Chinese Turbines in Europe: Security Risk or Net Zero Necessity?

Intro (00:00):
Welcome to Power Pod, the renewable energy podcast from TGS 4C, a leading provider of offshore wind intelligence. In each episode, we explore the key developments shaping the offshore wind market and bring clarity to the biggest trends shaping the industry and the wider energy transition.

Dan Wiseman (00:23):
Hello and welcome to another episode of PowerPod. I'm your host, Dan Wiseman. Today I'm joined by a couple of my fellow analysts here, James and Chris, to discuss a key talking point in the industry at the moment, which is China and the EU's stance on using Chinese imported products, and how that affects the European market, and how that has a knock-on effect with the Chinese market as well. So, welcome to the podcast, guys. Good to have you here. Why don't you start and just give a quick introduction on who you are and what it is that you do here at TGS 4C?

James Payne (01:03):
Thanks for having us, Dan. My name is James. I am the market analyst for mainland China, Taiwan, and Vietnam markets here at TGS 4C.

Chris Ayres (01:15):
Thanks for having me, Dan. I'm Chris Ayres, and I'm the market analyst for Finland, Sweden, Portugal, Spain, and Ireland, predominantly for EU policy and their policy towards offshore wind, grid reform, interconnection, and all that fun stuff.

Dan Wiseman (01:26):
Excellent. So this is going to be a pretty interesting conversation because I think we've touched on a couple of our episodes before, mainly because we are seeing that in the EU, progress is relatively slow. They have a massive target to reach, and it is getting harder for us to see how they're going to achieve these targets if they're not looking to outsource some of the components. Now, we know the EU's being quite strict about using Chinese turbines and using Chinese components in offshore wind in Europe. So, break it down for us: what exactly is the EU's stance on involving China in offshore wind in Europe?

Chris Ayres (02:15):
Well, it's an interesting one because there are kind of two sides of looking at this. There's the stance that shows a lot more restraint towards China, and then there's another stance that is a lot more allowing or looking to be more accommodating for China.

So, I'll start with the first sort of restrained position, and that's around if you see all they're doing around cyber security laws, strengthening EU resilience and cyber industry laws. For instance, later on this year, the EU is due to release the EU Cyber Security Act number two. That follows a lot of pressure from industry and from policymakers to say, actually, there are growing threats to offshore wind.

So that's absolutely key to their strategy going forward if we're to assume a more restrained EU strategy towards China. You know, I've just referenced that offshore wind is an increasingly critical target. Some, even CEOs and members of the defense community, have said EU offshore wind manufacturers cannot or should not import key components or subcomponents from China out of cyber security concerns.

And that includes, and we'll get onto this in a little bit more detail later on, but the critical kind of semiconductors that are absolutely vital for a range of offshore wind components and functions. And of course, there's a whole raft of legislation that's been introduced aiming at curtailing Chinese integration. We've had the Net Zero Industry Act, I've talked about the Cyber Security Act two, the strengthening of state aid laws preventing a kind of race to the bottom, if you like, of state investment into offshore wind manufacturing.

And I think it's important to remember the actual wider geopolitical context that I think EU legislators in particular are very conscious about. There are very key lessons learned from four years ago when Russia invaded Ukraine and our overdependence on Russian gas. And, you know, we saw prices rise across supply chains, not just offshore wind, not just energy. And that's had an immeasurable impact on offshore wind cost and deployment.

Actually more recently, this isn't the rest is politics, but the dependence that's been highlighted around military-industrial reliance on the military-industrial strength of America. I think that dependence on America in this instance and on Russia from the invasion of Ukraine gives the kind of mindset, I guess, of where EU legislators are with regards to industrial dependence on another single third country for anything.

So I think that's the more sort of China-pessimistic or third-country-pessimistic point of view. And we can get onto the kind of more optimistic or at least more accommodating view later on, but that's where they may be at.

Dan Wiseman (05:45):
Okay. And I mean, by no means do China need to move into Europe? I mean, China in terms of their pipeline is world leaders in terms of offshore wind. So, why look to branch out? Is it a case of they're looking to aid in kind of more global pursuits of offshore wind, or are they just looking to create some sort of kind of deal with countries to kind of just expand because it's business, or what is it that China's looking at when moving into the EU?

