Just a few years ago, General Electric's (GE -2.36%) fossil-fuel-dependent power segment was one of the company's two flagship businesses. Adjusted for some segment shifts, GE Power reported revenue of $36.8 billion and a $5.1 billion operating profit in 2016.
However, operational missteps, changing market conditions, and divestitures have caused the power division to shrink significantly since then. Instead, the industrial conglomerate has looked to its renewable energy unit for sustainable growth in building and servicing energy generation facilities. That transition took a big step forward last week.
No more new coal projects
Last Monday, GE said that it plans to stop building new coal power equipment. The decision didn't come as a surprise. Coal is going out of favor rapidly in many countries due to its status as one of the dirtiest fuels, along with falling costs for cleaner sources of energy like natural gas, wind, and solar. Furthermore, GE stated in its annual outlook presentation that it would right-size its steam power unit (which primarily operates in the coal-fired power market).
GE's announcement was light on details, but the company said that it may pursue divestitures as it exits the new-build coal market. Job cuts and plant closures also seem inevitable.
General Electric did note that its steam power business will continue to service existing coal-fired power plants. Services accounted for 60% of the unit's $4.4 billion of revenue last year, so the steam power business is likely to remain an important part of GE Power for a while longer. GE also said that it will remain active in supplying and servicing steam turbine islands for the nuclear market.
A big step forward in wind energy
Less than 24 hours after General Electric revealed its move away from new-build coal power, its renewable energy segment announced the finalization of supply contracts for the first two phases of what will become the world's largest offshore wind farm.
For several years, GE has been touting its new Haliade-X wind turbines. As the most powerful and efficient turbine ever built for the offshore wind market, the Haliade-X -- now rated at 13 MW, up from 12 MW -- has the potential to bring down the cost of generating wind energy. GE installed a prototype in Rotterdam a year ago, received a provisional type certificate in June, and expects to begin serial production in the second half of 2021.
Not surprisingly, the company sees this product as a key growth driver. Last year, the Haliade-X won commitments totaling nearly 5 gigawatts of capacity. The finalization of the deal for the first two phases of the U.K.'s massive Dogger Bank offshore wind farm -- totaling 190 units -- will solidify about half of those commitments.
While GE's big bet on offshore wind is finally close to paying off, the company also continues to announce a steady flow of deals for its onshore wind business. Onshore wind represents the core of GE's renewable energy business, generating about $10 billion of its $15.3 billion of revenue last year. The company announced a particularly noteworthy order for 187 turbines for three U.S. wind farms earlier this week.
Renewable energy is the future for GE Power
The ongoing transition from fossil fuels to clean energy has caused plenty of problems for General Electric. Weaker market conditions in gas, coal, and nuclear power have contributed to weak margins and cash flow for GE's power business. Last year, the segment posted a paltry operating margin of 2.1%, and it burned $1.5 billion of cash.
Unfortunately, the growth of the renewable energy business hasn't helped matters. The renewable energy unit lost money last year and burned $1 billion of cash. Pricing pressure and execution missteps have weighed on the segment's performance recently. GE expects another operating loss and even higher cash burn for the renewables segment in 2020.
Nevertheless, it's good to see GE pivoting more aggressively toward parts of the power generation market that are likely to grow. GE Power's woes stem in part from a misguided strategy under previous management of cutting prices to maintain volume in the face of weak demand. Exiting shrinking markets and cutting costs while maintaining pricing discipline in stronger parts of the business should lead to stronger earnings and cash flow. GE also has opportunities to cut costs and hold the line on pricing in renewables to improve its profitability and cash flow.
Meanwhile, GE's renewable energy unit is finally poised to cash in on its offshore wind investments. Today, it is incurring costs but not generating any revenue in offshore wind. Several years from now, offshore wind revenue could reach $2 billion annually, with positive earnings and free cash flow. Delivering on this growth potential while cutting costs in the legacy power business will both be critical to General Electric's broader turnaround efforts.