The energy landscape has changed dramatically in the last decade. Since the 2015 Paris Climate Agreement, big energy companies have pledged to reduce their risk of catastrophic climate change by cutting emissions. But as some struggle in the push into green energy, here we explain how Ørsted has undergone one of the biggest transformations in the sector.
The push to reduce carbon emissions has had a profound impact on the energy sector. Renewable energy accounted for half of global growth in energy generation in 2017, according to the International Energy Agency. Indeed, energy companies are taking action to transition to a low-carbon world: Royal Dutch Shell has promised to halve the carbon footprint of the energy it sells by 2050 and invest about $500m a year in cleaner technologies. BP has also set emissions targets and intends to spend $1bn-$2bn on its new energies division. But few have undertaken a transformation as radical as current holding Ørsted.
Turning black into green
Ørsted, formerly DONG Energy, started life as a state-owned energy company when Denmark looked to harness North Sea oil and natural gas resources in the early 1970s.
By the 1990s, Ørsted became one of the first movers in then-nascent offshore wind generation, building the world’s first offshore wind farm in 1991. Over the past decade, the company has repositioned its business from oil, gas and coal to renewable energy, including offshore wind.
After gaining a strong leadership position in offshore wind, the company made its stock market debut in June 2016. A year later Ørsted offloaded its upstream gas and oil interests to chemicals company Ineos. The company now expects to be almost entirely carbon free by 2023, completing its transformation from ‘black’ to ‘green’ energy.
Because Ørsted was an early mover in offshore wind, it today enjoys a commanding position in the sector: it is the world’s largest offshore wind farm operator. Last year, Ørsted accounted for almost one fifth of all new wind capacity by megawatts in Europe (see Figure 1)1.
Figure 1: Developers’ share of 2017 annual installations
Source: WindEurope as at February 2018
Gearing up to meet long-term demand
Offshore wind has become a more attractive source of renewable energy compared to onshore wind in recent years thanks to the higher wind speeds it generates and environmental objections to onshore wind sites.
Last year, Europe saw a record 3,148 megawatts of net additional installed capacity in 20172. That corresponds to 560 new offshore wind turbines across 17 wind farms. What’s more, the market has plenty of room to grow in Europe: PricewaterhouseCoopers estimates that the market will grow from 14,803 megawatts to 73,972 megawatts of power generated by 2030, a fivefold increase (see Figure 2)3.
Figure 2: Current and planned offshore wind capacity in Europe until 2030
Source: PricewaterhouseCoopers as at April 2018
Furthermore, the increasing momentum behind the adoption of electric vehicles in Europe will result in an upswing in electricity demand. For example, there are approximately 90,000 plug-in electric vehicles currently in use in the UK – and that number is expected to reach 9m by 20304. In fact, it is estimated that these vehicles could create as much as 18 gigawatts of extra electricity demand by 2050, equivalent to nearly six new Hinkley Point nuclear power stations. We therefore expect that this demand for electric vehicles – and thereby the impact of charging their batteries – will reverse the recent trend of falling electricity demand in recent years. We also believe that this pattern will be repeated outside the UK, in the broader European market – especially in light of decisions such as the French ban of sales of new petrol and diesel cars by 2040.
Winds of change: reducing costs
Today, the wind power sector is at a turning point. Subsidies that have underpinned the industry since the early 1990s are beginning to disappear as governments change their policies to make it more commercially viable. For this reason, it is becoming increasingly important for developers to reduce costs.
In total, Ørsted has installed more than 1,000 wind turbines offshore, having built more than a quarter of the capacity in operation globally. Indeed, this extensive turbine capacity has helped the company drive down its capital costs in recent years, as the company has moved along the learning curve. Moreover, the knowledge acquired during the installation process and ongoing advancement in turbine technology will make turbine installation and maintenance easier, thereby contributing to further cost reductions in the future.
Leading the way in energy transformation
At Hermes, we seek companies that are undergoing transformational change that will lead to higher future returns. We believe our investment philosophy is illustrated well by the reinvention of current holding Ørsted.
It has overhauled its business, shifting its focus from oil, gas and coal to renewable energy. The company also ranks above its peers group in our proprietary QESG scoring system – which captures a firm’s environmental, social and governance metrics compared to its peers.
Although it has been a trail blazer in the push towards green energy, its transformation is under-appreciated by investors. Consensus figures suggest that EBITDA will peak at $3.4bn this year before steadily declining thereafter. However, we do not believe this reflects the company’s ongoing transformation. Instead, we believe Ørsted will benefit from factors that will generate positive enduring change: rising demand for offshore wind and electricity, its positioning know-how and experience in wind farm construction, and lower capital and operational expenditure.
1 “Offshore wind in Europe – Key trends and statistics in 2017,” published by Wind Europe in February 2018
2 “Offshore wind in Europe – Key trends and statistics in 2017,” published by Wind Europe in February 2018
3 “Unlocking Europe’s offshore wind potential: Moving towards a subsidy free industry” published by PricewaterhouseCoopers in April 2018
4 “Electric cars will fuel huge demand for power, says National Grid,” published by The Guardian in July 2017