James Payne (06:20):
Yeah, I mean, the EU is a very attractive market for China right now. The Chinese domestic market at the moment is quite saturated. The manufacturers from China right now have faced some incredible competition. So, for each wind farm they bid for, the profits they can get from that are quite low, or lower than they used to be, certainly. There was a subsidy program from the National Chinese government up until about 2021, and when that stopped, things got incredibly intense competition-wise, and the profit margins just dropped completely. So, they're looking to expand abroad, these wind turbine manufacturers. Some are state-owned, so some might not have to worry so much, but the ones that are privately owned, they really need to get some track in some foreign markets to get some profits going, stay afloat.

Dan Wiseman (07:22):
Yeah, of course. I mean, it's not been the easiest of things for them to try to do. Obviously, we saw the issues they had in the UK where the UK have just outright said, "Look, we're not allowing Ming Yang to build their factory up in Scotland," and kind of put a bar on any Chinese company coming in and creating components for offshore wind. Some countries have been a lot more open about the conversation. We've seen Spain enter conversations with Ming Yang. Poland have obviously not said no, but they've not said yes. They've kind of said, "Look, we're not going to actively look to bring in Chinese components, but if it comes to it, we know that they may have to be a viable option." Other markets such as Brazil are entering talks with Ming Yang, and up in Canada, especially on the west coast, it's a lot more logistically feasible for them to source their components from China because it's going to be a major pain trying to import European products to the west coast of Canada when China's just there.

James Payne (08:37):
Yeah, absolutely.

Dan Wiseman (08:40):
And I mean, obviously, I think cyber security has always been the number one aspect, and I think whenever you hear a conversation about China and Chinese turbines, the reason people are put off is because of cyber security. So, when they raise these questions, Chris, and when they raise the point of cyber security, what exactly is it that they're talking about? What is it that they feel that China has the ability to do that puts offshore wind farms or the energy sector in certain markets at risk?

Chris Ayres (09:12):
Yeah, no, it's a great question. It's an odd thing to think of cyber security attached to this sort of asset, not a vessel, but this asset in the middle of the sea just turning. But the truth is every modern offshore wind farm requires what are called microchips, or microprocessors, to do very complex performance-related functions.

They're used in SCADA systems, they're used in control systems, they'll be used in IT systems, even for corporate data in relation to a developer, or just general administrative and sensitive data related to offshore wind. And so, there are a whole range of kind of access points at which a malign force or a cyber hacker could enter into or do some particular damage to the functions or the performance of an offshore wind farm.

Where China comes into this is actually, and I alluded to this earlier, is in the kind of raw materials that are needed in order to produce the modern microchip, and that's in semiconductors. China is the world leader, is the dominant world leader, in kind of mainstream basic semiconductors used for these microchips.

From some analysis that TGS 4C did of the four kind of absolutely critical semiconductors that are used in the modern offshore wind farm industrially, China absolutely dominates the world in three of the four of them. And the fourth one, which I believe is palladium, is dominated by Russia, so the less said about that, the better.

And the worry is that given that the EU has incredibly ambitious offshore wind targets, 300 gigawatts by 2050, it's going to have to build more offshore wind at scale, which will ultimately require numerically more assets, more semiconductors, more microchips. And if it's going to achieve these targets, it's going to have to let China integrate into European supply chains. And it's going to have to allow the imports of these critical semiconductors and the components that China uses these semiconductors for.

Yes, the European Union has introduced means at improving or increasing the EU's own semiconductor industrial capacity. I think it's investing 3.3 billion euros in the next five years or by the end of the decade, but it's unlikely to be enough. And if we're relying on any one single market for a particular component, let alone many components, then that creates a level of dependency.

And the worry is that China, as a market that has been identified as being a potential cyber risk, this carries risks going into the future as this offshore wind expansion continues. So, there's the direct and there's the kind of indirect sort of link between cyber security and offshore wind growth in Europe, if that makes sense.

Dan Wiseman (13:05):
Yeah, and I think one thing you touched on there is over-reliance. And I think that's been kind of a very hot topic in Europe, not just in the offshore wind industry but quite a lot of industries as well where they want to be as self-sufficient as possible. And I think, especially over the last couple of years, when once strong political affiliations and relationships have broken down, the need to be more reliant on ourselves as a continent has grown.

James Payne (13:30):
Yeah, absolutely.

Dan Wiseman (13:32):
But with the semiconductors, obviously that risk of cyber hacking, which can have the potential to shut down a wind farm and gather data otherwise kept by states. In terms of vetting the materials and the components that would be leaving China, James, how strict is that process in China of ensuring that components are up to a certain code?

