Danish renewable energy company Orsted lost a quarter of its market value Wednesday August 30, after warning of hefty impairments related to three wind projects off the east coast of the U.S., adding further pressure to an industry hit by surging costs and supply delays. Is the wind blowing the wrong way for wind energy companies?
Offshore wind developers are facing turbulence at the same time as demand for renewable energy is greater than ever, with governments moving to hit climate targets and boost electricity supplies. The Biden administration is targeting 30 gigawatts of offshore wind power to be installed by 2030, enough to power roughly 10 million homes, up from essentially zero now, and the country has opened up areas mainly along the east coast for development whilst offering tax credits to encourage development and cut costs.
Rising costs and diminishing returns
But soaring inflation has seen materials and services costs rise while higher interest rates mean financing costs have surged, sending project costs spiraling out of control and forcing developers to renegotiate or exit contracts as projects are no longer profitable.
The company is also facing delays from suppliers, mainly from companies that build the offshore foundations as well as from a specialist installation vessel, which could create knock-on effects for final installation as well as potentially delaying revenue and increasing costs, but assuming no further supply chain issues the company will book impairments of up to DKK5 billion from this issue.
Orsted’s chief problems relate to three U.S offshore projects; the company said late it could book up to 16 billion Danish kroner ($2.34 billion) in impairments in its third quarter earnings next month after reviewing the projects. Those projects haven’t yet reached a final investment decision, which is the final stage before a project gets fully sanctioned, and Orsted said that although it hopes to move ahead, it will continue to explore alternative options.
Other off shore projects face similar problems
It js not only Orsted that is facing these problems. Norway’s Equinor and Britain’s BP are developing three wind farms off the coast of New York and said in June that they will need to renegotiate power prices or the projects won’t get financing, while a subsidiary of Spanish multinational Iberdrola last month agreed to pay $48 million to back out of an offshore wind-power deal in Massachusetts that it bid in September 2021, when project economics were more favorable.
There are only two offshore projects that are currently under construction in the US — both south of Martha’s Vineyard, Massachusetts. They were able to line up supply deals before inflation drove up costs. A first-ever auction of offshore wind development rights in the Gulf of Mexico resulted in a single $5.6 million winning bid on Tuesday, while two areas offshore Texas that were offered received no bids at all. Energy companies may be recalibrating their bidding strategies after years of paying top dollar for prime real estate near large cities in the Northeast. The US government collected a record $4.4 billion in an auction last year for offshore wind leases near New York and New Jersey.
“As we mature towards final investment decision, if the walk-away scenario is the economical, rational decision for us, then this remains a real scenario for us as an alternative to actually taking the final investment decision,” Chief Executive Mads Nipper said on a media call after the announcement. Orsted has eight U.S. offshore projects off the coast of Connecticut, Maryland, New Jersey, New York and Rhode Island.
Will tax credits eliminate the headwind?
As part of U.S. efforts to encourage offshore development, it offers tax incentives to wind developers which comprise a series of tax credits based on certain criteria such as using domestically produced materials and various jobs and location criteria, among others.
Orsted said it is in discussions with federal stakeholders to qualify for additional tax credits beyond 30%, aiming to qualify for at least 40% of credits on all of its projects, however, due to the lack of capacity in U.S. industry it’s currently impossible for any developers to qualify for the extra 10%. The company is “pushing really hard” to change the situation, Nipper said.
If its efforts prove unsuccessful, it could lead to impairments of up to DKK6 billion. In addition, if U.S. long-dated interest rates remain at the current level by the end of the third quarter, the company said it will cause impairments of around DKK5 billion.
“We still believe in the long term potential of the U.S. market but something needs to happen short-term in order for this industry to be scalable…it’s extremely important that the federal government takes this as seriously as they possibly can if they still intend to have scalable offshore wind,” Nipper said.
The situation in Europe is no different
Headwinds also continue in Europe, with European projects facing similar problems. Swedish state-owned utility group Vattenfall last month decided to stop development of an offshore wind farm off the U.K. coast as higher inflation and interest rates meant the guaranteed price for electricity produced at the project was no longer enough to ensure project profitability.
Helene Bistrom, head of Vattenfall’s wind business, said at the time that a decent mechanism that reflected the current market situation was needed and that talks within the industry with suppliers, the U.K. government and developers were continuing.
Suppliers, too, have felt the pinch. Turbine maker Vestas Wind Systems has seen its shares fall 20% this year amid slowing orders as higher project costs and slow European permitting weigh on orders. Hopes have been high that the U.S. push into offshore wind would provide a boost to orders in the second half of this year, but shares slipped as much as 5.2% following news of Orsted’s U.S. woes.
