Ørsted 'not structurally concerned' about rising costs in offshore wind

Denmark's Ørsted A/S, the world's largest offshore wind developer, is grappling with the effects of rising interest rates and capital costs as it prepares to lock down its investment in more than 11 GW of awarded projects globally.

Capital expenditure in offshore wind has undergone a double-digit increase, CEO Mads Nipper told reporters Feb. 1, pointing to higher prices for critical components like turbines, cabling and foundations, but also activities like transportation and installation.

The issue is most pressing for those projects awarded government contracts or power purchase agreements before prices started to rise, but which have yet to go through a final investment decision, or FID.

Ørsted's pipeline includes more than 11 GW of such projects in Europe, the U.S. and Taiwan, and the company is "working hard to make all of those cases investable," Nipper said.

One such project, Sunrise Wind in New York, saw Ørsted recently write down the value of its 50% stake by 2.5 billion Danish kroner due to cost inflation and rising interest rates.

Still, Nipper said the company is "not structurally concerned" about the cost increases given that higher prices will eventually just become "the new reality."

"[Offshore wind] will still be very competitive to fossil fuels," the CEO said.

Auction prices 'need to go up'

Ørsted's 11-GW pipeline of awarded projects features five other wind farms off the U.S. East Coast, as well as one project in Taiwan, two in Poland and the 2,852-MW Hornsea 3 wind farm in the U.K.

Hornsea 3, slated to come online in 2027, was awarded a contract for difference by the U.K. government in July 2022 worth £37.35/MWh in 2012 prices. The contract is inflation-indexed and includes an element of merchant flexibility, but the price level is still the lowest ever awarded in the U.K., providing Ørsted with a challenge to make the project economic.

"We will get there with our FID," Nipper said about Hornsea 3. "It's hard work, but I'll say that overall there needs to be, also from the government's side, an expectation that future [auction] prices ... will need to go up."

Ørsted originally expected to take an FID on the project within 18 months of being awarded the contract, and potentially by the end of 2022. While the latter target was not met, it points to a wider trend of slower progress in the European offshore wind sector.

Lobby group WindEurope said Jan. 31 that 2022 yielded no investments in new offshore wind farms, adding that several projects had expected to reach FID but were ultimately delayed due to inflation, market interventions and uncertainty about future revenues.

Nipper acknowledged that progress in offshore wind is "happening too slow," adding that part of problem is structural given the much longer lead times compared with onshore wind.

"The time to react to a new reality, in terms of what the prices are, is very often reflected much sooner in onshore," Nipper said. "We don't see that Europe is ... down, or a market without opportunities, but we think there is ... a real need to significantly speed up the permitting and the visibility of the opportunities, not least in offshore."

Highest EBITDA ever

Ørsted's offshore wind business dragged on the company's earnings in 2022, chiefly due to the adverse impact of hedges and construction delays on Hornsea 2 in the U.K. and Greater Changhua 1 & 2a in Taiwan. In all, earnings from offshore amounted to 9.9 billion kroner, down 3.1 billion kroner from 2021.

Yet the group still managed to achieve its highest EBITDA ever — 32.1 billion kroner with the sale of project stakes, or 21.1 billion kroner without — driven by strong performance in its onshore wind, solar, combined heat and power, and gas businesses.

Ørsted guidance for full-year EBITDA in 2023 is between 20 billion kroner and 23 billion kroner, increasing the guidance range by 1 billion kroner due to the market volatility.

The make-up of this year's earnings is expected to look different from 2022, with offshore earnings poised to be 6.5 billion kroner higher, driven by the commissioning of Greater Changhua 1 & 2a in the second half and the fact that last year's negative hedging environment is not expected to be repeated.

Ørsted's gross investments in 2023 will amount to between 50 billion kroner and 54 billion kroner, a significant increase from the 37.4 billion kroner the company invested in 2022.

The midpoint of the investment guidance is 15% higher than analysts at Jefferies had estimated, and includes what Ørsted described as "timing effects between years" where activity was lower in 2023 and certain projects slipped into 2023.

As of Jan. 31, US$1 was equivalent to 6.85 Danish kroner.

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