The United Kingdom has just approved the world’s largest offshore wind farm, the Hornsea Two project. In contrast to the delays and suspicions raised over Britain’s nuclear facility at Hinkley Point C, the country has signed off on a £6 billion plan ($7.8 million) to construct 300 wind turbines 50 miles off the coast of Yorkshire. The farm’s combined output will equal 1.8 GW, enough to power 1.6 million homes. If it proceeds on schedule, Hornsea Two (H2) will be completed in the mid-2020s.
At the forefront of the project is Dong Energy, a Danish green energy construction company which has been pushing to expand its profile on both sides of the Atlantic all summer. With off-shore wind energy a very expensive means of generating power, as well as one with some potentially negative environmental impacts of its own, DE has taken advantage of domestic subsidies for green power and the momentum of the green energy movement to expand its profile. Its CEO has even gone on the record as “skeptical of new nuclear,” a clear attack on the struggling Hinkley Point project: he clearly feels that off-shore is a safer and cheaper bet in the long term.
Dong Energy is already on the line to construct Hornsea One (H1), a separate wind farm of 176 turbines in an adjacent area. Due to be completed in 2020, H1 will join three other wind farms off the Yorkshire coast. The UK has committed itself to an expansive off-shore wind program, which seeks to provide 10% of the country’s power by 2020.
Owned in part by the Danish government and investment bank Goldman Sachs, Dong went public in May 2016 in what was the largest IPO of the year in Europe, up to that point: $16 billion (£11 billion) was floated, of which the Danish government retained 50.1% of the shares (it owns 59% of the company overall). A series of previous IPO attempts had been withdrawn due to unfavorable market conditions. Dong’s offering was a clear statement that company expected the market for offshore wind power to grow and grow.
And it may be right. In Europe, there are currently 84 projects to construct off-shore windfarms in 11 countries. Dong was formed out of a number of oil, coal and gas companies but now focuses on renewables. After recording a 35% increase in Q1 profits for 2016, it launched its IPO confident that the Hornsea project would go forward. Related: Oil Product Demand In This Middle-East Nation Just Hit An All-Time High
But the winds have been a little gusty for Dong in recent months. The firm expressed optimism about its future after the British vote to leave the European Union in June. It recorded Q2 loses of $278.3 million, mostly from its oil and gas operations. Some investors were upset when Goldman Sachs sold off a portion of their share in the company before the float, triggering a minor political crisis in Denmark.
Wind farms like the massive H1 and H2 are extremely expensive, considering the amount of power they generate. Dong has taken advantage of subsidies from the British government to meet construction and operating costs. It received subsidies totaling £4.2 billion to construct H1, and its contract with the British government in 2014 allows it to sell energy at 140 per MW-hour of power, three times the commercial rate. Opposition to these subsidies means that further projects are impeded. Dong withdrew from another wind-farm in England in August, citing the failure to make it commercially viable.
But Dong has looked beyond England for its future growth. The United States lags behind Europe in investing in wind farms: cheap alternatives, lack of regulation and local/political opposition make them impractical. A $2.6 billion project to construct turbines off the coast of Nantucket had to be canceled due to strong objections from locals upset that their views would be impeded. Related: Can Oil Prices Continue To Rally Like This?
But that is beginning to change. The first off-shore turbines in the US were recently installed three miles off the coast of Block Island, Rhode Island by Deepwater Wind. On August 1 the Massachusetts state legislature passed a resolution committing the state to contracting 1600 MW of off-shore wind power. Last year Dong leased an area of land off the coast of Massachusetts and now plans to construct a wind farm that will generate an estimated 1000 MW of power.
While Massachusetts has taken a relatively radical step in embracing offshore wind power, it is possible that other states might follow suit. With demand in Europe likely to grow, and a possibility of further growth across the Atlantic, Dong Energy looks ready to expand its profile and seize further opportunities in the changing energy environment.
By Gregory Brew for Oilprice.com
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