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Page 90 of 162 Know-how
The learning experiences from executing 3GW of offshore wind projects have provided Ørsted with a second-to-none in-house expertise, providing it with the ability to design and optimise projects with a “total life-cycle cost of wind farm” mindset. It also means that Ørsted has a better understanding of the risks of executing a large offshore wind farm project, which should minimise the number of mistakes and wrong decision-making.
Technology
Ørsted is a pioneer on many of the technological advances in the industry, giving them a rare technological know-how. This has contributed significantly to reducing LCoE and has made it possible for Ørsted to make competitive bids in auctions. Therefore, their technological development is difficult to imitate. For example, though the years, Ørsted has utilised larger and larger turbines and is a first mover in suction bucket technology.
Furthermore, over the years, Ørsted has built up a portfolio of proprietary IT tools. These IT tools help optimise the design of a wind farm in order to maximise output and minimise costs.
Logistics
In terms of logistics, Ørsted has a cluster approach to its site selection, which helps it to realise synergies when it takes sole responsibility for the operations. The cluster approach can thus ensure lower logistics costs, fewer technician hours with fewer facilities needed and lower inventory levels. This is reflected in the days-on-hand analysis of the balance sheet.
Financial Leverage
In 2017, Ørsted’s net debt/EBITD ratio was 0.49, and Ørsted is close to having the lowest financial leverage.
This is largely a function of Ørsted’s farm-down model. Having such a low liquidity risk has been an advantage for Ørsted, especially when several competitors faced balance sheet pressure that prevented them from concentrating more capital and management in the offshore wind business. The low financial leverage will be a competitive advantage for Ørsted when trying to expand its business in Taiwan and the US with larger CAPEX requirements.
6.2. Weaknesses
Non-diversified
In practice, the source that provides energy with the lowest LCoE is considered more attractive. By having a scope of different renewable energies, governments can easily substitute one with another. Ørsted’s business model depends mainly on LCoE from offshore wind. As such, Ørsted faces threats from other renewable sources such as hydro, which are not within the operational scope of Ørsted at the moment.
Page 91 of 162 Irrationality and lack of strategic thinking
As previously described, Ørsted was one of the driving and leading entities behind the zero-bids. However, as noted, the bids might have come a tad too early, as the bids essentially have the possibility—under the wrong market conditions—to cause unprofitable investments where the returns of projects are below the WACC.
Bidding for unprofitable projects should indeed be noted as irrational behaviour as the projects are very low relationship-driven, thus a better relationship cannot justify the unprofitable bid as it would likely lead to more unprofitable bids. Ørsted is already an established, well-known player within the industry and should not engage in capturing unprofitable market shares. In the end, the zero-bids might lead to a higher level of speculation within the industry as bidding for an unprofitable project demands a technological advance, such as larger turbines with larger output until that project starts being installed. However, it should be noted that Ørsted withdrew from the auction in the Netherlands, reflecting that they carefully assessed the earnings spread over WACC.
Lack of size
With zero-bids, the offshore wind industry is a competition of who has the strongest balance sheet. Ørsted is not the strongest financially when competitors such as Statoil enter the market, forcing Ørsted to be clever about its strategy.
6.3. Opportunities
CO2 Targets
The goal of reducing CO2 entails a shift from the conventional fossil fuels towards renewable energy sources, such as offshore wind. Offshore wind is particularly well positioned to play an important role in the ongoing energy transformation and EC targets. BNEF (2017) estimates offshore wind will be the fastest-growing renewable technology in the years to come.
Governmental aid
In summary, with the overall emission targets, the governments are clearly interested in building offshore wind farms. This is also reflected in the EC being interested in pooling funds towards helping companies like Ørsted set up offshore wind projects. If there are no sellers, e.g., Ørsted, then the government might be forced to increase the prices so suppliers can build at a profitable rate.
Strategic divestments
The strategic divestments are split into two, the first being that of the divestment of Ørsted’s business division and the second is the strategic divestment of projects. In September 2017, Ørsted divested its upstream oil and gas business to INEOS in order to restructure and rethink its core business portfolio. This divestment is
Page 92 of 162 expected to help Ørsted focus on its core business and, through further development and growth, increase its revenue.
New markets
The markets in Europe have far from consolidated. However, as previously stated by Ørsted’s head of wind, subsidy-free projects have made it extremely difficult to remain profitable. As such, Ørsted has looked beyond their usual markets and across oceans towards markets that seem more profitable due to their low level of market saturation and possibilities for subsidies. While the current portfolio is concentrated on the UK, Germany and Denmark, thanks in large part to attractive support schemes there, Ørsted is also targeting geographical expansion from 2020, with the US and Taiwan representing the most attractive long-term opportunities. However, markets in Asia will offer new types of geographical challenges for Ørsted, such as deeper waters, earthquakes and typhoons.
6.4. Threats
LCoE & new technologies
In order for Ørsted to remain competitive, a large focus has to be put on lowering the LCoE. Ørsted plans to reduce its cost of electricity by 2020 to EUR 100 per MWh (Ørsted, 2018f). This implies that offshore wind will be chosen by the government since the LCoE of offshore wind is then cheaper than other sources. The threat arises if the new technologies—such as solar, hydro or a completely different third option—begin to decrease the LCoEs of those projects and Ørsted is too slow on implementing and executing newer technologies not formerly used. Following newer technologies also raises the question of know-how. If Ørsted fails to spot the relevant technologies that are able to disrupt the renewable energy markets by driving down LCoE, chances are they do not possess the know-how in terms of installing and operating the projects based on a new technology. In turn, this leaves Ørsted vulnerable to competitors or new entrants that have been working and improving on the technology for some time.
Power prices
In case the politicians across markets ‘copy’ each other regarding zero subsidies, Ørsted is going to be exposed fully to the power prices. The power prices are volatile. Without any form of subsidies or PPAs, Ørsted has no other option than to hedge away some of the risk in the power market.
Politics and subsidies
The complex nature of offshore projects entails a large governmental involvement. As such, the legislation and overall political goals have a large impact on Ørsted. As described, subsidies are either decreasing or disappearing, making it harder for Ørsted to establish new projects. In Ørsted’s IPO prospect, they state that
Page 93 of 162 approximately 62% of the revenue from their operational offshore wind farms in FY 2015 was derived from subsidies and other financial support (Ørsted, 2016a, p. 52). The zero subsidies pose a threat as it is a large part of the old and current business model.
Interest rates
Rising interest rates pose a risk for the offshore wind industry. Most of the companies in this industry have credit ratings at the lower end of investment grade, making it expensive for them to finance their project. On an absolute basis, rising interest rates are a threat for Ørsted and its competitors. If the farm-down model continues to be successful then, on a relative basis, rising interest rates are an opportunity for Ørsted, as the competitors might run into financial trouble.
Only Two Turbine Suppliers
Ørsted’s high degree of reliance on only two turbine suppliers exposes them to risks. Delays, increased prices for turbines, or lack of spare turbine parts due to limited supply all constitute a risk for Ørsted.
New entrants
The threat of new entrants is low, mainly due to the massive CAPEX requirements needed to run instalments of offshore projects. However, the financial muscles from former oil companies will change the competitive environment.
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