James Payne (14:05):
I mean, there is something that Ming Yang said recently after being rebuffed by the UK government, which was that they try and put their standards up to the European standards, that they are trying to meet them.

Dan Wiseman (14:25):
I mean, do you feel that would be enough if China were to say, "Look, we're happy to work with you and meet European regulations on what's coming in?" Because that's obviously something that China is willing to do.

James Payne (14:35):
They are doing this, yeah. So, the standard question is really what Europe wants. I mean, when Ming Yang were rebuffed by the UK government with this new base they were planning to build this offshore wind industry base they were planning to build in Scotland in the Highlands, that was canceled back in March. So, the standard question was about, you know, is this about cyber security or is there more of a leaning towards protectionism? Because we saw with the photovoltaic industry, I mean, solar panels now are absolutely dominated by China, the Europeans really have no track in this anymore. And so, Europe is afraid of losing another industry in that way. So, this could be more about protecting our industry.

Dan Wiseman (15:30):
Yeah, and I think it's the more we look into it, the more that we read about it on a daily basis, it does feel like the cyber security is such a convenient thing to say, especially when it comes from China because it's an age-old argument of products coming out of China. There's always been that fear and that worry that, you know, it carries some sort of risk. But we've seen markets such as Italy using Chinese turbines in the water, and they've gone to their own governments and said, "Look, we know that you have these reservations about Chinese turbines and Chinese products, but we've been using them for years and we've had no issues. They've kept up to code, we maintain them, we monitor them, and we've not had an issue." Do you feel it's a case of that's what Chinese manufacturers just need - they just need that open door to go in and to prove themselves?

James Payne (16:40):
It's tough to say because the government really didn't give a clear reason for why it canceled the agreement or why it canceled Ming Yang's plans. Ming Yang said afterwards that it would try and keep up with all standards that it needed to. And so, we're pretty much at a loss as to why or what it would take for Europeans to let them in. I mean, it may come to a point where they just have to, as Chris said, to meet their goals in Net Zero. The Chinese can out-produce, and the costs are just so much lower for these turbines now that the Chinese producers - they've got the scale, they've got the localized supply chains within China. There's pretty much no European presence in China anymore. I believe Siemens produce their turbines in China, but they're all for the foreign market. They're not for any domestic wind farms in China.

Dan Wiseman (17:40):
And especially with growth being the main focus of a lot of offshore wind farms as well, we've seen in China that they are able to develop massive turbines.

James Payne (17:55):
Yeah, getting up to 26 megawatts.

Dan Wiseman (17:57):
Which, when you compare that to Vestas or Vinova, these are like a decade away. You know, these are many years away, especially with some of the turbine manufacturers refusing to go any bigger. Vestas came out, I think last year or very early this year, and said, "Look, we're not really going to go above our workhorse capacity."

And that obviously threw a lot of wind farms into a bit of chaos because they were banking on these larger Vestas turbines that just now aren't coming. And from kind of an outside point of view, because obviously I deal with the Americas, so I'm very much removed from the EU-China argument, very much involved in the America-China argument, but that's a whole different story, maybe a whole different podcast—but when you have these manufacturers who are not manufacturing larger turbines and, as we've seen, are having financial troubles, are they going to be the reliable option when the EU is still so very far away from meeting their targets?

So, I guess the question is, what can the EU do to maybe soften their stance and maybe take into consideration that we're very close to just not meeting this target by any stretch of the imagination? Maybe we need to change our stance and allow some outside help. What is it that they can do to kind of be less stoic about things?

Chris Ayres (19:40):
Well, this comes onto the kind of, as you said, the more accommodating way that the EU might manage China. And I think, to be honest, I think first of all is listen more, perhaps, to some of the developers, some of the project owners that have already used Chinese components, turbines, like in Italy, in think Serbia, and I think there may be one or two others.

The turbines haven't exploded, they haven't had any major fault, no voltage suppression, there's not been any cyber-attacks, so I guess listen to those project owners. In terms of more broadly, to be honest, I think the EU has taken steps in the right direction.

So, if we look back a couple of years ago, where the EU ratified the Net Zero Industry Act, which set about some new mandatory pre-qualification criteria for public procurement procedures, crucially, one of the new rules was that developers would not be allowed to import more than 50% of that Net Zero technology's value, or of any major component, from any single third country outside of the European Union, without facing pretty stringent potential fines of up to or more than 10%, which sends, I think, pretty clear signals to China to say, "Okay, we're going to let you into the EU market, into the EU supply chain, as long as you open manufacturing plants in Europe."

