We hosted an investor theme call focused on Energy’s Engine Power Plants business on December 11, 2024, with the President, Wärtsilä Energy and Executive Vice President, Anders Lindberg.
The call offered a good opportunity to learn more about Wärtsilä Energy’s Engine Power Plants business. No new material information was disclosed during the call. The recording of the call is available here, and the presentation slides are available here.
Anders started the call by going through the development of the past year, as the business has become stronger and more resilient, with an improved and future-proofed product portfolio. As renewables increasingly displace traditional baseload energy generation, the greater the need becomes to shore up the grid’s stability with balancing capacity. Wärtsilä’s flexible and scalable balancing solutions quickly ramp up whenever renewables aren’t generating enough electricity, providing the necessary balancing power to keep the grid stable. There are strong long-term growth prospects in the balancing market, highlighted by a significant 260% increase in Wärtsilä’s balancer order intake (LTM Q3/24 compared to LTM Q3/23).
The end-to-end engine business is delivering on commitments
Since last year, Wärtsilä Energy has successfully implemented a new organization and governance structure, improving risk management and thus profitability. The rebalanced order book now consists of 80% EEQ (Extended equipment supply) and 20% EPC (Engineering, procurement, construction). While continuing to engage in EPC projects, Wärtsilä Energy does it selectively, focusing on markets where the right risk-reward balance can be achieved. We anticipate maintaining a balance of 70-80% EEQ versus EPC in the future.
We have had good progress in our service business, with a 15% increase in the agreements with performance guarantees and a 5pp increase in agreement coverage (LTM Q3 2024), achieving a renewal rate of over 90%. Service sales have grown by 7% over the past year, with a book-to-bill ratio of 1.1. We are focusing on increasing agreement coverage and moving up the service value ladder with decarbonisation agreements and sustainable fuel conversions. Stable running hours are expected to continue, supporting the service performance.
Over the past year, the financial performance of Wärtsilä’s Engine Power Plant business has shown significant improvement. Order intake (rolling 12m) has grown consistently since Q4 of last year, and comparable operating result (rolling 12m) has increased, rising from 6.5% in 2023 to 14% in the third quarter of 2024. Key drivers of the better profitability include the recovered profitability in equipment sales, achieved through better risk-reward balance and improved project selection and governance. Continuous improvement initiatives and higher operating leverage from increased net sales have also played a crucial role. Additionally, growth in service sales has contributed to higher margins, further enhancing overall profitability.
Thermal balancing is needed for an optimal decarbonisation transition
On December 10, Wärtsilä Energy launched a global modelling study to assess the impact of balancing on achieving net zero by 2050, as outlined in the Paris Agreement. The study compared two scenarios: one using only renewables and energy storage, and the other incorporating thermal balancing. The findings revealed that incorporating thermal balancing could save the world 65 trillion EUR between 2025 and 2050 by reducing the need to overbuild renewables to manage weather conditions and demand fluctuations. Additionally, thermal balancing allows for a faster reduction in CO2 emissions by enabling the quicker phase-out of coal and oil, even if gas is used initially.
The growth opportunities in the balancing market are highly promising, driven by the expansion of wind and solar energy. From 2023 to 2030, the balancing sector is expected to grow by 17% annually, while the base load remains relatively stable. This growth is crucial to support the increasing penetration of renewables. To achieve this, it is essential to have favourable conditions for adding balancing capabilities and to use gas as a transition fuel until sustainable fuels become widely available. Flexible engines are highly effective in supporting renewables on a minute, hour, and daily basis. Wärtsilä's order intake (MW) for balancing power plants has increased significantly this year compared to 2023, indicating strong growth in balancing growth.
Investors in thermal balancing need proper incentives, as the plants do not run continuously. Introducing shorter dispatch intervals, like the five-minute intervals, can provide the necessary financial incentives. Our studies of over 200 markets worldwide show that the energy transition phases typically involve adding renewables, followed by thermal balancing and storage, and eventually phasing out inflexible power plants. This structured approach ensures a smooth transition to a more flexible and sustainable energy system.
