The World’s Biggest Offshore Wind Farm Will Be as Cheap as Coal

[perulv]

Sorry for the sensationalist headline. It is straight from this article:

 

https://www.bloomberg.com/news/articles/2019-09-20/plunging-offshore-wind-costs-could-soon-end-u-k-subsidies

 

“The auction results today show offshore wind is in line with current power prices - it is already competitive with existing fossil fuel plants, let alone new fossil fuels,” said Deepa Venkateswaran, an analyst at Sanford C. Bernstein & Co. in London. “In the next auction in 2021 we will see costs go well below that of existing fossil fuel plants.”

 

There is a lot of discussion in Norway currently about wind-power (mostly that we want it, but not where it ruins our nature, which means offshore, and that is not economically viable yet. There is also a good case to be made for combining wind with our hydro, especially if you convert some of the existing hydro-plants to pumped hydro, acting as a battery for leveling out the supply) . Yes, yes, we are a super-small country who struck oil, and on top of that happens to generate 50% of europe's hydro power, and every other car sold now is an EV. So we are not representative of anything. The Norwegian partly state-owned company Statoil (literally "state-oil") rebranded to Equinor a while ago, and are part of the project mentioned in the article.

 

Hype or not, this project is said to deliver power to 4.5 million people, and beginning to get price-competitive. These windmills will be fastened on the bottom of the ocean, at only 40 meters depth. Much of the north sea requires floating wind-mills which are more expensive. Still, it will be interesting to see if, and how quickly, the price continues do decline. Hopefully big projects like this will help.

 

Not sure what a good investment would be, related to this. Equinor is still very much an oil/gas company. I keep thinking there must be a quality company out there doing something (smart-)grid related, that will benefit from a shift to renewables. One that is not just a part of a giant like e.g. ABB.

[John Hjorth]

Thank you for sharing, Per,

 

Yes, a [frigging] lot is going on nowadays. Equinor is not the most boring company to follow in that regard.

[SharperDingaan]

Look at Vespas, the leading maker of wind turbines ;)

Copenhagen Stock Exchange

 

SD

[Spekulatius]

Look at Vespas, the leading maker of wind turbines ;)

Copenhagen Stock Exchange

 

SD

 

Producing Wind turbines is a mediocre business at best. I looked at Vestas a while ago and didn’t see a reason to get exited.

[Guest longinvestor]

This is great news for Pacificorp with a long coastline and states eager to see totally renewable resources. The hydroelectric battery is icing on the cake.

[John Hjorth]

This is great news for Pacificorp with a long coastline and states eager to see totally renewable resources. The hydroelectric battery is icing on the cake.

 

US Department of Energy : 2018 Offshore Wind Technologies Market Report.

 

The party is just about to begin in the US. There is a tremendous amount of work to do, and ditto capital to deploy.

[SharperDingaan]

Look at Vespas, the leading maker of wind turbines ;)

Copenhagen Stock Exchange

 

SD

 

Producing Wind turbines is a mediocre business at best. I looked at Vestas a while ago and didn’t see a reason to get exited.

 

Agreed - but everything in the wind farm business is mediocre.

Per public markets, the choices are either the utilities using them - or the turbine makers themselves. Different types of business.

 

Turbines pollute (noise, aesthetics, etc). Viable locations are limited, and damage suits are working through the system.

Hence utilities have a long tail risk, that must be included. Turbine makers not so much.

 

Turbines are two businesses. Once/done construction, and erection/decommission + repair/maintenance.

When the industry is growing the money's in construction, when its mature it's in servicing.

Break everything down into flat-packs, and ship by the thousands to extract economies of scale.

 

Asia (& therefore Asian manufacturers) has a material advantage.

Easier to override public objections, cleaner air/water quicker -  by leapfrogging o/g and coal as a fuel source, and lots of sparsely populated windblown desert/plains to put them in. For every 1 'western' turbine, maybe 2-3 Asian turbines are being installed. And not just in Asia.

 

The problem is time to market development.

These are FUTURE cash flows - that must be discounted at a high rate to reflect the uncertainties.

Current NPV is negative to marginal - at best. Hence the industry subsidization.

You don't get rich, your kids do.

 

SD

 

[Deepdive]

Look at Vespas, the leading maker of wind turbines ;)

Copenhagen Stock Exchange

 

SD

 

Producing Wind turbines is a mediocre business at best. I looked at Vestas a while ago and didn’t see a reason to get exited.

