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Orsted faces reckoning over big bet on US offshore wind industry

Danish company raced into American market but faces multiple challenges

An ambitious bet on the US has helped make Orsted the biggest global player in the offshore wind industry, earning the once little-known Danish company plaudits as a clean energy pioneer.

After paying $510mn for a string of projects off the north-east coast in 2018, Martin Neubert, then head of Orsted’s offshore wind business, hailed the exciting “journey” the company was on having first entered the US market in 2015.

Now Orsted’s charge into America’s fledgling offshore wind industry threatens its status as one of the big winners in the era of renewable energy. Investors have wiped DKr73bn ($11bn) from the group’s market capitalisation since a warning last month that it expects to write down the value of its US assets by a potential DKr16bn.

Chief executive Mads Nipper blamed a combination of rising interest rates, supply chain disruptions and doubts over how many billions of dollars in tax credits the company would be eligible for under President Joe Biden’s plan to make the US a global leader in clean energy.

“Their business model [to be an early mover] comes with certain risks,” said James Smith, fund manager of the London-based Premier Miton Global Renewables Trust.

“You have to set up the supply chain, you’re dealing with politicians or civil servants who may be unfamiliar with the sector,” he said of the hurdles Orsted has faced establishing itself in the US. “If that goes well, that’s great. If it doesn’t, you are on the hook.”

The potential writedown of its US portfolio is equivalent to half the investment Orsted has so far made in the country’s offshore wind market.

Following its aggressive expansion, Orsted owns one of the country’s only two offshore farms in operation and is developing seven projects in the north-east, which it says will be able to supply power to about 2mn homes. Its three big projects due for completion in the next few years lie off the coasts of New Jersey, Rhode Island and New York’s Long Island.

The company’s US portfolio also includes onshore wind farms supplying enough power for about 800,000 homes.

While supply chain strains, higher interest rates and rising costs have blighted the entire offshore wind industry over the past two years, analysts say that Orsted’s warning has undermined management’s credibility, especially as the group struck a more optimistic note on securing tax credits at an investor day in June.

“It used to be a darling company, constantly exceeding expectations,” said Tancrede Fulop, senior equity analyst at Morningstar. “There is a confidence issue [now].”

Investors’ alarm was reflected in the 25 per cent plunge in Orsted shares on August 30, the day the writedown risk was disclosed. The shares were then hit further after rating agency Moody’s cut its outlook on the company, sending them to their lowest level since 2018.

The bruising last month for Orsted is in sharp contrast to the period between 2018 and 2021, when shares surged as investors raced to back the clean energy sector and applauded the group’s determination to take the lead in the offshore wind market.

Even before Orsted disclosed the problems at its US business, shares in the group had fallen from a record high set in 2021 as the initial euphoria over clean energy faded and interest rates began to rise.

Formerly known as Danish Natural Oil and Gas (Dong Energy), Orsted was founded by the Danish state in the 1970s to help develop the country’s energy reserves as the Arab oil embargo raised fears over supplies. The company began moving away from fossil fuels in 2008.

A plan to break almost completely from them was thwarted by Russia’s invasion of Ukraine, which led the Danish government to order Orsted to keep two coal and one oil-fired power stations available until June 2024.

The three power stations sit alongside Orsted’s vast wind business, which stretches from the UK to Taiwan. By the end of last year, the Copenhagen-listed company had more than 8.9 gigawatts of offshore wind projects installed around the world — enough power for roughly 9mn homes.

The era of low inflation and interest rates emboldened Orsted to expand globally, helping it cope with large upfront expenses and long-term contracts that do not always allow extra costs to be passed on to customers.

Alongside higher interest rates driving up its financing costs, Orsted said that about DKr5bn of the likely impairment stemmed from delays in sourcing the foundations that secure turbines to the seabed and a shortage of vessels to install them.

The remaining DKr6bn relates to whether the company will receive bonus tax credits available under the Inflation Reduction Act. Designed to help America’s renewable energy industry, the IRA awards extra credits to companies that use US-made supplies or support jobs in regions that are reliant on oil, gas and coal sectors for employment.

The requirements to secure bonus credits are onerous, with developers complaining that local supply chains are not yet ready.