Wärtsilä Energy’s “sweet spot” is in 50-400 MW plants
Wärtsilä Energy identifies our “sweet spot” market as being in the 50–400-megawatt range for power plants. This size allows to achieve high efficiency across various load levels due to the modular design. Wärtsilä’s engine power plants can start and stop quickly, adapting to system needs and price signals without significant maintenance implications. This flexibility makes us cost-competitive, especially in markets requiring frequent starts and stops.
Additionally, data centres present a promising baseload opportunity, driven by the increasing demand for AI and digitalisation. From 2024 to 2027, an additional 45 gigawatts of power capacity are expected to be added, with many data centres requiring baseload power due to delayed grid connections. Historically, backup power ranged from 20 to 100 megawatts, with customers focusing on capital expenditure and high availability. However, as the size of data centres is growing, future demand will be higher, between 50 to 300 megawatts, with customer focus on efficiency, operating expense, delivery time, and emissions, presenting a promising opportunity for our medium-speed engines.
Wärtsilä Energy is well-positioned to provide the fuel flexibility needed for the energy transition
Fuel flexibility is crucial in the energy transition, ensuring our engines remain future-proof over their 25–30-year lifespan. While hydrogen is a promising fuel, its transportation and storage challenges mean other green fuels like ammonia also have potential. This year, we launched a 100% hydrogen-ready power plant, set to be available in the markets in 2025. Our existing plants can already run on a 25% hydrogen blend, demonstrating the immediate potential for blending.
Q&A
Regarding the mix shift in favour of balancing versus baseload, can you discuss your market share in both areas and how it has evolved?
This year, we have seen a significant increase in balancing demand, with 70% of our order intake for new build engines being for balancing up until Q3. Typically, our market share for engines alone has varied between 50% and 70%, depending on the size of the projects. When including turbines, our market share is around 15%.
Considering the shift to more balancing, which means fewer running hours, how do you model long-term service growth?
The most important driver is the growing installed base. We have developed a strong offering for balancing power plants, ensuring good business through agreements with our customers. This year, we’ve seen increased interest from new customers in signing agreements directly when they are buying new equipment, which is a positive development.
While balancing plants have fewer running hours, it is good to note that the division of baseload and balancing is not black and white. Also, baseload plants’ running hours are not stable over their lifecycle and customers may decide to run it as balancing. By securing agreements and focusing on moving up the service value ladder we think we can have a good opportunity for our lifecycle services.
Regarding balancing power, the US has a strong market, but Europe seems slower to adopt it. Is this due to the legacy installed base of coal and turbines?
The US remains our highest momentum market, but we also see interest in balancing in parts of Europe, like the UK, and in other regions like Southern Australia, Chile, and Brazil. However, system needs alone aren’t enough; financial incentives are crucial for investments in thermal balancing power plants. Many countries are moving towards shorter energy-buying windows and capacity markets, which help make these investments viable. This transition is happening, but it takes time to change market mechanisms.
What do 5-minute market and 15-minute markets mean in practice, and where are those implemented?
Thermal balancing is highly valuable for the power system, but power plants must also be profitable investments for owners. Introducing 5-minute intervals for dispatch and price settlement in electricity markets improves the power system's ability to balance renewables. The 5-minute market is already implemented in the Australian National Electricity Market (NEM). It aligns operational dispatch and financial settlement every five minutes, leading to more efficient bidding, operational decisions, and ultimately lower electricity prices.
The 15-minute market is being adopted in various regions, including the Nordics. This transition involves moving from 60-minute to 15-minute Market Time Units (MTU) settlement periods. The goal is to reduce imbalances in energy production and consumption, leading to a more stable and efficient energy market. This change is particularly important for integrating renewable energy sources and balancing.
How are you able to compete with gas turbines in data centres if they run solely as a baseload?
We expect Wärtsilä medium-speed engines to be competitive due to shorter lead times, higher reliability, and the modularity of our engines. When compared to aero-derivative gas turbines, engines offer fuel flexibility and higher fuel efficiency, and they can achieve higher capacity factors. Finally, the installation size for off-grid baseload data centres (50-300 MW) is well suited to the sweet spot at which our engines are most competitive.
