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As governments around the world try to “green” their economies’ power production, and utilities retire fossil-fuel power stations, wind power has emerged as one of the most popular forms of renewable energy.
Here in the United States, Texas leads the way. In 2023, wind represented 28.6% of the state's energy generation, second only to natural gas (NGK24). There are 239 wind-related projects in Texas and more than 15,300 wind turbines, the most of any state.
However, ill winds have been blowing through the industry.
Ill Winds Blowing
Inflationary wind gales led to impairments totaling nearly $5 billion in 2023 from numerous companies, such as Orsted (DNNGY), crippling the industry. More than 3 gigawatts (GW) worth of U.S. offshore wind projects - more than half of the overall total - canceled their offtake agreements last year.
These deals had been struck before the Ukraine war, or not long after. Higher financing costs and a spike in the price of everything from cables to turbines later made them uneconomic.
Contract terminations make for bad headlines. They are proof, though, that most wind power project developers now appear to be acting rationally. Before Russia’s invasion of Ukraine, competition in the sector had intensified so much that it was questionable how these companies would ever make money from these projects.
It’s not all doom and gloom, though. Our country’s first two utility-scale offshore wind projects have kicked off operation. And in addition to New York, a number of New England states are allowing wind project developers to rebid contracts for more favorable terms.
The CEO of the wind business at GE Vernova (GEV-), Vic Abate, told investors a few weeks ago that “The market is going through a tremendous reset . . . I believe the better days are ahead.” The company forecast that its wind segment (including turbines), which has suffered steep losses, to become profitable in 2025.
So, despite all the negativity surrounding the industry, I find myself in agreement with Abate and believe 2023 marked the low point of the industry’s problems.
Fair and Profitable Winds Coming
Globally, offshore wind capacity is poised to quintuple between 2022 and the middle of the next decade, according to BloombergNEF. But in order to get more energy from the wind, wind turbines are getting bigger and bigger. That means that ships capable of installing them are in growing demand.
Currently, the fleet of this type of ship is in short supply. And that condition looks likely to continue for the foreseeable future.
Clarksons Offshore Renewables, a shipping broker that matches vessels with project developers, estimates that there are only between 15 and 20 ships outside of China able to install turbines with a minimum 15-megawatt capacity. To meet future demand, the energy consultancy Wood Mackenzie anticipates about $14.8 billion will need to be invested. So far, only about a third of that has actually been committed.
So, aligning supply and demand for the giant ships used to build offshore wind turbines won’t happen overnight.
Consider this - it takes at least three years and $400 million to build a new installation vessel. And this time frame is likely to be even longer, as shipyards in Asia are already stretched trying to fill orders for oil (CLK24) and LNG carriers.
This is great news for the companies that already own this type of vessel. Let’s look at one of them - Cadeler A/S ADR (CDLR).
Buy Cadeler Stock
This Danish company’s stock began trading on the New York Stock Exchange in December after it merged with Eneti. That combination made Cadeler the world’s leading offshore wind turbine transport and installation company.
This merger also created the world’s largest and most versatile state-of-the-art fleet for the offshore wind industry. Cadeler operates four Offshore Wind Farm Installation Vessels (WFIV). And it is currently strengthening its fleet with six purpose-designed newbuilds to meet the future demands of transport and installation vessels.
Ships in the industry tend to be reserved several years in advance, and Cadeler’s vessels are almost fully booked through 2027, a significant change from just a few years ago. It also has several new ships on order.
The biggest offshore wind developers are now securing ships on charters that are several years in length. That has led directly to ships getting more expensive to hire. Day rates have jumped from about $200,000 in 2022 to about $350,000 for the newest and biggest vessels, according to Clarksons. That compares with a rate of about $54,000 per day for a supertanker traveling between from the Middle East to Asia.
During 2023, Cadeler ensured it had a record-breaking backlog of orders. The contracts that Cadeler signed will provide a steady, continuous flow of projects through 2030. Highlights of the past year include the signing of two major contracts with Ørsted for the Hornsea 3 offshore wind farm, with a total value of 500 million to 700 million euros ($538.5 million to $753 million). The combined contracts represent the biggest deal in Cadeler’s history.
Of course, Wall Street is still in its “hate anything in renewable energy” mode, so they are giving you a nice entry point on Cadeler stock. It’s a buy below $19.
