The collapse in the shares of Danish offshore wind developer Orsted (ORSTED:CPH) has been alarming and has wider implications for the renewables sector.

While the market reacted with shock to the company’s warning of big impairments in the US, a combination of rising costs, permitting and grid connection delays and sharply higher financing costs has been brewing for some time, and has drastically shifted the economics of offshore wind projects.

According to BloombergNEF the cost of electricity of a subsidised US offshore wind project has increased almost 50% from 2021 levels to $114.20 per megawatt hour in 2023.

Developers, who struck offtake agreements when interest rates were near zero and inflation was negligible, are either trying to renegotiate contracts or exit them altogether – as Spanish firm Iberdrola did in Massachusetts recently.

Without access to capital and developers being able to achieve sufficient levels of return, the significant expansion in renewables required to hit net zero targets could be extremely difficult to achieve. Increased subsidies from the US IRA (Inflation Reduction Act) and similar initiatives elsewhere in the world are unlikely to be enough on their own.

Orsted has compounded these problems through poor communication and poor execution as it chalks up a potential $2.3 billion impairment on its Ocean Wind 1, Sunrise Wind and Revolution Wind projects. Around $700 million of this figure is thanks to cost overruns driven by supplier delays, but higher rates and a potential failure to get the better levels of subsidy available through the IRA could take us to the $2 billion-plus total.

As Morningstar analyst Tancrede Fulop observes, the news on subsidies is particularly damaging. He says: ‘This is disappointing as the group has, so far, said it was confident of getting the 40% ITC (tax credit), deemed crucial for those projects to have a neutral net present value.’

Fulop adds: ‘With high ambitions in the US, Orsted neglected the risks inherent to a new offshore wind market and in turn destroyed its goodwill built on a solid execution track record. This calls into question the company’s risk management.’

Berenberg analyst Marc Ip Tat Kuen thinks the market has overreacted to Orsted’s news, particularly as 80% of the firm’s expected revenue until 2030 comes from regulated and long-term contracted earnings. 

However, he adds: ‘It may take time to rebuild investor confidence in the group’s long-term vision for renewables growth and value creation.’

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