At the June investor day, David Hardy, chief executive of Orsted’s US offshore wind business, said that the company was assuming its three main projects due for completion in the next few years would qualify for some extra credits, pointing to “strong relationships” and discussions with the government.

When asked after the August warning to explain Orsted’s gloomier outlook on credits, Hardy said there had not been “enough progress to give us more confidence” on two of the projects, though he remained confident about securing bonuses for the third.

The US has just seven operational offshore wind turbines so far, but the industry is part of the Biden administration’s ambition to rapidly expand the clean energy industry. Jennifer Granholm, US energy secretary, has described offshore wind as “critical” to the administration achieving its goals.

Orsted is not alone in finding America’s offshore wind market hazardous to navigate, as companies face inflexible contracts with utilities, competition with cheaper onshore wind, a still evolving system for tax credits and varying levels of state support.

Iberdrola and Shell are exiting agreements with utilities to build new farms, with the hope of striking new deals that take into account rising costs. A subsidiary of Iberdrola agreed to pay almost $50mn to terminate an agreement with several utilities in Massachusetts in July.

Orsted is particularly exposed given its large portfolio but the company has raised expectations of success given what it has said was an “outstanding” record of getting projects off the ground outside the US.

“Orsted has invested a lot in the US and, in doing so, neglected the risks inherent in the market,” said Fulop at Morningstar. “Capital allocation is key for the value creation of the company.”

As Orsted’s share price tumbled at the end of August, rivals moved swiftly to reassure shareholders that they were doing a better job of managing the risks in the US. Iberdrola told investors it was not experiencing “delays of any significance” to supply chains and took a “conservative approach” over the potential benefits from tax credits.

Deepa Venkateswaran, senior analyst at Bernstein, said that while investors’ reaction had been “too harsh”, confidence in Orsted’s management had been damaged.

“A few years back, everything Orsted touched was seen to turn to gold and now it’s [seen as] rock,” she added, saying that “markets overshoot and undershoot.”

John Podesta, Biden’s senior clean energy adviser, said last week that the first offshore wind projects would be “the most challenging” but that he remained “very optimistic” that the industry had a strong future.

With Nipper having urgently to rebuild confidence, a pivotal decision will be whether Orsted is prepared to walk away from some US projects if the economics fail to add up.

“Unless we see material positive developments, it’s still a real option,” Nipper, who has led Orsted since early 2021, said after revealing the writedown risk.

However, that would mean waving goodbye to significant sunk-costs, and risking its reputation as a reliable developer among utilities and suppliers. Meanwhile, investors will be on high alert for any further damaging news from the US.

“Market sentiment may take time to turn around,” said analysts at JPMorgan.

Proportion of construction groups reporting a lack of new orders surged to 44.2% in August

Cancelled building projects and financial distress among landlords and builders in Germany have hit their highest levels since reunification three decades ago, intensifying the construction crisis in the EU’s biggest economy.

Hit by rising interest rates, soaring costs and weaker demand, 20.7 per cent of construction companies said they had been forced to scrap a project in August, up from 18.9 per cent in the previous month, according to a survey of 500 businesses by researchers at the Ifo Institute in Munich.

“The probability increases month by month that more and more firms will go out of business,” said Klaus Wohlrabe, head of surveys at Ifo, a think-tank, warning that almost 12 per cent of residential construction companies were reporting financing difficulties — the highest level since its survey started 32 years ago.

The proportion of construction companies reporting a lack of new orders also rose to 44.2 per cent in August, up from 40.3 per cent in the previous month and 13.8 per cent a year ago. 

Wohlrabe said the crisis was particularly severe among mostly smaller construction companies that focus only on housebuilding. “Some businesses are already struggling to keep their heads above water,” he added. “Fortunately, many firms also cover other aspects in construction — roads, commercial construction. This allows firms to diversify in some way.”

Soaring borrowing costs, following an unprecedented rise in the European Central Bank’s policy rates in the past year, have suppressed demand for new mortgages and reduced house prices.

At the same time, inflation has sharply raised the cost of building new homes. German construction costs are 38.5 per cent higher than before the pandemic hit in early 2020. Ifo said tougher energy efficiency regulations had also reduced government subsidies for builders.

