What are we to make of the share price collapse and retrenchment of Ørsted, the “renewables posterchild”? When vital investment projects in offshore wind in both Europe and America get abandoned by one of the companies most competent to deliver them, we need to ask what we are doing wrong.
I and many others have referenced Ørsted as a beacon of the climate transition.
It recognised long ago that the transition from fossil fuels will be driven by substituting demand, not suppressing supply. And it led that substitution, selling its oil and gas business and investing and innovating in wind power, particularly offshore wind, leading the way in driving down the cost curve.
At the peak of its market capitalisation, in early 2021, investors were handsomely rewarded for this bold leadership. Today, they would have done better financially to stay in fossil fuels: Ørsted’s share price over the past five years has underperformed its Nordic neighbour Equinor and indeed all the oil majors.
Offshore wind is caught in a cost squeeze. Revenues are capped by the implicit promise – and market necessity – to match fossil-generated electricity without a green premium.
Costs for offshore wind’s long-term infrastructure build projects have risen substantially, hit by rising costs of capital, inflation and supply chain bottlenecks. And optimistic new entrants have driven up the cost of sea-bed licences.
Rasmus Skov, Ørsted’s head of global external affairs and positioning, described this last summer as a “perfect storm”. “Projects that had a business case two years ago often don’t have one anymore.”
Ørsted is once again a posterchild. This time it is as something different but no less important: a company that does just what the world needs and wants it to do, but finds itself let down by a business environment that can’t support it through a tough cycle.
The lesson to take from Ørsted’s courageous and outstanding leadership: just because you should doesn’t mean you can.
This lesson matters, far beyond Denmark and beyond wind power. The assumption underlying much of the ESG investing and sustainable finance world is that companies could perfectly well do what is needed if they put their mind to it, and we need to nudge (or force) them to do it, by engaging with their management or by divesting.
Of course, there are companies that can do more than they do. But as the transition scales up, we will find many more situations like Ørsted’s that reveal the impotence of the financial system we are deploying. Neither engagement nor divestment would help Ørsted to build the wind farms it has just cancelled.
All the talk about “mobilising private capital” is empty if that capital can’t finance the projects that need to be built.
Explanations at climate conferences about “misalignment of risk appetite” are unhelpfully euphemistic. Nobody can be expected to have appetite for projects with no business case. In these situations, we have to switch our focus to how we can create the market and policy environment in which companies are motivated to invest and are rewarded for doing so.
Is it fair to focus on the financial system? We can’t blame the banks or investors directly. Banks have shareholders too and can’t be expected to fund unprofitable projects. The constraints are real, so we need to recognise them, and not expect private finance to do more than it can.
But we need investment in wind power to grow, not scale back. The International Energy Agency’s Net Zero Emissions by 2050 Scenario sees installed wind power capacity nearly tripling in six years, from 1.1TW this year to 2.9TW in 2030.
Most of that will be onshore, but it “will require increased support for both onshore and offshore installation”.
If private finance can’t support that when the going gets tough, that’s okay – it needs to put its own interests first, for financial stability as well as for its shareholders. But it needs to say so.
That way, we can choose to limit our dependence on market solutions that can’t fully commit. Otherwise, we face a systemic risk from the financialisation of our climate action.
Simon Glynn is founder of Zero Ideas, challenging leadership thinking on climate action.
