What's Happening with Offshore Wind?
Orsted, a key player in the industry, recently made significant financial adjustments by announcing potential write-downs of up to 20% of its shareholders' equity base. This move reflects the challenges faced by the offshore wind sector in recent months.
Here are the key points:
- Orsted had ambitious plans to invest over $69 billion by 2030, aiming to reach 50GW of renewable capacity, with a substantial portion in offshore wind. Central to this plan was achieving EBITDA growth of 13% to 14% annually, but this objective is now in question.
- Orsted disclosed substantial impairments in its US portfolio. These impairments include:
- Up to DKK5 billion ($730 million) due to delays from suppliers related to foundation issues in three US offshore wind farm projects.
- Up to DKK6 billion ($870 million) due to potentially lower achieved Investor Tax Credits (ITC) caused by changes in tax regulations.
- Approximately DKK5 billion ($730 million) due to the negative impact of rising long-term interest rates in the US.
3. Despite these impairments, Orsted maintains its guidance and confidence in achieving a 14% Return on Capital Employed (ROCE) from 2023 to 2030.
4. These challenges come on the heels of a 22% decrease in Orsted's EBITDA in the first half of 2023, primarily attributed to insufficient wind conditions, affecting the entire industry.
In addition to these elements that impact every operator, there has been the problems encountered by Siemens Gamesa with its onshore turbines which illustrate the industrial difficulties that a major player such as Siemens can face. We can also mention the risks of copper and cable shortages in the coming years due to supply-chain bottlenecks, as announced by the Nexans CEO Christopher Guerin. Every link in the offshore wind chain seems to have its share of problems. 4. These challenges come on the heels of a 22% decrease in Orsted's EBITDA in the first half of 2023, primarily attributed to insufficient wind conditions, affecting the entire industry.
It is therefore understandable that the market is becoming tense, and this explains the cancellation of billions of dollars’ worth of projects over the summer. Orsted lost the bid for the Rhode Island project as its proposal was judged too expensive, Vattenfall said it is to stop developing UK offshore due to rising costs issues, Iberdrola stated that there is no need to book impairments in its offshore business but cancelled last month a planned wind farm off the coast of Massachusetts ($48m cancellation cost). RWE won a bid this week in the Gulf of Mexico after just two bidders participated, which testifies the enthusiasm of other operators…
All these factors lead us to assume that Orsted’s strategic plan is certainly over-ambitious and that it will be difficult to deliver the planned capex and generate the expected EBITDA, which is therefore a bearish scenario.
In addition, to remain as competitive as possible in tenders and win the bids, Orsted and all other operators must be able to obtain the lowest possible cost of capital compared with other operators.
The full report is available here.
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