Posted on November 29, 2023
It has been a hard year for Ørsted. High interest rates and supply chain bottlenecks have rocked the world’s largest offshore wind developer.
Earlier this month, Ørsted wrote down the value of its U.S. portfolio by $4 billion after canceling two projects off New Jersey. The company’s stock price has lost more than half its value since the start of the year, and it recently announced a reshuffling of its management team, with the departure of the company’s chief financial officer and chief operations officer.
David Hardy is one executive who has weathered the storm. He has led the Danish-based company’s operations in the U.S. since 2020. Hardy sat down for an interview Monday with E&E News at a critical time for the company.
Ørsted is preparing to submit a new bid for Sunrise Wind in New York after regulators there rejected the company’s request to charge consumers more for the 924-megawatt project’s electricity. In New Jersey, the company is bracing for a fight over $300 million in performance guarantees related to its Ocean Wind I project. And its partner, Eversource Energy, is looking to sell its stake in three offshore wind projects.
If that wasn’t enough, Ørsted has also been in talks with the White House over implementation of the Inflation Reduction Act. Hardy has called on the administration to revise its rules governing a domestic content bonus in a bid to make it easier for offshore wind developers to qualify for tax credits.
Last week, Ørsted announced the installation of the first turbine for South Fork Wind, a 132-MW project serving New York. Hardy said it could begin generating power by the end of this week. Ørsted has also begun work for Revolution Wind, a 704-MW project serving Connecticut and Rhode Island.
The conversation has been lightly edited for clarity.
It’s obviously been a difficult year. What lessons do you take from South Fork and Revolution moving forward — not just for Ørsted but for offshore wind in the U.S.?
Well, first off, these to me are bright spots in the industry right now. It’s easy to kind of be focused on the negatives. But here’s two projects that are in construction and moving along and, between the two of them, are over 800 megawatts of offshore wind, which will be powering over 400,000 homes in New England and New York with clean power. They’re also projects that are the foundation for the supply chain, the foundation for the operation and maintenance hub, the foundation for current and future union jobs, and all kinds of other things that the industry promised. And so I think our perseverance and commitment to getting these projects built says a lot. They’re still not amazing financial return projects, but we’ve been able to work through all the challenges in the industry … to take a positive final investment decision and progress these projects.
There’s been a lot of news about write-downs and project cancellations. How did Ørsted get to this point? And how do you start to right the ship?
I think it’s a little bit of unfortunate circumstance and probably a little bit of decisionmaking that could have turned out differently but didn’t. And so Ørsted was an early market leader in the U.S. We had a large position. We had five projects, over 5 gigawatts of projects awarded. We were hopeful with the Biden administration we could continue to progress these projects, even though they were significantly delayed by the previous administration. And we were, again, hopeful with the IRA that we could make the economics work.
But the counter forces in this period were rapidly rising interest rates, which are the worst enemy of capital-intensive projects like offshore wind, and global supply chain bottlenecks. And so we were the most exposed of the other offshore wind players. Our projects were the most mature. So when we decided to cease development, we had a much larger investment versus some of our competitors when they decided to walk away from PPAs [power purchase agreements] or ORECs [offshore renewable energy credits]. They hadn’t invested that much. And so that’s the circumstance part.
What could we have done differently? In hindsight, maybe we were too optimistic. Maybe we were too aggressive. Maybe we should have paced ourselves a little bit more. But at the time the industry was booming. Our stakeholders and customers wanted — we were the market leader and we had these early projects. And these early projects are the foundation of a successful long-term industry. So it made logical sense at the time to kind of keep pushing forward. But as things just kept going against us, we got to the point where we had to kind of cease some developments.
Ørsted CEO Mads Nipper has talked about the U.S. being a source of uncertainty. Where does the U.S. fit in Ørsted’s overall portfolio?
We’ve got these two projects in construction, which is really exciting and really important. We are, I would say, pretty optimistic about New York’s potential for a so-called rapid rebid process that could help Sunrise. You know, get an off-take agreement that makes it work. And assuming that happens, it’s construction ready. So we could take a FID [final investment decision] and start construction on that project in the spring. That would be a third project for us.
And then we’ve got a whole bunch of lease area that positions us well for the future of offshore wind, and we just need to make sure that the macro conditions and the off-take conditions are suitable for us to continue to make investments. And so you know that’s how we’re looking at it. We see other auctions on the horizon, we see BOEM [Bureau of Ocean Energy Management] continuing to approve projects. We see, hopefully, a stabilization of interest rates. And so, U.S. offshore wind still has a lot of potential, but we’re going to approach it prudently. Obviously, we’ve spent a lot of money learning the hard way. So we’re not going to make the same mistakes.
