery. And said that he expects Renewables to remain on track for the full year guidance of double-digit revenue organic growth and did not care a jot that the margin would be negative through 2019.

In June Culp spent a week with his Renewables leadership team and left feeling confident he said, that GE can grow this business profitably as legacy items run-off. He talked up tighter pricing controls and traction and positive pricing movements for the first time in 10 quarters, while still reducing costs.

While we don’t believe that onshore wind order pricing has fully stabilized his company clearly has increased orders for H2 2109.

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