Several German developers have filed for insolvency in the past few weeks, among them three Düsseldorf-based commercial real estate groups Gerch, Centrum Group and Development Partner, as well as Euroboden of Munich and Project Immobilien Gruppe of Nuremberg, which build both residential and commercial property. 

Big landlords such as Vonovia and Aroundtown have announced big writedowns of their property portfolios.

Coupled with higher borrowing costs and weaker growth — the German economy is widely expected to shrink this year — this led to a sharp drop in new building permits in the country, which plunged 34 per cent in the second quarter from a year earlier.

While the issuance of new permits has declined throughout the wider eurozone, Germany has witnessed a speedier drop.

German construction companies’ overall output remained flat in July from a year earlier.

A survey of purchasing managers in the sector by S&P Global, published last week, suggested a rebound in civil engineering activity was compensating for the biggest slump in German housebuilding activity for more than 13 years.

Wohlrabe said: “Many firms live on the current stock of orders acquired before the rise in interest rates.” He warned a majority of German building companies expected further declines in new business in the next six months.

Last year only 295,300 dwellings were built in Germany, well short of the government’s target to build 400,000 homes a year. Industry executives expect the numbers for this year and next to be even lower — bad news in a country that is facing a shortage of 700,000 homes, according to the German Property Federation.

It’s a doozy

The financial details of the FTX saga are not surfacing quite as quickly as the guilty pleas. But Monday brought some fun bits of information for those of us still gawking at the wreckage almost a year later.

The first was a presentation breaking down the asset-recovery efforts of FTX’s current management:

The $7bn figure matches the estimates provided by the management team earlier this year, so this breakdown isn’t exactly new, but there are some fun details nevertheless.

In the chart above, the “Digital Assets A” group is liquid crypto including Bitcoin, Ethereum and the relatively-not-illiquid Solana. The “Digital Assets B” appear to be shitcoins, more or less, with the biggest position $362mn of Serum (as of Aug. 31).

Also, big congrats to FTX after last month’s Grayscale court ruling, we guess? The biggest holding in FTX’s brokerage accounts is the Grayscale Bitcoin Trust, which has more than doubled this year thanks to its narrower discount to NAV and Bitcoin’s rebound.

It has also received a handful of unsolicited questions about some of its stakes in other businesses, according to the presentation:

Management is also floating restarting FTX. ¯\_(ツ)_/¯

Anyway, the second court filing comes from the criminal trial of Sam Bankman-Fried. SBF’s defence attorneys have asked the judge to ban testimony from Prof Peter Easton of Notre-Dame, who will be acting as an expert witness for the prosecution. (Part of their argument seems to be that he is not good enough at computers to be an expert.)

The government opposes that, of course, citing Easton’s expertise and the work he has done on the case thus far. Find the prosecutors’ filing here.

But what’s most entertaining is that the government goes ahead and shows the professor’s ongoing work calculating Alameda’s historical balances with FTX — basically the firm’s net P&L — from last year:

Ahahaha that is incredible! Let’s look a bit closer at that X-axis . . . 

So for one beautiful moment last year, Alameda booked (barely) positive performance. We think it’s nice that the terminally online young crypto founders got their wish fulfilled for a day.

My perfect weekend in Paris: Le Collectionist’s Max Aniort

The co-founder of the luxury villa rental company on his favourite spots for everything from groceries to cocktails in his ninth-arrondissement neighbourhood

DAX:

MDAX:

SDAX:

Search engine faces charges of using illegal agreements with partners such as Apple to maintain a monopoly

Google, the country’s dominant search engine, faces its biggest legal threat ever this week when the company goes on civil trial in Washington on allegations of violating U.S. antitrust laws.

The Justice Department’s case is aimed at Google search, and whether the company has used illegal agreements to sideline its rivals and harmed consumers and advertisers in the process. Google pays billions of dollars to Apple, for example, to be the default search engine on the Safari browser.

Alphabet GOOG 0.39%increase; green up pointing triangle-owned Google grew up during an era of more relaxed antitrust enforcement, particularly against technology companies that developed innovative—and often free—ways to explore and use the internet. Efforts to regulate Google and other technology giants have failed to advance in Congress in recent years. In the absence of such rules, the government is trying to use antitrust law to govern competition on the web and put curbs on the internet’s gatekeepers. Here are some crucial questions about the biggest U.S. antitrust trial since the government challenged Microsoft more than 20 years ago.