I think on the cyber security front, I think you could - one angle to look at the new laws, or the new proposed Cyber Security Act two law, would be it's not about restricting access, it's just a way of managing China's integration, not preventing Chinese integration. If there are very clear rules and regulations that all manufacturers and developers would need to follow in this regulation, so Chinese supply chains would simply by law have to abide by them, like James said.

So, I think to be more accommodating, I think it already is to an extent, and I think the EU will have to, I guess, signal to developers that this is a managed entry into the market, because at the end of the day, to achieve its targets, it's pretty inevitable, I think.

Chinese supply chains would simply by law have to abide by them, like James said. So I think to be more accommodating, it already is to an extent, but I think the EU will have to signal to developers that this is a managed entry into the market. Because at the end of the day, to achieve its targets it's pretty inevitable, I think.

James Payne (22:39)
Just if I can come in with there are a lot of difficulties that have to be overcome here. I mean, one of them being that the definition of a private Chinese company or a state owned Chinese company, for anyone who's dealt with Chinese business world will know is quite nebulous, whether a company actually is private or public at in the end, because at the end of the day all big companies in China are answerable to the government, especially in the high tech industries and the key industries, the industries that the government, central government considers key, any national security concerns that China has, that company's going to be responsible for it.

So, as I think we were talking about earlier today, Chris, there's an investigation that the EU's doing into Goldwind, the big Chinese turbine manufacturer. Goldwind is, I believe, state owned, but then I'll looking into whether the subsidies that it receives is going to constitute unfair competition. And I mean this could really apply to all those manufacturers as far as I'm concerned. So, this is a real pickle. and I really don't know how that ends up.

Chris Ayres (23:59)
Yeah, and just to actually to come onto what you were coming on, actually, there's going to be an interesting let's assume a scenario in which Chinese integration is managed and continues to pick up into European supply chains, is particularly on cybersecurity, the Chinese OEMs, for instance, will be at a court in the middle of A, abiding by e-regulations around cybersecurity, which are increasingly strengthening.

But also and I can't remember when this was passed. This was this is quite it was quite a bit older, but there was a piece of legislation introduced in China that demands that all developers or manufacturers, all companies, state or non-state owned, must comply in in the interest of national security with data requests in any capacity from the Chinese central government.

And there is that tension. We don't know how that would play out, but that's something to bear. I think it's going to be increasingly important going forward. So that's just a key legislative battleground is not a great term to t to coin it, but it'll be interesting to see.

Dan Wiseman (25:16)
Yeah, and like you were saying, James, everything is passed on to these Chinese companies. And I guess it goes the other way as well. If anything happens from a corporate perspective, that then reflects badly on the Chinese government. And I think that whilst the geopolitical tensions are still there, it’s a case of having a bit of good faith on both sides. From what we see and what we read across all markets and all developers, it doesn't seem to be a developer concern where they get these turbines or components. It is a political one. And it's good to know that the EU are putting things in place to say, well here's the caveat of what you can and can't do. Because with a lot of markets, and you'll be aware in your markets, Chris, there's a lot of domestic content rules and regulations. It's a big European thing where they want percentages of wind farms to be sourced by the local area because it increases industry, creates jobs, and creates work for people where in some instances there is none.

Which is a very understandable position for the EU to be in, because it is very easy because of the speed at which China does things. I was saying I deal with the Americas, and I was watching how many Chinese turbine installation vessels were being built in the time it took for the US to build one. And it's incredible to see how industrious a country China is.

That's going to be at the back of people's minds. If we're waiting years to get our order of turbines for this one wind farm, we know China can do it in a couple of months. It's very easy then to allow them to move in and have a monopoly in the EU or anywhere else. And it's important then for the EU to say, we do recognize that it is a genuine concern and a great possibility, but to say, look; we can let you in, but these are the conditions in which we will do so and not allow them to have that monopoly.

And I think in other markets it's going to be maybe a different story, especially in South America and North America. We see Canada, which is on the brink of their initial voyage into offshore wind. They're looking at both the east and west coasts. And I think China would be an incredibly viable option for them. And the same with South America, where they are needing to prove themselves as an emerging market. China is a very lucrative option for them to look at.

Because the one thing developers want to do when building a wind farm is keep their costs as low as possible. And one of the best ways to do that is using Chinese turbines, not because they are cheap because of quality, they're cheap because of the supply and demand of it. And we'll probably see the Americas be very open to China in the future. But in terms of other markets, maybe outside the EU, has there been any indication from manufacturers in China on where they would ideally look to reach out to?

