The centrality of climate change and sustainability to post-pandemic recovery plans reinforces the opportunity for clean energy providers. Europe’s world-leading offshore wind industry looks well placed to benefit.
Building back better
In line with commitments made under the Paris Agreement, a major focus for governments has been the goal of achieving climate neutrality – or ‘net zero’ carbon emissions – by removing as much CO2 as we emit. Covid-19 has not dulled this focus. In fact, global action to tackle the ‘tragedy of the horizon’ – as then-governor of the Bank of England Mark Carney described climate change – has become central to plans for the post-pandemic recovery.
The EU has committed EUR 1.8 trillion to rebuilding a post-Covid Europe, with 30% of the entire package earmarked for climate protection and the curbing of greenhouse gas emissions. As part of its response, the UK – the first major economy to sign its net-zero undertaking into law – has committed to a sustainable economic recovery through a 10-point plan to ‘build back better’ in the wake of the virus.
The UK recognises that an energy transition away from fossil fuels will be imperative for achieving this plan. With the country already home to more installed offshore wind-power capacity than anywhere else in the world, the offshore wind sector will be a major pillar in Boris Johnson’s ‘green industrial revolution’. But this vision will require sizeable finance. If the prime minister is to realise his plan to power every home in the UK by offshore wind within the next decade, the UK’s current offshore capacity will have to be quadrupled – requiring nearly GBP 50 billion in investment.1
The EU has similarly ambitious targets. The European Commission’s Offshore Renewable Energy Strategy is targeting 300GW of offshore wind by mid-century, with a funding requirement of EUR 800 billion.
The boom in offshore wind is perhaps unsurprising, given that the cost of investment has fallen in recent years thanks to technological advances that have increased the efficiency and capacity of wind turbines. Offshore wind also benefits from greater site availability versus solar and onshore wind, especially in areas with high population density such as Europe, the US coasts and parts of Asia. We believe this makes it an area of the market worth watching.
Despite the disruption Covid has caused to the world’s energy markets, the global offshore wind industry actually enjoyed a financing surge of around GBP 27 billion in the first half of 2020.2 In fact, the total global project pipeline increased by nearly 50% between January and October last year.3
Offshore wind is an industry in which Europe leads, not only in terms of installed capacity – 75% of offshore wind capacity is installed in Europe4– but also in market share. On the basis of permits awarded to date, European companies will have a market share of 74% in 2025 in an industry growing 13% per annum and offering a USD 1 trillion investment opportunity over the next two decades.
Europe also has a competitive edge. European renewable developers have a first-mover advantage in offshore wind, and are at the forefront of research & development. They also benefit from scale and their large customer base offers an important route to market for their renewable production. As offshore wind technology continues to advance, equipment manufacturers are focusing on larger and more efficient turbine models, an area in which European turbine manufacturers are ahead, with higher-quality offerings. Furthermore, floating offshore wind technology, while nascent, has the potential to be the next big thing in renewables – and again, it’s a market that European companies control.5
We believe European utilities such as Orsted, RWE, Iberdrola, Enel and SSE are in a strong position against this backdrop, offering shareholders visible and growing cashflows.
Orsted, a Danish firm, is the market leader in offshore wind, with a 30% market share of installed capacity. Even through the current crisis, the company saw its earnings from wind farms increase 16% in the third quarter of 2020 compared with the same period in 2019. Based on projects awarded to date, Orsted looks set to double its offshore wind capacity by 2025. We anticipate double-digit profit growth over the medium term, given the considerable competitive advantage provided by the company’s scale and track record.
UK-domiciled SSE recently partnered with Equinor, the Norwegian state-owned energy company, to build the world’s largest offshore windfarm, Dogger Bank, off the Yorkshire coast. SSE has signed a 15-year contract for the project, which is due to supply 5% of the UK’s total electricity. We believe SSE pays an attractive dividend (with a forecast yield of around 6%) and has high growth potential. Like Orsted, SSE is set to more than double its offshore wind capacity by 2025.
Beyond the growth in offshore wind, European utilities that are part of the broader renewables mix should continue to benefit from investor interest in sustainable products. While conventional European equity funds experienced significant outflows in the first quarter of 2020 – at the height of the Covid-induced sell-off – their sustainable counterparts were experiencing net inflows. The trend for the remainder of the year was less divergent, but the preference for sustainable funds remained, with third-quarter flows into such funds 82% higher than those into conventional equity funds.6
Given their visible and growing revenue stream, we continue to see value in European offshore wind companies, underpinned by visible long-term growth, and grounded in a supportive regulatory environment and strong investor demand in the climate megatrend. Whether they’re powering offshore wind turbines or growing shareholder value, these are certainly the sort of tailwinds we’re interested in.