Ørsted was the darling of climate investors. Now the Danish wind developer reflects the trouble facing clean energy companies at a time of rising interest rates, fractured supply chains and oil dominance.
Its shares are valued at a quarter of what they were since peaking in early 2021 at $74.60. The company’s credit rating was downgraded to negative after it wrote down the value of its U.S. offshore wind projects by $2.3 billion. And the future of several of those projects is up in the air, perhaps hinging on whether the Biden administration eases barriers to clean energy tax credits.
Analysts say Ørsted’s struggles illustrate the wider challenges buffeting renewable energy developers. Rising interest rates have made it more expensive to borrow money to build giant wind projects in the sea, and supply chain constraints have driven costs even higher. It all comes as strong oil prices have made fossil fuels a lucrative bet for investors who had flirted with shifting their money to renewables.
The combination jeopardizes international climate goals, which depend largely on the ability of companies like Ørsted to build clean energy infrastructure, said Knut Slatten, an analyst who tracks the renewable industry at Moody’s Investors Service.
“If they don’t do that, well, nothing’s going to happen,” Slatten said. “The energy transition will go much slower than what it would have otherwise.”
Ørsted was once touted as a model for how to remake an energy company amid a rapid increase in global temperatures. The company is headquartered in Denmark, where it historically operated a fossil-fuel-reliant utility and drilled for natural gas in the North Sea.
Ørsted executives decided to overhaul the business after a failed stock listing in 2008, paving the way for a strategic shift that would transform the company into the world’s leading offshore wind developer. It now operates 8.9 gigawatts of offshore wind capacity, or about 15 percent of the global total as of the end of 2022.
The early returns were promising. In 2020, Ørsted’s market capitalization eclipsed the likes of ConocoPhillips, a major oil company, thanks to the success of its offshore wind business in Europe. The company expanded into Asia and the U.S., where it inked five power contracts to sell electricity from offshore wind projects planned from Maryland to Rhode Island. The Harvard Business Review described Ørsted’s shift as one of the most successful global business transformations of the last decade.
Then things became difficult. Russia’s war in Ukraine snarled supply chains serving the industry. The construction of an installation vessel Ørsted intended to use for building two projects in waters off New England is taking longer than expected. In New Jersey, construction of a foundation factory that is supposed to supply an Ørsted project planned off the coast is more than a year behind schedule, according to a recent report from the Sweeney Center at Rowan University.
“The issue that Ørsted is facing in the U.S. in particular is that you have a combination of delay in the supply chain, which leads to increased cash costs,” Slatten said. “I’d say it’s a challenging period not only for Ørsted, but for the entire wind industry, I think over the next 18 months.”
‘Get rid of them’
New Jersey, in particular, highlights the challenges facing Ørsted. This summer, the company lobbied state legislators to allow Ørsted to recoup federal tax credits the state had previously planned to use for reducing the cost on consumers of wind projects. Ørsted said the subsidies were needed to make its Ocean Wind I project profitable. Shortly after state lawmakers approved the request, the company announced Ocean Wind’s start date would be delayed one year, until 2026.
Those developments strained the wind company’s political relationships in Trenton, the state capital. Some offshore wind supporters said New Jersey officials might be forced to look for other developers to meet its clean energy and climate goals.
“I am not happy with the performance. We in the state of New Jersey have done everything to move the process along,” said state Sen. Bob Smith, a Democrat who co-sponsored this summer’s legislation. “The ball is way in Ørsted’s court. If they don’t perform, let’s get rid of them. Let’s move onto Plan B.”
On Wednesday, Ørsted officials told state utility regulators they intended to move forward with Ocean Wind I, a 1.1-GW project capable of powering 500,000 homes. The company posted a $100 million performance security Oct. 4, company officials told the Board of Public Utilities. The payment was required for Ørsted to qualify for the federal subsidies under the terms of this summer’s legislation.
Ørsted is also lobbying the Biden administration to make it easier for wind developers to qualify for tax bonuses available under the Inflation Reduction Act. Company officials have warned they might be forced to walk away from projects unless they can qualify for the credits.
“As the world’s leading offshore wind company, we are prioritizing driving a clean energy transition and attracting capital to help achieve this,” Ørsted said in a statement. “In order to implement our plans and make the most meaningful progress on the timescale that the climate crisis requires, we need to have value creating projects.”
Analysts said the wind developer’s struggles offer a lesson to policymakers. Many governments have relied on technological improvements and clean energy subsidies in an attempt to lower renewable costs and reduce greenhouse gas emissions.
Yet in recent years, those efforts have shown to be lacking, said Charles Donovan, a professor of sustainable finance at the University of Washington. Strong oil prices make the traditional energy business a valuable proposition to investors, limiting the flow of capital from fossil fuels into renewables.
Governments need to find a way to make clean energy investments more attractive to companies in order to accelerate the shift to low-carbon sources, he said.
“If people think they can get a better return on investing in oil and gas, I’m sorry to say there are a lot of investors who are going to do that,” Donovan said. “Policymakers have to understand why this is happening and make a midcourse correction because these issues are fundamentally tied to the global capital markets, which are tied to the rate of change.”
David Victor, who studies the energy transition at the University of California, San Diego, echoed that assessment. Offshore wind is critical to deep reductions in emissions, he said. Winds over the ocean tend to be stronger and more consistent than those onshore. They also complement other renewable sources that produce power at different times of day.
Yet offshore wind is much more capital-intensive than erecting onshore turbines. That makes companies like Ørsted sensitive to changes in interest rates, which increase their borrowing costs.
“The more transformative the thing you’re doing, the greater the risk,” said Victor. “Policymakers have been able to absorb a lot of the risk. Offshore wind would be nowhere without policy. But even with all the policy, there are still a lot of risks for a company that executes pretty well like Ørsted.”
This story also appears in Climatewire.