US Offshore Wind Industry Overcomes Obstacles Amid Promising Growth

The Troublesome Backdrop

The offshore wind industry, which governments have pushed as a solution to combat global warming, has been severely impacted by increased lending rates, growing costs, and disruptions in the supply chain. The difficulties have been especially severe in the US, where the industry’s supply chain is still developing and contracts that developers sign usually offer less insurance against inflation. Anja-Isabel Dotzenrath, BP’s head of low-carbon energy, said at a Financial Times conference on the 1st of November that the US offshore wind business was “fundamentally broken” and that a “fundamental reset” was required to support the emerging market’s expansion. ¹

In a major setback to US efforts to create renewable energy, the largest offshore wind developer in the world, Ørsted, has backed out of two US projects it was working on off the coast of New Jersey because of rising financing and supply prices and disclosed a larger than anticipated write-down of its portfolio. This news caused the share price to drop by 26% on the same day. The company’s long-term rating was placed on credit watch negative by rating agency S&P ² and Ørsted announced that it modified its top management in November 2023. The write-down by Ørsted exceeded the DKr16bn that the Danish state, which owns most of the firm, had identified in August 2023. Since then, the business said that revisions to tax incentives and construction license assumptions have resulted in “further negative developments” for its US offshore wind projects.

Orsted-Stock-Data-Offshore-Wind-Industry-Trends - CATENAA

One of the largest producers of wind turbines in the world, Siemens Energy’s shares fell over 40% by the 23rd of October 2023 to record lows on the German stock exchange, wiping off €3 billion of its market value, following rumors that it was in talks to obtain government guarantees as part of a €15 billion rescue plan to enable shoring up its balance sheet. ³

Following a string of well-timed bets against wind energy stocks, hedge funds profited well in 2023. The dramatic declines in the share prices of wind industry stocks in 2023, such as Siemens Energy and Ørsted, have produced millions of pounds in profits for some, like Marshall Wace and the quantitative trading business Qube Research & Technologies. ⁴ Despite the substantial tax credits and subsidies that the governments in the US and Europe have provided to renewable energy producers, the short bets indicate a general lack of enthusiasm for green energy equities.

Typically, wind farms establish long-term contracts that set the price at which they sell energy. However, rising inflation has increased their expenses, and borrowing money for frequently costly new projects has become more costly due to high interest rates. Early in the coronavirus pandemic, the S&P Global Clean Energy index, which comprises 100 of the largest renewable stocks, soared and peaked in early 2021. However, it plunged precipitously later that year and has dropped by another 35% this year after losing more ground in 2022. James Smith, manager of the Premier Miton Global Renewables Trust, stated that there was a “very high correlation” between interest rates and the index’s performance, adding that issues at individual firms were also weighing on the sector. ⁴

With growing anticipation that higher borrowing costs would start to cause problems in the green energy sector, short sellers have been expanding their bets against green energy companies for some time. According to statistics from S&P, the percentage of the company’s shorted shares began to rise in March of this year and peaked on November 3rd, 2023, at 1.64%. As of yet, none of the positions meet the requirements for individual disclosure. ⁵

The Tide is Turning

In 2024, however, the US offshore wind industry appears to be improving. Two problematic offshore wind projects received fresh contracts from New York in February 2024 as part of an attempt to save the infant industry that has been severely harmed by harsh socioeconomic conditions. The state is essential to the Biden administration’s goal of deploying 30GW of capacity by 2030 because it has one of the most aggressive offshore wind targets in the entire country. This is reassuring to the industry and these contracts will incentivize the sector and send good market signals to the supply chain.

The two projects that were granted were the Sunrise Wind facility by Ørsted and Eversource and Equinor’s Empire Wind 1 project. The two projects with a combined capacity of 1.7GW were the Empire Wind 1 project by Equinor and the Sunrise Wind facility by Ørsted and Eversource. At least one response from the supply chain has already been observed; Vestas declared that it was getting ready to fulfill orders for turbines related to Equinor’s project off the coast of Brooklyn. The company stated in 2023 that it was taking a “wait-and-see” stance with plans to develop a US factory because of a lack of market certainty, thus it is still unclear whether the turbines will be built in the US. Ørsted and Eversource released a statement saying, “States are signaling clearly that they value the large-scale clean energy generation, local jobs, and supply chain investments that offshore wind offers”. ⁶

Due to supply chain limitations, rising interest rates, and inflation, US offshore wind is going through a “fundamental reset” since projects that were contracted before the epidemic were no longer viable. In 2023, over half of US offshore wind contracts were canceled or in danger of being canceled, including the major projects in New Jersey that Ørsted scrapped. Relationships between large developers, such as those between Ørsted and Eversource and BP and Equinor, have also ended (Ørsted is buying Eversource’s share in Sunrise Wind). However, on the brighter side, the country’s first two utility-scale offshore wind farms in the country have begun to operate. Manufacturers of wind turbines reported higher quarterly profits. Apart from New York, a group of New England states permit developers to rebid contracts for favorable conditions.

Vic Abate, chief executive of the wind business at GE Vernova, said that there has been a massive reset in the market. The company anticipates that in 2025, its wind division, which has seen severe losses, will turn a profit. ⁷ The latest state contracts, according to Vestas senior vice-president Josh Irwin, are a “step in the right direction,” but further inferences cannot be made. A steady pace of project development over a long period while utilizing current infrastructure investments to support upcoming US developments is necessary for the industry’s long-run certainty.

