Investors will be blown away by the growth potential of offshore wind energy
The rise in renewable energy usage has been well-documented, and one of the specific forms of renewables seeing outsized growth is wind energy. Wind energy farms have popped up all over the country—but what investors might not realize is that there is a budding offshore wind energy industry ready to take off. The first offshore wind farm was developed in 1991 off the coast of Denmark, and has seen increasing levels of investment since then.
That’s why investors should get used to hearing more about offshore wind in the near future. Many large energy companies, including in the oil and gas industry, are beginning to set their sights on offshore wind. The latest development out of this emerging industry is a huge IPO that recently took place in Europe. In the not-too-distant future, offshore wind could be a phenomenal growth engine within the broader energy sector.
Offshore wind—an emerging niche
Danish utility Dong Energy, the largest operator of offshore wind facilities in the world, made huge news recently when the company filed its initial public offering. The company went public on June 9, and the stock immediately jumped 10 percent in early trading. This set the tone that there is clear investor interest in offshore wind. The performance on its first day of market trading valued it at $16.5 billion, making it the largest IPO in the world this year. This IPO is huge, because it sets a precedent that offshore wind is a bankable industry. Dong has constructed more than 25 percent of the world’s offshore wind farms, and almost 75 percent of Dong’s capital is tied up in offshore wind projects.
The relative environmental advantage of wind energy versus traditional fossil fuels like coal and oil, are abundantly clear. Whereas the drilling and burning of fossil fuels causes harmful carbon emissions and the release of greenhouse gases, wind energy is clean, and renewable. But within wind energy more broadly, there are also advantages of specifically using offshore wind. Put simply, the oceans are the largest source of renewable energy of all.
Indeed, the potential for offshore wind is truly impressive. According to the U.S. Department of Energy, offshore wind offers a number of benefits over onshore wind. Offshore wind resources are vastly abundant, stronger, and blow more consistently than onshore wind farms. Furthermore, the massive supply of offshore wind is truly compelling. The Department of Energy stipulates that more than 4,000 gigawatts of potential capacity could be developed from state and federal waters along the coasts and the Great Lakes. The scope of these resources is amazing—offshore wind has approximately four times the combined generating capacity of all U.S. electric power plants. Clearly, offshore wind is a major opportunity to generate electricity.
Last September, the Department of Energy reported that there were 21 offshore wind projects in the U.S., totaling more than 15,000 megawatts of capacity. 13 of these projects are in advanced stages of development, and these 13 projects will provide enough energy to power 1.8 million homes.
It won’t be long before offshore wind farms are brought to the United States. States like California are perfect territory for offshore wind, because of the powerful winds that occur off the West Coast. Wind energy developer Trident Winds LLC recently applied for a lease to construct an offshore wind farm off the coast of California, and if the initial foray proves successful, offshore wind could have a meaningful place in the future energy landscape. Indeed, it’s about time the U.S. joins Europe in embracing the power of offshore wind. Other geographic regions of the U.S. that would be appropriate for offshore wind include the East Coast and the Great Lakes.
Companies to watch
For example, Statoil is about to begin construction on a floating wind project in the North Sea. Statoil’s Hywind project will consist of five 6-megawatt turbines, and will be located about 25 kilometers off the coast of Scotland. Construction is expected to begin later this year, with turbines to be installed next year.
For its part, General Electric CEO recently told French media that the industrial giant is in talks to acquire French company Areva-Gamesa's offshore wind joint venture Adwen. GE is no stranger to wind energy—the company has contracts to build 1,500 megawatts of offshore wind capacity, after GE acquired energy assets from Alstom last year. These wind projects are expected to be completed by 2019.
German conglomerate Siemens is also believed to be a potential bidder for Areva’s stake in the Adwen business. Siemens has a large renewables business, involved in designing, manufacturing, and installing wind turbines for both the onshore and offshore markets. As a result, it would be an ideal fit for expanding offshore wind projects. At the end of last year, Siemens held 63 percent of Europe's installed offshore wind capacity.
While these companies initially sound like poor choices for wind energy development, seeing as how they are major operators in traditional fossil fuel production, the similarities of their business models are obvious. Consider that in many ways, building offshore wind farms would involve similar technology and processes as building offshore oil rigs. Going forward, wind farms could take the form of floating facilities, in adverse environments such as the West Coast where the continental shelf plunges quickly.
Moreover, it is not inconceivable to think deep-water offshore wind farms will be widely used one day. Floaters and deep-water offshore wind farms would open up additional markets, including Japan and across the Mediterranean. Floaters and ultra-deep water rigs, as they are called, are already commonplace in the offshore oil industry—so who better to build them than companies like Statoil, General Electric, and Siemens to further the cause?
Bob Ciura is an independent equity analyst. Since 2012, his work has focused on fundamental investment analysis of publicly-traded companies in the energy, technology, and consumer goods industries. Bob has a Bachelor's degree in Finance and an MBA in Finance.