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Once again, I would like to thank the community for providing such an interesting discussion about the renewables sector in the comments section of my article last week. Your insight has sparked several ideas for future articles (for example, the use of tidal energy or the opportunity for small nuclear reactors and hydrogen), which I will seek to explore in the coming weeks. But first, I promised a deeper dive into some of the big players in the business of alternative energy.
Starting with what has long been the pick of the bunch - Orsted. Founded in 1972 to manage Denmark’s North Sea oil and gas reserves, Orsted became the world’s first carbon company to go green after the commercial success of its first wind farm, which began providing power in 2013. The company is now the largest owner and operator of offshore wind farms (outside of China) and generates over 90% of its revenue from renewables.
But its ambitions are far greater. By 2030 Orsted aims to have 30 GW of installed offshore wind capacity, just shy of the average annual energy requirements of the whole of the UK. In addition to its offshore wind farms, the company also plans to expand its onshore wind business in the US, its thermal power division and expand into green hydrogen. There is a long way to go to achieve these targets. As of June 2022, the company had 7.6 GW of installed capacity, 4.8 GW of which was operational.
This proposed expansion has spooked investors a little. When chief executive Mads Nipper announced that he anticipated DKK450bn (£52bn) of expenditure on green initiatives between 2020 and 2027, the share price dropped 6% and has continued to tick steadily downwards.
It is a little ironic that the investors who have ploughed into Orsted for its green credentials are retreating now that the company is planning on doubling down on its investment to take advantage of the opportunity in the renewables space. But it’s right to treat that level of spending with a degree of caution, especially considering the DKK58bn of bank and bond borrowings on Orsted’s balance sheet as of 30 June 2022. Management plans to continue to pay for its green projects with existing bank debt, which costs around 100 basis points in financing charges.
Still, Orsted remains a quality operator. Revenues and net profit have risen at a compound annual rate of over 6% since 2016 and are forecast to keep climbing in the 2022 financial year. The company has placed heavy focus on return on capital employed, and only commits to projects that it believes will return strong profits in the long term. ROCE has averaged 11.6% since 2016 - well ahead of its market average.
But as capital expenditure has risen (to DKK82.2m in the 2021 financial year from DKK35.6m three years previously), the impressive fundamentals have become slightly less sturdy. Operating margins and ROCE were lower last year than they have been for many years and operating cash inflows dipped for the first time since 2017. Continued heavy expenditure means profits are forecast to drop in 2023.
But this investment is necessary. Orsted paved the way for carbon companies’ green transformation, and others are now starting to follow suit. It will take a long time for the likes of Shell and BP to reach the scale of Orsted, but competition is ticking up, which might make it harder for Orsted to win the contracts it deems will deliver the greatest returns.
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Hi
£UKW recently invested in Horsea I believe.
Portion from the RNS ....
'Greencoat UK Wind plc
Investment in Hornsea 1 offshore wind farm
Greencoat UK Wind plc (the "Company" or "UKW"), the leading listed renewable
infrastructure fund, invested in UK wind farms, is pleased to announce that
it has completed its acquisition of a net 12.5% stake in Hornsea 1 offshore
wind farm, as previously announced on 16 May 2022.'
RNS here
https://www.investegate.co.uk/...
Regards
Howard
From Christopher Sibley I think. If true an inflation protected buy and the taxpayer funds their growth ;). PFI was bad enough but this industry may turn out to be another poor deal for UK PLC.
“This year it will receive a guaranteed payment of £158.75/MWh for every unit of electricity it can produce, compared to the current market price of £45/MWh. Hornsea’s total capacity of 1.2GW, due on stream in the next two years, can expect to receive annual subsidies of £430 million for the next 15 years, all index-linked, and all on top of the revenue for the electricity they actually sell”.
Hi GarryC
I don't know who Christopher Sibley is, or the context of the quote you have given so maybe it was partially accurate at the time it was written, but it certainly is not true now. In fact it is grossly misleading.