The US is predicted by most to fall short of its 30GW ambition; by the end of the decade, only 14.5GW are projected to be installed, according to consultant BNEF. The two projects granted (the Empire Wind 1 project and the Sunrise Wind facility by Ørsted and Eversource) show the bill impact for Empire Wind 1, and Sunrise Wind will now cost taxpayers more than double, from $0.73 per month to about $2. Analysts note the price tag reflects the wider increase in the cost of capital and excludes savings from commodity shocks and the benefit of emissions reductions. ⁶

In 2023, wind turbine installations reached an all-time high, indicating significant progress towards clean energy adoption. ⁸

Doreen Harris, president of the New York State Energy Research and Development Authority, which awarded the new contracts, stated that they are making good strides to achieve a desirable position albeit not with a lens of complete optimism.” The authority anticipates that New York will reach its own 9GW offshore wind target by 2035. There will inevitably be hiccups in the path as well as unpredictability surrounding the presidential race. The Financial Times has been informed by former Trump administration officials that should he return to the White House, he will repeal the IRA, which contains extravagant subsidies for offshore wind. ⁹ Another Trump administration could also impede lease sales and reviews or risk Biden-approved projects in the event of a legal challenge. Even though the IRA may endure, the executive branch’s authority cannot be understated.

Offshore wind energy is essential to achieving energy security and Europe’s climate ambitions. However, the macroeconomic environment has severely affected offshore wind energy stock performance in 2023. Short sellers have been expanding their bets against green energy companies for some time and well-timed bets against wind energy stocks provide profitable opportunities. On an optimistic note, the US offshore wind industry appears to be improving, with problematic offshore wind projects receiving fresh contracts from New York. It can be expected that these projects will face more future challenges and unpredictability surrounding the upcoming US presidential race.

The company’s long-term rating was placed on credit watch negative by rating agency S&P, ² and Ørsted announced that it modified its top management in November 2023. The write-down by Ørsted exceeded the DKr16bn that the Danish state, which owns a majority of the firm, had identified in August 2023. Since then, the business said that revisions to assumptions about tax incentives and construction licenses have resulted in “further negative developments” for its US offshore wind projects. Consequently, the business announced that it was “taking measures to support its capital structure,” including portfolio rationalization. ¹¹

Ørsted is moving forward with a third project, Revolution Wind, which it anticipates being finished in 2025, even though it is abandoning two others, Ocean Wind 1 and 2. Having to halt the projects, Mads Nipper, chief executive of Ørsted, expressed his “extreme disappointment” and stated that the US “needs offshore wind to achieve its carbon emissions reduction ambition.” Ørsted is a leading wind company that changed its business model in the last few years from producing oil and gas. The business has not yet determined whether to grant final approval for the North Sea project but hopes to do so before the end of 2023. Nipper declared that the third quarter had been “really good,” notwithstanding the growing difficulties in the US. The company had reported an adjusted net profit of DKr5.9 billion. The company’s underlying operations and earnings ability appear to remain solid. ¹⁰

Enacted in 2022 to expedite the nation’s shift to renewable energy, the US Inflation Reduction Act has made offshore developers eligible for substantial subsidies. In New Jersey, the Ocean Wind projects have pledged to produce more than two gigawatts of offshore wind energy. The company believes that although write-downs might shake investors’ trust, the news was necessary to disclose for investors’ clarity. A request to renegotiate contracts was denied by regulators, leading to BP recording a $540 million write-down on two offshore wind projects off the coast of New York the day before the impairment. ¹²

Swedish developer Vattenfall stopped construction on its Norfolk Boreas project in the UK North Sea in July, stating that it was no longer sustainable at the electricity price it agreed with the government a year earlier. Market conditions have deteriorated since it signed a contract to fix the price of electricity it sells for 15 years.

One of the main components of Vattenfall’s strategy for living without fossil fuels is offshore wind, which is necessary to produce cheap, secure, and clean electricity. However, the current state of the sector as a whole is exceedingly difficult due to a constrained supply chain, rising costs of capital and prices, and fiscal frameworks that do not adequately account for the reality of the market. The business stated that building wind turbines now requires more expensive borrowing, and supply chains are having difficulties. The company has stated that it has attractive wind power projects in the pipeline, and investment decisions will always be based on profitability. ¹³

Hedge funds are profiting well following a string of well-timed bets against wind energy stocks. Some are even speculating that the struggling industry would see further suffering. The dramatic declines in the share prices of wind industry stocks in 2023, such as Siemens Energy and Ørsted, have produced millions of pounds in profits for some, like Marshall Wace and the quantitative trading business Qube Research & Technologies. Despite the substantial tax credits and subsidies that governments in the US and Europe have provided to renewable energy producers, the short bets indicate a general lack of enthusiasm for green energy equities.

Typically, wind farms establish long-term contracts that set the price at which they sell energy. However, rising inflation has increased their expenses, and borrowing money for their frequently costly new projects has become more costly due to high interest rates. Early in the coronavirus pandemic, the S&P Global Clean Energy index, which comprises 100 of the largest renewables stocks, soared and peaked in early 2021. However, it plunged precipitously later that year and has already dropped by another 35% this year after losing more ground in 2022. James Smith, manager of the Premier Miton Global Renewables Trust, stated that there was a “very high correlation” between interest rates and the index’s performance, adding that issues at individual firms were also weighing on the sector. ⁴

Offshore wind energy is essential to achieving energy security and Europe’s climate ambitions. However, rising inflation has increased the expenses for offshore wind energy firms, and high interest rates have made borrowing money more costly. The performance of offshore wind energy stock is severely affected by the current macroeconomic environment, and the prices of offshore wind energy stock are expected to continue to decline. Short sellers have been expanding their bets against green energy companies for some time and well-timed bets against wind energy stocks provide profitable opportunities.

Sources