Orsted (ORSTED.CO) Chief Executive Mads Nipper is walking a tightrope. The $17 billion Danish offshore wind giant and industry bellwether on Wednesday revealed a larger-than-expected impairment of around $4 billion in the United States, nearly writing down all its capital expenditure there. The setback also prompted Nipper to cancel two projects off the coast of New Jersey. He still needs to invest more in the States to meet lofty long-term targets. But until that risky gamble pays off, Nipper will have to show restraint in the UK.
Turbulent news has buffeted the wind sector of late, from faulty turbines at Siemens Energy (ENR1n.DE) to Orsted’s own surprise impairments in August. Yet the Danish group’s new writedowns, reported a day after Halloween, still spooked investors, sending its shares down 20%. After that surprise – largely caused by suppliers’ issues – Orsted’s stock price is just a fifth of its 2021 peak of 1,350 Danish crowns. That suggests investors are neither counting on future growth from its U.S. portfolio nor sufficiently factoring in Orsted’s earnings from operating projects.
Yet the latest mishap doesn’t make it easier for Nipper to walk away. If he exited all projects in the United States – a key growth region thanks to the subsidies of the Inflation Reduction Act – Orsted would miss its long-term financial targets set out in June. Its EBITDA would drop by up to 24% in the three years to 2030, Bernstein analysts reckon. That’s a far cry from the annual average increase of 14% from 2023 onwards implied by Orsted’s EBITDA target of up to 55 billion Danish crowns in 2030.
That’s why on Wednesday Nipper pressed ahead with Revolution Wind, another project off the U.S. East Coast, due to come online in 2025. That scheme has already had troubles in securing a buyer for its power, so, barring more generous U.S. aid, more impairments may be underway. Given Orsted’s deteriorating balance sheet, its under-fire management team needs to be bold with Hornsea Three in the UK – a project to power 3 million British homes that won’t deliver any income until well into 2027.
Hornsea Three would require capital investments of 48.5 billion Danish crowns, according to Bernstein. But its electricity would fetch a low price due to government regulations. That means Orsted may face potential writedowns in the UK. Delaying or even cancelling Hornsea Three might be less painful. Orsted’s Hornsea Four project, awarded in July, could use the same suppliers, reducing the penalty costs for exiting.
If Nipper walks away, he might face the wrath of local politicians. But that may be the price to pay to pursue Orsted’s fading American dreams.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)
CONTEXT NEWS
Denmark’s Orsted, the world’s largest offshore wind farm developer, said on Nov. 1 that it had recorded a 28.4 billion Danish crown ($4.03 billion) impairment charge for the first nine months of 2023, and that it will cease work on its U.S. offshore wind projects Ocean Wind 1 and 2 off the coast of New Jersey.
The announcement knocked 20% off its shares in morning trading.
Orsted added that it has made a final investment decision on another U.S. project, Revolution Wind, saying that it is expected to be completed by 2025.
In August, Orsted said it may see U.S. impairments of $2.3 billion due to supply chain problems, soaring interest rates and a lack of new tax credits.
