by Philip Totaro, Principal, Totaro & Associates
A panel discussion at a recent wind industry event has shed some light on a brewing storm in the wind industry. This may prove to be an unwelcome headwind, particularly as many companies stare in the face of shrinking margins and more competition.
This panel comprised several developers and service providers as well as a representative from a major U.S. developer and operations and maintenance (O&M) provider. He indicated that his organization will sidestep the turbine original equipment manufacturer (OEM) when it comes to sourcing spare parts.
This type of cost-saving strategy is not limited to this particular company. It is indicative of a maturing industry which is still trying to come to grips with all the costs and associated risks of project development and O&M.
Largely speaking, the turbine supply agreements which turbine OEMs sign with their customers cover the breadth of their patent protection, but typically only a use license is provided. If there are aspects to the turbine design which are patent protected, then the ability to modify turbines or use substitutes from lower cost component suppliers may not be implicitly provided to the owner/operator of the turbine.
We’ve seen this happen before. In other industries, like automotive or gas turbines, the OEMs have created features of certain key components which mean the components or the service can only be provided by an OEM representative or certified technician. This locks in an aftermarket revenue stream for the OEM. For the wind industry, this is something the OEMs will not want to lose out on as more ‘modern’ turbine fleets continue to age and go off-warranty.
As the O&M cost structure and optimization of wind farm operations becomes more of a hot button issue, we will see what steps the OEMs will take to ensure revenue streams in this increasingly competitive market. Assertion of patent rights is certainly a tool in the toolbox.
As competition emerges and the industry matures, IP owners will likely assert their rights if they feel there is diminishment of their commercial enterprise. We have seen GE assert their rights against many other turbine OEMs on variable speed technology, and even go to court with Mitsubishi in a series of lawsuits which could have profound implications on the industry. Last year, AMSC also made public the theft of trade secrets by one of their customers.
This begs an important question: Will the turbine OEMs, who have accumulated over 5,450 U.S. patents and applications on all aspects of wind turbine technology, begin to seek targets other than their OEM competition for licensing revenue in a U.S. market which is increasingly cost-competitive? What recourse does a wind farm operator or a turbine OEM have to refuse a curtailment order from an ISO if they know that it would infringe on a third party or competitor’s patent? Would an OEM jeopardize an existing or potential customer relationship and future turbine sales opportunities to assert their patent rights?
The most likely response is simply to say ‘just go get a license on the patent’ or ‘buy an indemnity insurance policy.’ However, in an increasingly cost-sensitive market, passing the cost of the license fee or insurance policy premium along to turbine purchasers and rate payers may not be possible. The costs of license fees and policy premiums could also have a material impact on the economics of a large project.
Insurance will still be required, and is an appropriate risk mitigation strategy, but the industry runs a risk of becoming dependent on insurance as the means for risk mitigation. This does not appear to be an adequate solution, because it is really just risk shifting and not mitigation.
If the infringement risk is shifted to the insurer though acquiring a policy, there is still a need to identify the scope of this potential risk in order to accurately calculate a policy premium. Being proactive will likely avoid excessive damage awards in case the patent assertion were to escalate.
As we have seen in the past in other industries, and even in wind, patent owners will look to assert their rights if they feel their margins or market share will be squeezed in some way. Given the market outlook in the U.S. over the next few years, we’ll see just how big the brewing storm will become.