UPDATE 1-DONG Energy faces tough year as offshore wind returns drop

(Adds CEO, analyst comment, background)

COPENHAGEN, Feb 2 (Reuters) - DONG Energy, the world’s biggest offshore wind farm developer, on Thursday reported its first full-year net profit since 2011, but will face tough competition for projects in Europe and the United States from new players that are pushing down margins.

The Danish company, whose listing in Copenhagen in June was one of the biggest globally last year, has profited from being a pioneer in offshore wind for two decades and has build more than a quarter of the world’s wind farms at sea.

But over the past year, prices for new projects were pushed to record lows by companies eager to establish a foothold in the market, which could mark an end to high returns in the industry.

In November, DONG lost a tender at home, when Swedish utility Vattenfall was awarded a project off Denmark with a winning bid to produce electricity for a price of 50 euros per megawatt hour (MWh). That beat a record DONG had itself set four months earlier with a price of 72.7 euros per MWh for a Dutch project.

“We were all surprised about how fast prices have come down,” DONG Energy’s chief executive Henrik Poulsen told investors and analysts at a capital markets day in Copenhagen on Thursday.

“Some people have said that the outcome of the (Dutch and Danish) tenders was the end of value creation in offshore wind. I firmly believe that’s a wrong conclusion,” he said.

Some 18.2 billion euros were committed to offshore wind projects in Europe in 2016, a 39 percent increase from the previous year, with more than half of investments made in Britain.

New project developers include oil majors like Statoil and Royal Dutch Shell, which have come under pressure from shareholders to diversify into green energy and have snapped up new projects in both the United States and the Netherlands.

Lesser known players from China are also trying to establish a foothold, with a Chinese developer last year partnering in a Scottish offshore wind farm.

“A dramatic shift has happened in the offshore wind industry over the last six months, which puts into question how much return you can get on new projects,” Sydbank analyst Morten Imsgaard said.

But DONG’s Poulsen said: “Irresponsible players who might submit bids that are not value-creating over time will eventually be weeded out.”

DONG Energy is the biggest owner of offshore wind power in Europe with 16.2 percent of installed capacity, Vattenfall second with 8.3 percent, according to industry group WindEurope.

“Getting to scale in this industry is a massive undertaking,” Poulsen said. He also acknowledged that in the more mature European market, there was “no reason to believe that returns we were seeing a few years ago of well above 10 percent will continue in the long term.”

Still, DONG forecast an average return on capital employed in wind power of 13-15 percent between 2017 and 2023, a target it aims to achieve by expanding into new markets like Taiwan and the United States.

“But even if you have a large balance sheet or whatever ownership structure you may have, there is a limit to how far you can go in terms of undertaking value-destroying activities of that scale,” he said.

On Thursday, the company posted earnings before interest, taxation, depreciation and amortization (EBITDA) of 6.3 billion crowns and revenue at 15.68 billion crowns in the last three months of 2016, both below analysts expectations. (Reporting by Jacob Gronholt-Pedersen; Editing by Jane Merriman)