 

Agreed - but everything in the wind farm business is mediocre.

Per public markets, the choices are either the utilities using them - or the turbine makers themselves. Different types of business.

 

Turbines pollute (noise, aesthetics, etc). Viable locations are limited, and damage suits are working through the system.

Hence utilities have a long tail risk, that must be included. Turbine makers not so much.

 

Turbines are two businesses. Once/done construction, and erection/decommission + repair/maintenance.

When the industry is growing the money's in construction, when its mature it's in servicing.

Break everything down into flat-packs, and ship by the thousands to extract economies of scale.

 

Asia (& therefore Asian manufacturers) has a material advantage.

Easier to override public objections, cleaner air/water quicker -  by leapfrogging o/g and coal as a fuel source, and lots of sparsely populated windblown desert/plains to put them in. For every 1 'western' turbine, maybe 2-3 Asian turbines are being installed. And not just in Asia.

 

The problem is time to market development.

These are FUTURE cash flows - that must be discounted at a high rate to reflect the uncertainties.

Current NPV is negative to marginal - at best. Hence the industry subsidization.

You don't get rich, your kids do.

 

SD

 

So turbines are like giant metal trees that eat carbons.  You plant them and get virtually no return, but your kids are glad you did just like you don't get to sit in the shade of the trees that you plant. 

[John Hjorth]

Look at Vespas, the leading maker of wind turbines ;)

Copenhagen Stock Exchange

 

SD

 

Producing Wind turbines is a mediocre business at best. I looked at Vestas a while ago and didn’t see a reason to get exited.

 

Agreed - but everything in the wind farm business is mediocre.

Per public markets, the choices are either the utilities using them - or the turbine makers themselves. Different types of business.

 

Turbines pollute (noise, aesthetics, etc). Viable locations are limited, and damage suits are working through the system.

Hence utilities have a long tail risk, that must be included. Turbine makers not so much.

 

Turbines are two businesses. Once/done construction, and erection/decommission + repair/maintenance.

When the industry is growing the money's in construction, when its mature it's in servicing.

Break everything down into flat-packs, and ship by the thousands to extract economies of scale.

 

Asia (& therefore Asian manufacturers) has a material advantage.

Easier to override public objections, cleaner air/water quicker -  by leapfrogging o/g and coal as a fuel source, and lots of sparsely populated windblown desert/plains to put them in. For every 1 'western' turbine, maybe 2-3 Asian turbines are being installed. And not just in Asia.

 

The problem is time to market development.

These are FUTURE cash flows - that must be discounted at a high rate to reflect the uncertainties.

Current NPV is negative to marginal - at best. Hence the industry subsidization.

You don't get rich, your kids do.

 

SD

 

Like Per said initially, coal is now dead. In short, we are at an inflection point, called "no subsidies" for this kind of energy production.

 

"Alternative assets", "Green energy", "Green world", "Carbon free energy" etc. etc. is "the new black". It has "Potential disaster" painted on it all over. The folly has already started.

 

The guys and girls operating in this space now are to me the "traditional" O&G bugs of the future. I try to stay disciplined here, however I must say I've been  tempted from time to time.

 

Let me give a few examples :

 

1. Danish Ørsted A/S was the first winner of an auction for offshore wind energy providing no subsidies. If I remember correctly, this was a Dutch auction. The bid was made based on technology, that at the time of the bidding didn't exist. There was a clause on the bid determining a break-up fee [again, to the best of my recollection] of DKK 842 M to walk away from the contract. This is certainly not doing business the prudent way. But is it reckless? [i will provide sources by linking, if any CoBF member asks me to.]

 

2. One of the two predecessors to Vestas Wind Systems A/S [VWS.CPH] [called NEG Micon A/S] basically was broke at one point in time, because of gears breaking down in nacelles. It was saved by a capital injection of DKK 250 M from Schouw & Co. A/S [sCHO.CPH]. Later, the merged entity was on the verge of failure, because of too optimistic plans [executed on] for global expansion called "triple fifteen" [Fifteen EUR B in turnover in '15, operational margin of 15 percent in '15]. Schouw & Co. A/S missed out on a large [undisclosed] acquisition because of this [Mentioned by SCO.CPH CEO Jens Bjerg Sørensen in a 2017 interview], because the VWS share has tanked to 27 [Mr. Sørensen's acquisition currency before capital gain tax][now at 551.60], where the proceeds from the sale of the VWS shares were the currency, so he couldn't execute. [All hindsight bias, yes, but business culture has its own way to get passed on internally.] To me, & today, three Swedish industrialists saved VWS and made it to what it is today. Ditlev Engel was a doughnut as CEO, out of control by the board back then. [Again, I'll provide links to sources, if any CoBF member needs it.]

