General Electric US ITC Litigation Against Siemens Gamesa May Drive Developers to Vestas and Nordex Turbines

On Friday, July 31, 2020 General Electric Company (GE) filed a legal complaint against Siemens Gamesa Renewable Energy (SGRE) Inc. of Orlando, FL; Siemens Gamesa Renewable Energy A/S of Denmark; and Gamesa Electric, S.A.U. of Spain with the United States International Trade Commission (ITC) under section 337 covering intellectual property (IP) infringements of foreign imported goods.

Currently marked as docket number 3482, and pending a full investigation, this move represents the latest in a string of IP enforcement activities by GE to try and control the US market, and restrain competition from gaining too great a competitive advantage.

Looking at the rationale for GE to persist in pursuing IP infringement litigation against competitors, it is important to recognize that GE has been the top wind turbine OEM in cumulative capacity installed in the United States market since 2005. They were propelled into the top spot by sales of more than 13.9GW of their 1.5SLE product in the US market from 2005 - 2012 before shifting towards a largely 2.XMW product portfolio.

While GE enjoyed a lead in annual market share in the US in 2019, they may be poised to lose that mantle to Vestas Wind Systems A/S (Vestas) in 2020 with so many projects featuring the V110 2.X, V120 2.X, V136 3.X and 4.X and V150 4.X turbines from their respective product platforms in the construction pipeline.

Facing this new reality of increased competition, GE pursued patent litigation against Vestas in 2017 in an effort to compel them to take a license on the GE IP. The tactic is hardly a new one. Part of the strategy which GE has employed to gain control and then to retain control of the top spot in the United States wind energy market was to leverage their patent portfolio and use their intellectual property rights to enjoin competitors from gaining ground on them.

Using the threat of patent infringement litigation, GE was successfully able to enforce their intellectual property rights against competitors including Nordex, SGRE and Senvion. GE was also able to use their IPR to exclude competitors like Mitsubishi Heavy Industries of Japan and Enercon GmbH of Germany from participating in the United States market.

The technology which GE had patented was related to a concept in wind turbine control systems called variable speed, which allows wind turbines to maximize power capture despite fluctuating average wind speed. GE actually acquired from Enron Wind, which had acquired it from Zond, which had acquired it from Kenetech in the consolidation of the US wind turbine manufacturer market of the 1980's through the early 2000's.

From 2005 - 2012, when this particular patent expired, these competitors were all forced to absorb the license fees of GE into their gross margins for every turbine sale. As a result of the higher CapEx costs for these competitor turbines (by Nordex, SGRE and Senvion), GE was able to extend their lead in United States market share by effectively driving up the sales price of competitor turbines while they were able to achieve greater economies of scale in production of their 1.5MW and 2.XMW products.

This had an effect of stymied growth for most other competitors who were compelled into taking a license from GE due to an effective "tax" in the form of a royalty payment to GE on all their products being sold in the US.

Prior to the Gamesa merger, Siemens had managed to avoid this added cost because they did not utilize the same type of wind turbine hardware architecture and control system technology as the GE patent, while Nordex, Acciona and Senvion all did.

With GE making it more expensive for competitors to do business in the US, most of these companies who had a GE IP royalty payment in place were forced into negative margin territory on their turbine sales when prices dropped and their bill of materials could not decrease fast enough due to fixed supply chain costs and contracts.

This scenario is what contributed to SGRE and Vestas to collectively control 86% of the United States wind turbine OEM market share cumulatively through 2019, along with GE.

However, this latest move by GE to derail SGRE as competition in the US market may backfire, and compel the project developers of the 5.1GW of order book for SGRE onshore turbines in the US market to look at Vestas and Nordex Acciona as possible alternative suppliers.

Looking at some normalized (cost per installed MW) turbine pricing data, GE tends to have a more expensive product than Vestas, SGRE and Nordex Acciona. If GE is attempting to drive up the cost of SGRE turbines using this IP royalty as "tax" on every turbine unit sold, they may end up with a scenario in which developers can look to Nordex Acciona or Vestas for a less expensive option, since they both have the GE IP royalty already in place and factored into their cost.

Most project developers and asset owners do share in the patent infringement risks of a turbine OEM whom they source from due to several factors. In addition to the fact that limitation of liability in a turbine supply contract usually does not fully protect a project developer or subsequent asset owner, the possibility of an IP infringement litigation resulting in an injunction on the operation of an asset would not only shut down production of a wind park, but also trigger a business interruption event for insurance carriers to deal with.

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