Why consolidation might unlock value in renewable companies

The clamour grows ever louder that oil and gas companies should move wholesale into renewables . However, the experience of one company that did illustrates the challenges involved. But it opens an opportunity for a bold swoop – whether by a European oil major or a Middle Eastern investor. Danish Oil and Natural Gas (Dong) was a fairly successful developer of oil and gasfields in the seas of north-western Europe. But in May 2017, it sold its largest fields in Norway. In November of that year, it renamed itself Orsted, after a Danish physicist (and friend of Hans Christian Andersen), who discovered the connection between electricity and magnetism. The company concentrated on offshore wind power instead, where its home nation was already a leader. And the first few years under its new strategy were indeed a fairy tale. By January 2021, it was the world’s biggest offshore wind developer and its shares had soared more than five times to a market capitalisation of almost $80 billion. That was the high point, followed by a swift tumble. Today its shares are essentially back at the level when it metamorphosed, and it is valued at about $17 billion. Yet this comes against the backdrop of an expansion in offshore wind globally. Orsted now has 15.5 gigawatts of operating renewable capacity, and another 15.5 gigawatts under construction or awarded. Unlike onshore, there are few size constraints offshore. The 35 metre-high, 0.45-megawatt turbines that started the Danish wind journey in 1991 have now been replaced by 15-megawatt turbines that are 280 metres, almost as high as the Eiffel Tower. Offshore winds are stronger and more consistent. Offshore turbines are also away from local communities, meaning objections are unlikely. The cost of UK offshore wind dropped from £155 per megawatt hour in 2015 to just £37.50 last year, half the current wholesale electricity market rate. So what has gone wrong? In the past two years, interest rates have risen sharply, raising the burden of financing capital-intensive long-term projects. Equipment costs have gone up, reversing a long trend of cheaper systems, and undermining the economics of projects companies had been awarded previously. Governments have been unwilling to raise the amounts they agreed to pay for clean power. Environmental groups seeking to protect habitats, fishermen worried about disturbances to their catch, and military interests hoarding training grounds combine to frustrate developments. Last month, New York rejected requests by Orsted, Norwegian state energy company Equinor and others for rises in rates of between 27 and 54 per cent on previously committed projects. In the UK’s latest offshore wind auction, no companies bid after the government refused to raise the maximum price to reflect the market changes. Earlier in the year, Swedish utility Vattenfall said it would give up on the Norfolk Boreas wind farm as the higher costs had made it unviable. Orsted is not the only renewable company facing problems. Siemens Energy, spun out of Siemens in September 2020, has run into severe trouble with faults in the wind turbine blades it sells, following its acquisition of Spanish manufacturer Gamesa in 2017. It is on the hook for at least $1.7 billion in repair bills, and its shares are down 70 per cent since January 2021. The company is seeking $16 billion in German government guarantees, which it insists is not a bail out, to help it complete its portfolio of industrial projects. However, there could be an opportunity. Offshore wind power remains an exciting and competitive source of low-carbon electricity. The cost inflation and interest rate rises will work their way through the system as supply chains catch up. One ambition of the Cop28 conference in Dubai this month is for countries to commit to triple global renewable energy capacity, in line with, for example, the UK’s plans for offshore wind. The US wants to raise its 50 megawatts of ocean wind today to 30 gigawatts by the end of the decade. The European oil companies have had ambitious renewable targets and saw offshore wind as one area that might play to their strengths. BP says it wants 50 gigawatts of all renewables by 2030; France’s TotalEnergies aims for 100 gigawatts; and Equinor for 12 to 16 gigawatts specifically of offshore wind. But BP and Shell in particular have notably scaled back ambitions, putting more emphasis on profitability. They have discovered that extracting full value from complex offshore wind assets is a specialist job. Reaching these targets by organic growth or small acquisitions alone looks difficult. Pre-pandemic, it was suggested that to build scale and expertise, an oil major might buy a large renewable company, but valuations ran away from them. That again looks more in reach for a contrarian investor. The European oil companies sat out the recent wave of US shale consolidation – they have voluminous cash flow and not much idea of how to spend it other than share buy-backs. If not a European oil company, how about a Middle East investor? Regional companies have big ambitions of their own, but if buying a whole company is too much of a stretch or a political hot potato, they could take a large strategic stake. European governments might object, but this would also look hypocritical. Such a deal could also bring offshore wind to areas the Europeans have so far been shy of, including the Middle East, Africa and the Caspian. If an investor today can weather a few turbulent years, they could ride a brisk tailwind afterwards. Robin M. Mills is chief executive of Qamar Energy, and author of The Myth of the Oil Crisis

Why consolidation might unlock value in renewable companies

Building scale could be key to offshore wind energy producers' stable growth as they look for a steady flow of investments and reduce costs