Let me ask you about Ørsted’s talks with the Biden administration. Is there any update on the domestic content bonus or some of the things that you have been talking to them about?
The Biden administration has been supportive from day one, right. I mean, it’s a 180-degree turnaround from the previous administration. … Our final EIS [environmental impact statement] is coming soon [for Sunrise]. And so, from a permitting standpoint, much better. Getting the IRA passed — that’s Congress, not the administration — but trying to implement that. Most recently, I’m sure you would have seen recent guidance on kind of clarifying eligible basis for offshore wind, which has taken a while, but it’s what the industry expected. And so that was good news.
In every dialogue I have with them, they want to help. And so the challenge is, how do we get these first projects built? How do we get the first steel on the water? How do we get the first supply chain investments? Because it all builds on itself. And so the first projects create demand, which creates investment certainty for the supply chain. And right now, not just us, but other projects are either on hold or being canceled or delayed. And so there’s definitely a risk that the pace of the industry is not as fast as it was a few years ago. But I think it’s worth noting a lot of folks are still moving forward, including Ørsted.
Ørsted recently pulled out of an offshore wind consortium in Norway. Some financial analysts have been asking if you should cut your dividend and whether the company has enough cash. Does Ørsted have enough money to participate in some of these auctions that we’re going to see in the coming year?
Yeah, I mean, we don’t comment about what we’re bidding in and what we’re not bidding in here in the U.S., but we’re definitely following these New England opportunities. We’ve got our so-called lease area 500, or Bay State Wind asset, which is sitting right off the coast of New England. It’s one of the best leases in the world actually. High wind speeds, low water depth, close to shore. Those are what you want in a lease area, and access to multiple markets. And so we’re looking at the New England auctions, and then we’re also obviously anxious to see the New York details for Sunrise and potentially other opportunities.
Let’s talk about Sunrise Wind. When we saw results of the most recent solicitation, the average price paid to those three projects was $145 per megawatt-hour. The adjustment you asked for from the New York Public Service Commission was $139 per MWh. There’s this tension there. That seems like a good sign that you can get a price that’s strong enough to build the project. But on the flip side, you have some critics who say, well, these projects are going to cost more than we thought.
If you think about interest rates — you’ll hear Mads [Nipper] say this, you’ll hear me say this — that’s the fuel of offshore wind. Like, the wind is free. Onshore wind and solar, the wind and the sunlight is free. But interest rates are the fuel of renewables and for offshore wind, because it is so capital intensive. For every 100 basis points of increase in our weighted average cost of capital [WACC], the offshore wind power prices somewhere between $16 and $20 higher. So we’ve had 300 to 400 bps, 3 to 4 percent increase in the risk free rate. It doesn’t exactly correlate with our WACC, but it’s something along those lines. That’s a big impact to the cost of offshore wind. And we can offset that over time with other LCOE [levelized cost of energy] measures — larger turbines or efficiency in installation and all kinds of other stuff. But as we’re kind of getting started, where those input costs are high, and interest rates are high, the starting point for offshore wind has gone up from where it was three, four years ago. And that’s just the reality of how the economics work.
I still think that there’s a bright future for offshore wind to be more cost competitive. You can see in Europe that it’s pretty cost competitive. They’ve also had rising interest rates and rising input costs. So we’ve got to work on the things that are unique to the U.S. that make our costs higher and some of that is the inefficiencies we have today around not having Jones Act compliant vessels, supply chain, the extra logistics, etc., etc.
We’ve got to get our LCOE down in the U.S. by working on the things that we can control like building our own supply chain, taking those intercontinental logistics out. Right now, we’re pretty inefficient the way we’re building stuff, barging equipment out to foreign-flagged vessels. We’ve got different limitations on how fast we do our pile driving, etc. With technology, I think we can speed all that up. And so there’s just a lot of things we can do over time to bring LCOE back down. And then like I said, hopefully, interest rates also stabilize, at least, if not go down over time.
Offshore wind’s challenges are like a chicken-and-the-egg problem. The turbine and component suppliers need more projects to build factories. And you need more factories to address some of these issues. How do you break that sort of circle?
Yeah, you’re singing to my tune, Ben. This is the same conversation I have over and over with policymakers. Like this comes back to my thought that we’ve got to get the first projects built. Because those are the projects where the supply chain investments were happening. And if they don’t move forward, all these supply chain promises don’t happen. It even ties into the jobs that the Biden administration wants and ties into the domestic content that we want. And there’s a little bit of a vicious circle, but the way that it starts is by getting the first projects built and helping make those investments and people believing that the industry is real, and creating the jobs that come from the first project. So we’re trying to do our part on that.