The "guaranteed payment" given of "£158.75/MWh" I suspect relates to the £140 per MWh strike price (plus inflation linking) agreed for the 'contract for difference' subsidy back in April 2014 for Hornsea Phase 1. What is important to note is that this means that if the wholesale price is less than the strike price, the supplier gets a subsidy to make up the difference. However, if the wholesale price is higher than the strike price, then the supplier has to give the excess back. Hence the statement that " all on top of the revenue for the electricity they actually sell" is just plain wrong.
So at present, when the wholesale price has recently been averaging around £150, (graph from https://www.ofgem.gov.uk/energ... ) there is very little subsidy at all.
It is also important to remember that these strike prices were set when offshore energy was much more expensive to install and finance, so they needed to be set at a high level to get the industry off the ground. It is now the cheapest form of electrical generation as the strike prices are much lower.
Later phases of this project, like Hornsea 2 which is the phase that has just become fully operational has a strike price agreed of £57.5/MWh and for Hornsea 3 is £37.35/MWh. This compares to the current strike price of £106.12/MWh for the Hinkley C nuclear power station, and is close to the 10 year low in wholesale costs back in March 2020. The average is more like £50/MWh over the last ten years up until the recent rises. Gas generation is costing several times the strike price for renewables.
Whilst there are undoubted issues with the way that the UK electricity market works, in particular the way that the price is set by the most expensive supply (gas generation!). I don't believe it is true that "this industry may turn out to be another poor deal for UK PLC. " If the UK had not invested in building up a offshore wind industry we would have even worse problems now.
Thanks David for the comprehensive intel and seems a difficult industry to get head around so may look at some funds instead of individual cos. Some noted:
Harmony Energy Income Trust (LSE: HEIT)
Greencoat UK Wind (LSE: UKW)
Foresight Solar (LSE: FSFL),
Greencoat Renewables (LSE: GRP),
JLEN Environmental Assets (LSE: JLEN)
Renewables Infrastructure (LSE: TRIG)
Energy storage funds such as Gresham House Energy Storage (LSE: GRID), Gore Street Energy Storage Fund (LSE: GSF)
Hi GarryC
It has been quite useful for me to have to look again at how the electrical generation market works for renewables, as I had been anticipating higher profits at SSE (LON:SSE) (I hold) than I should have done. They have a strong wind farm and hydro business but also operate thermal power plants (mainly gas fired).
It is also worth noting that the 'contract for difference' arrangements are usually for 15 years, so after this the generators would get market price for the rest of the lifetime of the project, which could be very lucrative, depending on maintainance costs.
What is interesting about the investment case for renewables rather than fossil fuel generation is that almost all of the cost is upfront, with large capital outlays, but low running costs. This means that key componant is long term financing costs, which is in turn dependant on perceived risk. The UK government, by providing a defined income stream for generated electricity, reduces the risk, and hence lowers the cost.
The actual strike price is set by a reverse auction, where wind farm developers state the lowest price they will accept for building and operating the windfarm. So as they become more confident about the technology and the turbines become bigger and more efficient, the strike price has been coming down.
I don't have the technical ability or the inside knowledge to actually make any judgement about the precise cashflows involved, and hence the investment case for a specific company, but I think it is useful to understand some of the background. I should also say I have no idea of what the market arrangements are in the rest of Europe, so it could be different there.
One final word of warning, there is a lot of anti renewable propaganda driven by political attitudes, as well as a certain amount of overly rosy thinking driven by 'Green' optimists. I tend to have more sympathy with the latter, but it is definately worth taking a rigorous attitude to any information on this topic.
David
No
https://www.catalyst-commercia...
Ties in with DavidMcCabe above except its gone through the roof in August.
Phil
(Edit: You do realise I'm looking at the day ahead electricity price and not natural gas - that seems to be your graph)
(Edit: Units are a nightmare in the energy area, but as far as I can see 1 MWh = 34.1 UK therms. You seem to be dividing by 34.1 rather than multiplying by 34.1. )
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orstead has just had the largest off shore wind farm in world go online of the yorkshire coast at horsea 1.3gw