Orsted has helped boost the prospects of offshore windpower

THIRTY KILOMETRES off the coast of Denmark, in the dark, churning North Sea, 91 white turbines slice through the air. The Scandinavian country is the birthplace of the offshore-wind industry. In 1991 the world’s first such electricity generators were erected there and, 11 years later, the first large-scale offshore wind farm, built with the help of a freighter previously employed to ferry bananas. On a recent gusty day, dangling above the waves, mechanics abseiled down the 40-metre-long blades for routine maintenance.

Such sights are rare in most of the world; offshore wind generates just 2% of global renewable power. In Denmark they are humdrum. Behind it all is a company that few know and fewer can pronounce.

Seven years ago Orsted (“ur-sted”) was DONG Energy, Denmark’s state-owned hotch-potch of coal and natural-gas plants, a few wind farms, oil production and more. Today the utility is the world’s biggest offshore-wind developer, with a third of the market outside China. In 2018 offshore wind accounted for about 90% of Orsted’s gross operating profit and 80% of capital employed. As fossil-fuel-dependent rivals grapple with concerns about climate change, Orsted has transformed itself into a darling of environmentalists and investors alike. Its share price has doubled in the past two years. Around the world the Danish success story is being studied closely.

Orsted’s strategic shift was spurred by crisis. When Henrik Poulsen became DONG’s boss in 2012, gas and coal power plants were ailing. The division which drilled for oil and gas operated in dwindling North Sea fields. “The one business where we had some true differentiation”, Mr Poulsen recalls thinking, “was wind.”

He set about shedding fossil-fuel assets and in 2013 sold an 18% stake to Goldman Sachs, a bank, for $1.2bn to help finance investment in wind. DONG’s initial public offering in 2016 was that year’s second-biggest anywhere. Denmark’s government retained control through a 50.1% stake. But in other ways, the company had changed. To emphasise the metamorphosis, it renamed itself after Hans Christian Orsted, the Danish discoverer of electromagnetism. (Plus, as its advert at the time quipped, “when you hear ‘DONG’ your first thought isn’t green energy.”)

The bet on offshore wind is paying off. Although it remains a pricier way to generate electricity than onshore wind or solar power, its costs, at €62 ($69) per megawatt-hour in Europe, are less than half what they were in 2012. Unlike solar panels, it works at night. Unlike wind turbines on land, it raises few NIMBYist hackles. Bernstein, a research firm, forecasts that the offshore-wind market will grow at 17% a year to 2030, about twice as fast as onshore wind.

The Danish firm got a head start by winning early contracts in Britain, which was offering rich subsidies. Britain’s introduction of auctions in 2014 made companies more cost-conscious. Like rival wind developers, Orsted now uses bigger turbines, which are cheaper to build and maintain than a larger number of small ones (and uses purpose-built vessels, not banana freighters). But its focus on wind lets it seek out potential projects years before its generalist rivals, says Deepa Venkateswaran of Bernstein. The decision to manage projects closely and rely less on contractors helps contain costs. Data from 1,150 turbines across Europe help further optimise operations and allow the firm to design new projects more efficiently, adds Peter Bisztyga of Bank of America Merrill Lynch. Orsted expects a return on capital employed to average 10% in the next few years, about what big oil companies manage.

It may be a creature of northern Europe, with dilled cucumber snacks at its Scandinavian-chic offices, but the company has global ambitions, surveying the world’s open water as hungrily as a property magnate would Manhattan lots. Mr Poulsen thinks Orsted’s worldwide capacity will nearly triple by 2025. It has already secured the right to build 3.8 gigawatts along American and Taiwanese coasts, with local partners. It is starting to invest in onshore wind and solar, which will remain larger markets than offshore wind.

Not everything has gone smoothly. The sale to Goldman was so controversial it helped fell Denmark’s prime minister (in October 2017 Goldman said it would sell all its remaining shares). Amid uncertainty about the effects of America’s shale boom, it took until 2017 for Orsted to offload its oil-and-gas business. Although the firm plans to phase out coal by 2023, it still runs some fossil-fuel power stations. Hans Christian’s descendants sued (unsuccessfully) over the name. Denmark’s government has objected to Mr Poulsen’s effort to sell a power-distribution business, which would boost payouts for shareholders.

Global expansion brings new risks. Wind farms are now of a scale that, when a problem occurs, as it did when an outage at an Orsted wind farm off the coast of Yorkshire contributed to a blackout in Britain on August 9th, the world notices. Governments may unexpectedly change their terms, as Taiwan’s did this year.

Most important, Orsted faces stiffer competition. Equinor and Royal Dutch Shell, two European energy giants with six and 32 times its revenues, respectively, want to set offshore turbines atwirl. RWE, a German power company that is now the Danes’ closest rival, is buying the renewables assets of two other utilities. Macquarie, a bank, is among the heavyweights taking stakes in wind farms, providing capital that fuels more competition.

Analysts reckon that Orsted can hold its own even against the likes of Shell, which it recently beat in American tenders. If not for Denmark’s controlling stake, the oil giant might well be trying to buy it.

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