An ambitious bet on the US has helped make Ørsted the biggest global player in the offshore wind industry, earning the once little-known Danish company plaudits as a clean energy pioneer.
After paying $510mn for a string of projects off the north-east coast in 2018, Martin Neubert, then head of Ørsted’s offshore wind business, hailed the exciting “journey” the company was on having first entered the US market in 2015.
Now Ørsted’s charge into America’s fledgling offshore wind industry threatens its status as one of the big winners in the era of renewable energy. Investors have wiped DKr73bn ($11bn) from the group’s market capitalisation since a warning last month that it expects to write down the value of its US assets by a potential DKr16bn.
Chief executive Mads Nipper blamed a combination of rising interest rates, supply chain disruptions and doubts over how many billions of dollars in tax credits the company would be eligible for under President Joe Biden’s plan to make the US a global leader in clean energy.
“Their business model [to be an early mover] comes with certain risks,” said James Smith, fund manager of the London-based Premier Miton Global Renewables Trust.
“You have to set up the supply chain, you’re dealing with politicians or civil servants who may be unfamiliar with the sector,” he said of the hurdles Ørsted has faced establishing itself in the US. “If that goes well, that’s great. If it doesn’t, you are on the hook.”
The potential writedown of its US portfolio is equivalent to half the investment Ørsted has so far made in the country’s offshore wind market.
Following its aggressive expansion, Ørsted owns one of the country’s only two offshore farms in operation and is developing seven projects in the north-east, which it says will be able to supply power to about 2mn homes. Its three big projects due for completion in the next few years lie off the coasts of New Jersey, Rhode Island and New York’s Long Island.
The company’s US portfolio also includes onshore wind farms supplying enough power for about 800,000 homes.
While supply chain strains, higher interest rates and rising costs have blighted the entire offshore wind industry over the past two years, analysts say Ørsted’s warning has undermined management’s credibility, especially as the group struck a more optimistic note on securing tax credits at an investor day in June.
“It used to be a darling company, constantly exceeding expectations,” said Tancrede Fulop, senior equity analyst at Morningstar. “There is a confidence issue 1694599217.”
Investors’ alarm was reflected in the 25 per cent plunge in Ørsted shares on August 30, the day the writedown risk was disclosed. The shares were then hit further after rating agency Moody’s cut its outlook on the company, sending them to their lowest level since 2018.
The bruising last month for Ørsted is in sharp contrast to the period between 2018 and 2021, when shares surged as investors raced to back the clean energy sector and applauded the group’s determination to take the lead in the offshore wind market.
Even before Ørsted disclosed the problems at its US business, shares in the group had fallen from a record high set in 2021 as the initial euphoria over clean energy faded and interest rates began to rise.
Formerly known as Danish Oil and Natural Gas (Dong Energy), Ørsted was founded by the Danish state in the 1970s to help develop the country’s energy reserves as the Arab oil embargo raised fears over supplies. The company began moving away from fossil fuels in 2008.
A plan to break almost completely from them was thwarted by Russia’s full-scale invasion of Ukraine, which led the Danish government to order Ørsted to keep two coal- and one oil-fired power stations available until June 2024.
The three power stations sit alongside Ørsted’s vast wind business, which stretches from the UK to Taiwan. By the end of last year, the Copenhagen-listed company had more than 8.9 gigawatts of offshore wind projects installed around the world — enough power for roughly 9mn homes.
The era of low inflation and interest rates emboldened Ørsted to expand globally, helping it cope with large upfront expenses and long-term contracts that do not always allow extra costs to be passed on to customers.
Alongside higher interest rates driving up its financing costs, Ørsted said about DKr5bn of the likely impairment stemmed from delays in sourcing the foundations that secure turbines to the seabed and a shortage of vessels to install them.
The remaining DKr6bn relates to whether the company will receive bonus tax credits available under the Inflation Reduction Act. Designed to help America’s renewable energy industry, the IRA awards extra credits to companies that use US-made supplies or support jobs in regions that are reliant on oil, gas and coal sectors for employment.
The requirements to secure bonus credits are onerous, with developers complaining that local supply chains are not yet ready.
At the June investor day, David Hardy, chief executive of Ørsted’s US offshore wind business, said the company was assuming its three main projects due for completion in the next few years would qualify for some extra credits, pointing to “strong relationships” and discussions with the government.
When asked after the August warning to explain Ørsted’s gloomier outlook on credits, Hardy said there had not been “enough progress to give us more confidence” on two of the projects, though he remained confident about securing bonuses for the third.
The US has just seven operational offshore wind turbines so far, but the industry is part of the Biden administration’s ambition to rapidly expand the clean energy industry. Jennifer Granholm, US energy secretary, has described offshore wind as “critical” to the administration achieving its goals.
Ørsted is not alone in finding America’s offshore wind market hazardous to navigate, as companies face inflexible contracts with utilities, competition with cheaper onshore wind, a still evolving system for tax credits and varying levels of state support.
Iberdrola and Shell are exiting agreements with utilities to build new farms, with the hope of striking new deals that take into account rising costs. A subsidiary of Iberdrola agreed to pay almost $50mn to terminate an agreement with several utilities in Massachusetts in July.
Ørsted is particularly exposed given its large portfolio but the company has raised expectations of success given what it has said was an “outstanding” record of getting projects off the ground outside the US.
“Ørsted has invested a lot in the US and, in doing so, neglected the risks inherent in the market,” said Morningstar’s Fulop. “Capital allocation is key for the value creation of the company.”
As Ørsted’s share price tumbled at the end of August, rivals moved swiftly to reassure shareholders that they were doing a better job of managing the risks in the US. Iberdrola told investors it was not experiencing “delays of any significance” to supply chains and took a “conservative approach” over the potential benefits from tax credits.
Deepa Venkateswaran, senior analyst at Bernstein, said that while investors’ reaction had been “too harsh”, confidence in Ørsted’s management had been damaged.
“A few years back, everything Ørsted touched was seen to turn to gold and now it’s [seen as] rock,” she added, saying that “markets overshoot and undershoot”.
John Podesta, Biden’s senior clean energy adviser, said last week that the first offshore wind projects would be “the most challenging” but that he remained “very optimistic” that the industry had a strong future.
With Nipper having to urgently rebuild confidence, a pivotal decision will be whether Ørsted is prepared to walk away from some US projects if the economics fail to add up.
“Unless we see material positive developments, it’s still a real option,” Nipper, who has led Ørsted since early 2021, said after revealing the writedown risk.
However, that would mean waving goodbye to significant sunk costs, and risking its reputation as a reliable developer among utilities and suppliers. Meanwhile, investors will be on high alert for any further damaging news from the US.
“Market sentiment may take time to turn around,” said analysts at JPMorgan.
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