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Over the last thirty years, wind farms have grown from nowhere to become a global force in power generation, as the position of fossil fuels has been steadily weakened by a brave new environmental world.
As bond investors, Baillie Gifford looks to invest in businesses which have a strong outlook and a robust base from which to start. We believe that Ørsted, the Danish utility company, is one such example.
Ørsted is a global leader in offshore wind, with a 25 per cent market share. It can provide enough electricity for 11.7 million people and expects to service 30 million by 2025. In 2018, 75 per cent of the energy generated by Ørsted came from renewable sources, with the company targeting 99 per cent by 2025.
Ørsted’s expertise in renewables is not the first time that the Danes have led the way in wind power, Danish inventor Poul la Cour was a pioneer of wind power technology in around 1900, using equipment which resembled Dutch windmills. Nearly a century later the Danish government was one of the first to set up policies designed to encourage the development of the wind power market. It was this foresight and planning which helped lead to the world’s first offshore windfarm in 1991.
With its green credentials and undoubted ambition, Ørsted now looks to be travelling firmly in the right direction for the world’s future energy needs. If we wind the clock back to 2006, the transformation of Ørsted has been remarkable. For a start Ørsted had a different name, DONG Energy. DONG was short for Danish Oil and Natural Gas and its energy generation reflected this, with 83 per cent of its energy produced from fossil fuels. Over the past decade, Ørsted has looked to transform itself into a green energy company and thus far it looks to be succeeding.
Ørsted’s first windfarm in 1991 comprised turbines with a diameter of 35 metres. Today, its largest wind turbines have a diameter of over 164 metres, equivalent to the length of more than two Boeing 747s. A single rotation of one of these huge turbines produces enough power to supply the energy needs of a single household for 29 hours. When the Hornsea One windfarm off the UK coast is completed in 2020, it will be able to power over 1 million homes.
Not only is Ørsted able to produce huge amounts of energy, continuing efficiencies mean it can do so at materially lower costs. In 2018 in North West Europe, the cost of offshore wind energy in EUR/MWh was €61, down from €167 in 2012. The equivalent cost for a new coal plant would be €93 and a new gas installation would be €83.
Success in beating prices offered by fossil fuel generators is important to the future of the renewable energy sector. The sooner this pricing dynamic becomes the sector norm, the sooner it should lead to an increased shift away from capital being invested in fossil fuels and put into renewables instead.
Ørsted’s superior credentials, in this respect, are matched by its attractions as a bond investment. Management has built a strong balance sheet with low levels of debt. Given the likelihood of rising demand for wind power and the consequent boost in capital expenditure, it is likely that Ørsted’s debt levels will rise at some point. But management has planned for this and there is still room for the company to issue more debt without weakening its balance sheet to levels that would cause bond investors concern.
On behalf of our clients, Baillie Gifford’s bond funds invest in a number of Ørsted bonds. As part of our investment process we continue to monitor closely Ørsted’s debt policy, developments in the wind power market and the company’s strength within that market. If it can continue on its current trajectory, in combination with the bonds remaining attractively valued, there is reason to believe that Ørsted could be part of Baillie Gifford’s bond funds for years to come, whilst providing an example to the world of how it is possible to transform from a black to green energy producer in a relatively short period of time.
Image: © Ørsted.
The views expressed in this blog should not be considered as advice or a recommendation to buy, sell or hold a particular investment and it does not in any way constitute investment advice.
This communication was produced and approved on the stated date and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
This blog contains information on investments which does not constitute independent investment research. Accordingly, it is not subject to the protections afforded to independent research and Baillie Gifford and its staff may have dealt in the investments concerned.
Bonds issued by companies and governments may be adversely affected by changes in interest rates, expectations of inflation and a decline in the creditworthiness of the bond issuer. The issuers of bonds in which the fund invests may not be able to pay the bond income as promised or could fail to repay the capital amount.
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