 

3. The then CEO of Ørsted A/S, Anders Eldrup [the predecessor of Henrik Poulsen], who built & formed the foundations of the Ørsted A/S today [then called DONG Energy A/S], broke his neck [as CEO of Ørsted] also on being too expansive, so a financing issue appeared, initiating his ousting by the Ørsted board.

 

4. I've posted about Radius [a major part of the Sealand power grid here in Denmark] has been put up for sale by Ørsted A/S recently in the BAM topic here on CoBF. The political Denmark has vetoed out any potential buyer related to alternative asset management, based on what Australian Mcquarie has done with Copenhagen Airport, TDC & cum/ex deals on Danish companies. Now who skated away with Radius this week?: A regional Danish [consumer owned] energy company called SEAS-NVE, based out of Sealand [the Danish island where Copenhagen is situated at the east coast], who got shares in Ørsted A/S in the first place for its contribution in kind years ago to the formation of Dong Energy A/S, now called Ørsted A/S. The share price of Ørsted simply has left the atmosphere - "it doesn't matter - because our currency to pay in are the proceeds from our Ørsted shares".

 

- - - o 0 o - - -

 

Long burp short : Take care.

[John Hjorth]

... Not sure what a good investment would be, related to this. Equinor is still very much an oil/gas company. I keep thinking there must be a quality company out there doing something (smart-)grid related, that will benefit from a shift to renewables. One that is not just a part of a giant like e.g. ABB.

 

Per,

 

How about BOL.PA - Bolloré SE. Still part of something bigger, but at least an interesting stab at it. Bolloré - Electricity storage and systems. Vincent Bolloré has poured several hundred M EUR into it over the years from his cash cow [the logistics business], and he [and now one of his sons, Cyrill] is not going to give up on it.

[SharperDingaan]

All of this really drives home the point. Few are of a doubt that it’s a good long-term business, but net of discounted future cashflow; it’s very volatile in todays environment. In the short-term you are trading volatility, in the long-term you effectively own an essential business. This example is wind turbines. It could just as easily be electric cars, or the space industry. You are planting saplings in waste land; your kids benefit, not you.

 

There are many easier ways of doing the same thing – simply buy a ‘widows and orphans’ stock, and never sell. The continuously growing dividend will serve you well, and leave your capital for the kids. Different strokes for different folks.

 

SD

 

[perulv]

... Not sure what a good investment would be, related to this. Equinor is still very much an oil/gas company. I keep thinking there must be a quality company out there doing something (smart-)grid related, that will benefit from a shift to renewables. One that is not just a part of a giant like e.g. ABB.

 

Per,

 

How about BOL.PA - Bolloré SE. Still part of something bigger, but at least an interesting stab at it. Bolloré - Electricity storage and systems. Vincent Bolloré has poured several hundred M EUR into it over the years from his cash cow [the logistics business], and he [and now one of his sons, Cyrill] is not going to give up on it.

 

Thanks for the tip. From a quick look it seems to be a bit more heavy on debt than I like (55% of total asserts) and a bit low on roe/roa. But I will add it to my list, and keep digging.

 

All of this really drives home the point. Few are of a doubt that it’s a good long-term business, but net of discounted future cashflow; it’s very volatile in todays environment. In the short-term you are trading volatility, in the long-term you effectively own an essential business. This example is wind turbines. It could just as easily be electric cars, or the space industry. You are planting saplings in waste land; your kids benefit, not you.

 

My best investment by far was buying SolarEdge around $15 a couple of years ago. Not that one stock-pick proves anything, but nevertheless this is a "renewable energy company" that did 6x on my investment. And a company that fits my / some definition of value / quality investing : little to no debt, good roa/roe, low ebit /ev (at the time anyway).

 

They make inverters, something needed for solar power installations. And probably for battery storage as well, given that batteries are dc and the grid is ac. I guess they almost sell the proverbial showel in the gold rush. I want to find more such companies :) Advanced Energy Industries seems to maybe be in the same category...

 

 

[Spekulatius]

Advanced Energy Industries seems to maybe be in the same category...

 

Advanced Energy is heavily tied to the semiconductor and display industry. Their power supplies are used for thin film deposition pretty much everywhere.