James Payne (29:04)
Chinese manufacturers will take the business where they need to, anywhere, but as I mentioned, the EU is particularly attractive because of the stable nature of the market, the rigid completed rules and regulations that they have there. They like that stability. But indeed, Chinese manufacturers are bringing their turbines elsewhere. I believe I'd have to check this, but I think Vietnam, they're ready to go to Vietnam once Vietnam's ready to start developing offshore wind in earnest. Yeah, I'm not sure where else.

Dan Wiseman (29:47)
They are one of the pre-qualified companies in the initial call for bids in East Coast Canada. So, they are looking to get their fingers in as many pies as they can, but I think they need to do this because, as you were saying, China is a very saturated market.

James Ayres (30:08)
Lots of oversupply as well, just lots of things on the supply chain in warehouses, I suppose.

Dan Wiseman (30:16)
And when you're getting no return on that investment and you're not making money off the things that you're producing, it makes sense to throw something at a wall, just to hope it sticks.

James Payne (30:28)
Yes, make or break time for some of them, yeah, for sure.

Dan Wiseman (30:31)
So when you say make or break time, are there manufacturers that are struggling?

James Paynes (30:39)
Profit margins that they're seeing now from wind farms in China are very, very low. The competition is just too strong. So, they have to find those markets abroad.

Dan Wiseman (30:48)
Well, who knows, maybe over the next couple of years we'll start to see a bit more flexibility, because other than the EU as a whole, there's not really been a lot of markets that have just straight up said no. They're all open to the idea because they see the value in having this partnership with China because there's not really a lot of markets out there, especially in Europe, that are going to meet their goals easily. They're going to have to make some concessions somewhere. And China is a very viable option for that. So, we're coming to the end of the episode. It's been an interesting conversation. It's been good to hear both sides of the story, because I think it's very easy, especially working in Europe ourselves here, to see that EU standpoint and see that the EU is the right case because we only ever hear that story. But it's been nice to see the other side from China and where China's coming from. Before we sign off, is there anything else that we missed, do you feel, or anything else that has any sort of importance in either markets that could support the argument for or against China moving into the EU?

James Payne (32:15)
Yeah, so I suppose this is a question for the EU and whether it wants to allow its own companies into competition with Chinese companies, which would be very difficult. Where do they have advantages, do you think? I'm going off piece now, but where do you think European companies would have advantages over Chinese? Because it seems like we've been saying that they need to keep Chinese manufacturers out or else they'll just swallow whole, but I'm not sure that's the case, right? There's they've probably still got some advantages European manufacturing.

Dan Wiseman (32:50)
I think the one thing that would do as well is it would encourage the European manufacturers to step up their game. Because there's only really a very finite amount of manufacturers in Europe, or the rest of the world, there seems to be a little bit of complacency going. Vestas again, using that example where they would be like, right, we don't want to make bigger turbines. I think, well why would you not want to make bigger turbines? So maybe having China enter the fray will light a fire under them and be like, okay, we have some actual competition here.

James Payne (33:28)
Switching some production lines from fifteen to twenty is going to take a lot of investment. And then you find out that China's making thirty-megawatt turbines. Now they're out of date. It's a treadmill of ever-increasing speed. It's got to be tough for them. I think they're just focused on sticking with one size turbine that works and then just trying to make that perfect in every other way, apart from size. Is how I would have interpreted it.

Chris Ayres (34:02)
Yeah, and I think personally the will they, won't they of China integrating into the EU is a Rubicon that they're going to cross. When you've got cost at least ten percent or twenty percent lower for

James Payne (34:24)
I think thirty percent. But if we're talking about wind turbine costs.

Chris Ayres (34:29)
Thirty percent lower, faster. At the end of the day, TGS 4C are predicting that the EU offshore wind from a 300-gigawatt target in 2050 will possibly reach or just exceed half of that by 2040. So, we don't typically forecast out to 2050, but it's clear with the current industrial base and where the industry is now, we're not hitting that target without China. So, something needs to give. And I think with the huge uptake and increase in the European Commission's announcements and increased legislation around not just cybersecurity, but manufacturing and renewables targets. Personally, I think they are laying the groundwork for a future which has more China in it. That's my prediction.

Dan Wiseman (35:46)
A lot of good faith, I suppose. Excellent. Well, thank you guys for joining me here today. And as always, thank you for listening. Of course, join us next time when we'll have plenty more, I'm sure, to talk about here at TGS 4C.