Siemens Energy (ETR: ENR) (OTCPK: SMEGY) shares are down yet another 34%. ENR shares have fallen as the company appeals to the German government for subsidy. This indicates that the wind power business is not profitable. Well, OK, we want people to stop doing non-profitable things so as to free up those economic resources to be used to do profitable things. Therefore there should be no subsidy. But of course that’s not how politics works. It is how markets work though. A company calling for large subsidies is clearly and obviously not making money in the business line it pursues. So, if Siemens Energy is callig for subsidy then it knows that the wind business it’s in is not profitable. What should we as capitalists do about this? Not own the shares of the unprofitable business that is Siemens Energy, of course.
We’ve also seen this before, onely a few months back, at Siemens Energy: “It's possible that this is just a mistake on the part of Siemens. It's not wholly unknown for one of the large German engineering companies to simply get it wrong in this manner. Sure, it shouldn't happen, sometimes it does, but it's a function of internal controls at the manufacturing plant and no more.
“However, there's also long been a worry about the maintenance costs of those turbine towers. A muttering perhaps that the costs were being undervalued and that this impacts, definitively and grossly, on the overall calculations of whether wind turbines are even a good source of power in the first place. If it's that second then we should brace ourselves for similar revelations from other manufacturers like Oersted as well. For it's always the first admission which is difficult to prise out of people, isn't it?”
Siemens Energy share price from Google Finance
Since then we have indeed seen the wheels come off that financing bus for the wind industry. The latest auction of building rights in the UK gained no bids at all. Wind is a lot more expensive than we’d been led to believe. Half built wind farms are not being completed. And then there’s this demand for subsidy from Siemens: “Siemens Energy is in talks with the German government to secure billions of euros of guarantees for long-term projects after warning that losses at its troubled wind turbine business would be higher than forecast. The Dax-listed company said on Thursday that it was in need of backstops for projects as the financial picture at its wind turbine business deteriorates. In June, the group said that overhauling the division, which has been beset by technical mishaps, would cost €1bn. Without the guarantees, a €110bn portfolio of clean energy projects planned by the company will be in jeopardy, according to executives at the Munich-based company.”
They want a very considerable amount too: “Shares in the company, one of the world’s biggest makers of wind turbines, plunged by almost 40% to all-time lows on the German stock exchange, wiping €3bn from its market value, after reports emerged that it was in talks to secure government guarantees as part of a €15bn rescue package. A bailout could result in the German state taking responsibility for 80% of an initial €10bn funding tranche, while banks would be liable for the remaining 20%, according to reports in the German press.” That’s problems with the underlying economic model, not just with their own manufacturing.
That is, this is not just about Siemens Energy, this is a warning about the whole sector: “Siemens Energy (ENR1n.DE) shares plunged nearly 40% on Thursday, wiping 3 billion euros ($3.16 billion) off its market value, after the group said it was in talks with the German government about state guarantees following big setbacks at its wind unit.”
The lesson for us is that the economics of wind power do not stack up. Therefore we don’t want to be investing in wind power.