Renewable energy companies are facing a challenging earnings season as supply chain problems, manufacturing faults, and increasing production costs take a toll on their profitability. The rapid transition towards cleaner energy has resulted in a surge in global demand, making it difficult for equipment manufacturers to keep up. Consequently, questions arise about the economic sustainability of large-scale projects undertaken by major players in the industry.

One significant issue affecting the industry is the emergence of manufacturing faults, particularly at Siemens Energy's wind turbine subsidiary, Siemens Gamesa. As companies strive to construct turbines at a faster pace and on a larger scale, these manufacturing faults have been detrimental. Siemens Energy has even scrapped its profit forecast for this year and has sought German government guarantees of up to 15 billion euros ($16 billion).

Moreover, specialist wind energy firms are finding themselves outbid for seabed licenses by traditional oil and gas players. Even if they manage to secure contracts, electricity prices often fail to justify the manufacturing costs involved. As a result, companies are relying on government subsidies in Europe and the U.S. to restore balance to the market and ensure the viability of these projects.

The struggling renewable energy sector is reflected in the decline of wind energy stocks since the beginning of the year. A report by Allianz Research states that the eight largest renewable energy companies worldwide reported a combined $3 billion decrease in assets during the first half of this year, with wind projects facing particularly turbulent conditions. Economists at Allianz Research describe this earnings season as a "learning moment" for the industry, as challenges like rising construction and financing costs, quality-control problems, and supply-chain issues persist.

The feasibility of many ventures is now in doubt due to inflation, global energy-price fluctuations, and increased costs for wind-power projects. Some projects in the U.S. and the U.K. may even be at risk of abandonment if governments do not provide adequate support. Previous projects that were initiated before the energy crisis are becoming increasingly unprofitable, given their low guaranteed feed-in-tariffs.

Although renewables companies still maintain solid balance sheets, they are writing down assets and revising their earnings outlooks. For instance, Danish company Ørsted recently announced that it was canceling the development of two offshore projects in the U.S. This decision has resulted in impairment costs totaling $5.6 billion. However, Vestas, another Danish company, offered a glimmer of hope by surpassing earnings projections in the third quarter.

Vestas reported a third-quarter EBIT (earnings before interest and tax) of 70 million euros ($74.73 million), exceeding the projected 31 million euros. Nonetheless, the company cautioned that external factors could cloud its near-term outlook, leading it to revise its full-year investment and margin guidance. Henrik Andersen, CEO of Vestas, emphasized that the renewable energy sector is at a crucial turning point and that "winners and losers" will ultimately be identified.

Andersen acknowledged that one of the major challenges stems from projects secured at low prices back in 2019 and 2020. Since then, inflation and interest rates have risen, making it more expensive to realize these projects and resulting in a dwindling order book. The recalibration of political views on the cost of the planned energy transition is crucial, as wind turbines have seen a price increase of 20-30% since 2020.

Recognizing the urgency, the European Commission recently announced a new Wind Power Action Plan aimed at significantly expanding wind installed capacity. While this plan indicates that the necessary recalibration is underway, it is an ongoing process that will require more time and investment. The renewable energy companies currently face financial constraints and cannot invest as much as required to meet the ambitious goals set by policymakers.

In conclusion, renewable energy firms are facing a challenging earnings season due to supply chain difficulties, manufacturing faults, and rising production costs. These issues, coupled with low electricity prices and the need for government support, have resulted in declining profits and the need for asset write-downs. The sector is at a critical juncture, and while challenges persist, efforts are being made to recalibrate and ensure the feasibility of the energy transition.