Orsted sounds floating wind retreat as 'painful' US lessons force rethink

Orsted’s “value-focused” approach to its new business plan means less mature or slow-moving offshore wind markets may be dropped from the company’s investment portfolio – with its former floating wind ambitions in Norway, Spain and Portugal the first to take the fall.

Pledging to provide its investors with a more robust business model in future, Orsted announced a capital expenditure reduction of DKr35bn ($5bn) for 2024-2026, to be achieved by project cuts and a more phased approach to spending than was present when the previous plan was unveiled in June 2023.

The plan includes a scaling back of total capacity ambition for 2030, hundreds of job cuts and a suspension of the dividend to shareholders.

As part of these moves, Orsted said it's also walking away from several offshore markets, including Norway, Spain, and Portugal. All three are markets where prospects are dominated by floating wind.

The Denmark-based group said it is also “deprioritising development activities in Japan, and planning for a leaner development within floating offshore wind and P2X”.

'We chose not to go there'

In a press conference held earlier today, CEO Mads Nipper stressed that Orsted is not turning its back on floating wind entirely.

“We are convinced that, over time, all countries with potential and all technologies will contribute to the green transformation and present significant opportunities for growth. What we're reflecting… is not because we don't believe in (floating wind and Power-to-X technologies). But it is simply because the technologies are developing slower and because the potential in bottom-fixed is so significant that we are re-prioritising in the plan," he said.

The Orsted boss stressed that the move heralded a more focused approach to the criteria on value and risk, rather than a strategic move away from any sector.

"So the criteria would be the same. How many markets should we be in? How do we evaluate the value-creation potential in those markets? How do we evaluate the risk profile of potentially going into new projects," he stated.

Orsted had been eying a 4.5GW allocation round for two Norwegian areas – Utsira North and Southern North Sea 2.

Similarly, Nipper described Spain's offshore market as "less mature in terms of the knowledge we had about the market". He added: "We are very appreciative of our partner Repsol but it did not fit the list of priorities or countries we want to focus on. So it's it's an outcome of a portfolio review, rather than saying that this, this country or this partner or this (technology) makes no sense."

Both Spain and Portugal have been moving slowly in putting the full regulatory apparatus in place for their promised offshore wind rounds, and both countries face some challenges with port infrastructure and supply chain development for floating wind.

'Still ambitious'

Nipper also dismissed suggestion that Orsted is dropping its ambition to be a leading developer in offshore wind sector, arguing that the 6.7GW of offshore capacity under construction was double the nearest rival.

“We are the only developer currently active in so many number of countries, so we don't see decision about prioritising as compromising our ambitions.. upholding a strong position of offshore leadership, globally, doesn't mean being active in every in every market," he said.

Nipper also highlighted Orsted's moves to strengthening ourselves in core markets, such as the recent final investment decision on Hornsea 3 in the UK and the obtaining of a 1.6GW business licence in South Korea.

Orsted’s new business plan includes an ambition of reaching 35-38GW of installed capacity by 2030 – more than double its current installed capacity of renewable energy, but lower than the 50GW previously envisaged.

'Painful' outcome

As well as prioritising projects within its portfolio, Orsted said it has been revising its operating model to reduce risks in development and execution, based on learnings from the US projects.

Orsted said its revised operating model will place more focus on contingency planning, monitoring of suppliers, inflation protection with higher scrutiny of pre-FID commitments, greater flexibility on project timelines and commissioning dates, and more project governance reviews.

Referring to the US projects, Nipper said write-downs and provisions were incurred on Ocean Wind 1 which was "a very mature project where we had a very high level of capital commitments".

"Due to the surprises that hit the project, we took the economically rational, but obviously very painful decision to cease development on the project."

Impairments reflected the fact that there were over 270 contracts in place.

"We have already terminated by far the majority of these, and we are still working intensively on potential reuse," Nipper said, adding that some mitigation efforts have succeeded, including redeployment of an export cable.

In a possible further pivoting away from floating wind, given potential in California, Orsted said it will primarily focus its US offshore portfolio towards the North-East Atlantic.

Lessons learned

Reeling off a list of lessons learned, Nipper included a determination "never again, to be in a situation where we commit so much capital to a project that we find out has outstanding risks".

In a subsequent presentation to analysts, Nipper related how the company — with the intention of qualifying for tax credits — had allowed itself to become dependent on immature supply chain in the US market at a time of rising costs.

"We had high confidence. We we were part of insuring that there could be FIDs on newbuild vessels - we felt comfortable could be kept on track but progressed slower than expected with a lack of qualified labour and difficulties ramping up," he said.

"There were delays and suppliers failing to live up to commitments. We found ourselves without capacity to book for installing in 2025 and by time got this knowledge it was too late and this meant the project was facing such a delay that we’d have to re-contract most of capex at even higher rates."

Along with the absence of any lack of contractual protection against rising project and capital costs, Nipper also listed a failure to foresee possible delays with construction permits and uncertainty about the availability of an additional tax credit as critical factors on Ocean Wind.

He added that the most important thing on the list of lessons learned "is to ensure that our pre-FID financial commitments are significantly lower than was the case on the first US projects", adding that this metric was already much lower on Ocean Wind 2 and the repositioned Skipjack project.

Nipper stressed that the company is looking to overcome challenges left from the portfolio of awarded projects in the US, referring to the recent decision to re-bid into the New York 4 auction with the Sunrise project and is planning to continue development of its US seabed area, with 4GW potential in the Lease 500 area off New England,

He also said he was encouraged by prices accepted in New York 3, averaging $145 per megawatt hour, described as "an indication that there's a preparedness to pay realistic prices for what it takes to roll out offshore wind.

"So we still see the US as an attractive market. But we will do that in a focused approach where we do not run risk of getting into a similar situation again," the Orsted boss said.

In its revised business plan, Orsted also outlined plans for farm-downs and divestments that are expected to contribute proceeds of DKr 70-80bn are expected in 2024-2026.

Nipper highlighted the UK's recently-sanctioned Hornsea 3 as a likely candidate for farm down, though probably not until 2025.