EDITORIAL: Ørsted’s US fiasco highlights need for new offshore wind business model

If governments are serious about achieving decarbonisation targets, there needs to be an honest conversation about how to do so in an environment of perennial macroeconomic uncertainty

By Seb Kennedy, associate editor of E-FWD and founding editor of Energy Flux News

The crisis engulfing Ørsted, the Danish state oil company-turned-flagbearer of the offshore wind sector, is an indictment of the firm’s senior management. The debacle marks a nadir in the flagging fortunes of the wider offshore wind industry, and raises profound questions around how to commercialise capital-intensive renewable megaprojects in an era of high interest rates and macroeconomic volatility.

A series of strategic missteps in the US culminated in Ørsted’s decision to scrap the Ocean Wind 1 and 2 projects offshore New Jersey on Wednesday, triggering an eyewatering $4 billion impairment and another stock price meltdown. Ørsted CEO Mads Nipper has presided over a ruinous period for shareholders that has wiped USD 38 billion (60%) off the company’s market cap since January 2023.

Booking a $4 billion write-down on the cancellation of US projects that were yet to take a final investment decision (FID) demands an explanation because major capital expenditure typically begins after this milestone. Ørsted sold a 25% stake in Ocean Winds 1 in 2021 to New Jersey’s Public Service Enterprise Group (PSEG) before buying it back in early 2023.

Mads Nipper, CEO of Ørsted

The decision to reacquire at this stage bears scrutiny; presumably, at least some of the many problems that led to the cancellation were already apparent. The same could be said for Ørsted’s decision as recently as October 2023 to issue a $300 million guarantee that the wind farms would be operational by 2025, which reportedly involved placing $100 million in escrow. New Jersey governor Phil Murphy has threatened legal action to recoup these funds.

Ørsted is not solely to blame. Supplier and permit delays, changes in how to monetise tax credits promised under the Inflation Reduction Act, and rising long-dated US interest rates all undermined the business case. High interest rates make ‘wait and see’ an expensive strategy. Ørsted was forced by events to tear off the band aid. In a more benign market, it might have been able to weather the storm to get the projects away at a later date.

Spiralling costs and delays would have been manageable had there been a mechanism to pass costs through to consumers. But a cap on revenue, imposed from above by rigid regulatory structures such as the opaque tax credits system or fixed power purchase agreements (PPAs), provides little room for manoeuvre in the face of deteriorating macroeconomics.

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Failure to foresee a change in circumstances suggests poor forecasting and, perhaps, a strategic failure to hedge exposure to commodity and labour costs when committing development capital to wind megaprojects. Industry-leading developers such as Ørsted and Vattenfall, which paused development of its Norfolk Boreas wind farm in the UK North Sea earlier this year, should not need to learn these lessons the hard way.

Regulatory intransigence is no absolution for these transgressions, and turning cap-in-hand to consumers is a bad look for the industry. Yet it is worth remembering that other energy sources do not operate under these same constraints.

When oil prices surge, motorists pay more at the pump. The cost passthrough is almost instantaneous and governments are virtually powerless to stop it. Easing fuel duty merely shifts the pain from consumers to taxpayers; oil and gas producers are always made whole and their protection from price risk is rarely discussed, particularly by those who are quick to point fingers when renewable energy costs rise.

If governments are serious about achieving decarbonisation targets, there needs to be an honest conversation about how to do so in an environment of perennial macroeconomic uncertainty. As worsening geopolitical events portend a future defined by black swan events and commodity shocks, the need for flexibility and adaptability is paramount.

The model of fixed-price tendering for capacity that can take up to a decade to bring online is incompatible with a world wracked by volatility and precarity. If offshore wind is to realise its potential, governments and industry need to broker a new deal – a partnership grounded in adaptability that considers consumer costs in the wider context of decarbonisation, job creation and energy security. Persisting with a zero-sum approach to costs means everyone loses.

 

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