What happened in New Jersey, and why was Ocean Wind the project that got canceled?
I think all this stuff has been building over the last few years, as interest rates were going up and input costs were going up. Our margins were getting squeezed and squeezed and squeezed. And we were trying to do everything we could creatively to keep the projects on track. And we worked with the state, and we got passed the federal tax credits, which was helpful.
But in the end in the late spring and summer, as we got closer and closer to our FID and start of construction, we were looking more closely at all of our project schedule risks, etc. We started to see delays from some of our component manufacturers. That was what led to the first kind of announcement in August, around the potential impairments. And then in September, we learned that our main foundation installation vessel was going to be delayed. And we were getting squeezed out between one project finishing and another project starting. And there’s such a short supply of vessels in the globe that we couldn’t count on having a vessel available in 2024, 2025, 2026 even. There may have been opportunities, but when you start looking at a project that’s already very much under pressure having to be delayed one, two, three years, it just was the straw that broke the camel’s back for our board and for our management team. You can imagine that writing off billions of dollars for a project is not an easy decision. But we would only do that if we thought the alternative was worse. And so we had to make that tough decision.
What about the performance guarantees that you posted in New Jersey? Are you going to try to recoup those or is that money gone?
Editor’s note: New Jersey Gov. Phil Murphy (D) has said the state will seek to recoup $300 million in performance guarantees, but Ørsted has signaled it may seek to keep the money.
Ben, I’ll try to answer all the questions that you have. But that’s one I got to stay away from for now because of the potential legal implications, but we’re working through our options for that.
On their last earnings call, Eversource CEO Joe Nolan said that you were talking to a potential buyer about a joint venture agreement. Is there anything that you can say about those conversations?
I think questions for Eversource are for Eversource. But we do know that they’re in late-stage agreement to sell out their half of the existing projects. And of course that buyer will become our JV partner and so of course we’re in dialogue as well. And I would just confirm what Joe says that it’s pretty late stage.
A couple of years ago, it felt like you had tailwinds. Biden was coming into office, costs were coming down, the stock was doing great. Then today, it’s all headwind. The narrative has switched. How do you navigate all of that and get it back to something more stable?
I think we’re headed there. I mean, we’ve made some tough decisions, to cease development of some projects in their current configuration. We took FID on Revolution, we’re building South Fork, we see a path on Sunrise. There’s a number of auctions and feels like the willingness to pay price is more in line with what the market needs. I think we’re heading in the right direction right now.
I know, this is about offshore, primarily. But we’ve got a thriving onshore business as well. We just completed a project called Sunflower out in Kansas. We’ve got four other onshore projects in construction. We’re building one of the largest battery storage systems in the world, our 11 Mile project in Arizona. And so there’s a lot of things to be positive about.
The narrative, just like a lot of things in news cycles, kind of wants to dwell on the negative, but I actually think there’s a lot more positive going on than maybe people realize. And we’ll see, we’re just going to keep pushing, keep fighting and we’re going to achieve these milestones: get Southfork built, get Revolution under construction, take FID on Sunrise, hopefully. And we’ll see where this takes us.
When we talk about climate and reaching net zero, a lot of it really comes down to companies like Ørsted’s ability to get these projects done. And as you were just noting, you aren’t the only one, it’s not just offshore wind. And so I guess the question is, how do you build these projects that are really important for net zero in this sort of new interest rate environment?
I think an important nuance here is that with stable interest rates, relatively stable, we can manage it, right? Because then we know what our input costs are, our cost of capital and everything else. It’s when interest rates are moving very volatilely that it’s challenging for us. Obviously, if they’re moving down, that’s good news for us. If they’re moving up, it’s bad news for us. The challenge is if interest rates are high-stable, then you’ve got a higher cost, unfortunately.
But people have to decide how important are renewables to their mix. And if states and federal governments want net zero or carbon reductions then that will all come into play, I guess. You again can see New York demonstrating leadership and expressing a willingness to pay that’s higher than what has been contracted in the past. And that’s a result of primarily higher interest rates.
But also, I think, people haven’t really done all their homework — like that price is still pretty low. Actually, if you compare it to the retail rate that they pay in the winter today, this is a fixed price for 20 years that starts seven, eight years from now. So they get a natural hedge against variable costs in the future, you know, 25-plus years out. And so we really have to take that into consideration as well.
This story also appears in Energywire.
Correction: An earlier version of this story incorrectly reported the price adjustment Ørsted sought for its Sunrise Wind project in New York.