Why is Google facing an antitrust lawsuit?

The Justice Department and a group of states sued Google three years ago, alleging it illegally maintains a monopoly in online search and related advertising markets. Google has about a 90% market share in search and maintains its dominance through restrictive agreements with browser and phone partners such as Apple, Mozilla, Samsung and Verizon, according to the Justice Department. These deals, which the government says are illegal, make Google the default search engine on most U.S. phones. Google’s separate agreements with Android-based mobile-device manufacturers forbid pre-installing or promoting rival search engines if they opt to take a cut of Google’s search revenue.

What harm comes from Google’s agreements?

The Justice Department argues that Google’s exclusive deals with Apple and others prevent rivals from effectively competing for search business or improving their products. Because Google locks up all the browsers and gets all the queries, other companies such as Microsoft can’t perform enough searches to improve their product, the government says, giving it an anticompetitive scale advantage. Google’s agreements also stifle innovation, the Justice Department says, because the company doesn’t have to improve its search engine to maintain market share. Finally, Google has used its monopoly to raise prices for advertising on its search-results pages, according to the government.

How does Google explain the deals?

Google says its deals with Apple and others promote competition by supplying browser providers with what they want: a single default search option for customers. Apple and Mozilla chose Google because it continues to outstrip rival search engines, and not because they are coerced by revenue sharing or other inducements, it says. Windows users, who don’t have any Google products preloaded on their personal computers, generally opt for Google search because it is the best way to explore the internet, the company says.

Google also points out that its agreements don’t prevent its partners from offering other search engines, because users of Apple’s Safari or Mozilla’s Firefox browsers can change the default search option in their settings. And on Android phones, Google says, consumers can switch away from its preloaded search engine to other products on their own; the fact that few do so isn’t evidence of exclusionary practice, Google says, but of consumers sticking with a superior product.

What happens if Google loses?

In theory, U.S. District Judge Amit Mehta could order Google broken up but legal analysts consider that unlikely. More possible, they say, are new constraints on how Google does business, such as its ability to pay Apple, Samsung and others to be the default search engine on phones. “That seems like the most natural remedy,” said Paul Gallant, a tech-policy analyst at Cowen Washington Research Group. “Breaking up the company over unlawful payments to equipment manufacturers seems unlikely relative to the harm.”

When did the U.S. government last challenge a big monopoly in court?

The government sued Microsoft in 1998 over its attempt to control the market for internet browsers on Windows computers. The Justice Department prevailed in the lawsuit, which created an opening for rivals such as Google and Facebook to flourish in the future, according to the DOJ. The Justice Department says Google has emulated Microsoft’s 1990s playbook to build and maintain its own monopoly in internet search and advertising, while Google says the comparison is inapt.

How long will the trial last and when will a verdict be reached?

The Justice Department has one month to present its case, meaning the states and Google won’t question witnesses until October. Witness testimony is expected to conclude in November, and then the two sides will write briefs to the judge summarizing the case and arguing which way he should rule. Closing arguments and a judgment aren’t expected until next year. If Judge Mehta finds that Google violated the Sherman Antitrust Act, he would schedule a separate trial to decide penalties. The decision is likely to be appealed, so the final outcome might be years away.

Who are the key witnesses in the trial?

While a complete witness list isn’t available yet, Alphabet Chief Executive Sundar Pichai and some Apple executives, such as Eddy Cue, senior vice president of services, are likely to be questioned. The Justice Department is likely to call executives from Microsoft and DuckDuckGo, which operate competing search engines.

Who are the key lawyers working on the case?

Google’s principal trial lawyer is John Schmidtlein, a partner at litigation powerhouse Williams & Connolly. Schmidtlein represented a group of states in part of the 1998 trial against Microsoft. Google Chief Legal Officer Kent Walker and Susan Creighton, a partner at the Silicon Valley law firm Wilson Sonsini, have played key roles in dealing with the Justice Department and shaping trial strategy.

The Justice Department’s top lawyer in the courtroom is Kenneth Dintzer, a 30-year veteran of high-stakes government litigation. Dintzer began his DOJ career in the early 1990s and worked on the early Microsoft investigation. His trial colleagues include Adam Severt, Meagan Bellshaw and David Dahlquist.