No Offshore Wind Capacity Awarded at Latest U.K. Auctions; Orsted, RWE, and SSE Are Cheap

At round 5 of the U.K. contract-for-difference auctions on Sept. 8, 3.7 gigawatts of renewable capacity were awarded, one third of the amount awarded last year—1.9 GW was solar and 1.5 GW was onshore wind. No offshore wind capacity was cleared. This a blow to the U.K. goal to grow offshore wind capacity to 50 GW by 2030 from 14 GW currently. Still, no surprise here as many developers had warned that the ceiling strike price of GBP 44/MWh in 2012 prices of these auctions was way too low given the 40% increase in construction costs over the last year. Overall, the absence of awarded capacity reflects price discipline from developers.

Last year, a record of 6.9 GW of offshore wind capacity was awarded at a record low price of GBP 37.5/MWh in 2012 prices. Due to the latter and soaring costs ever since, none of the projects has been sanctioned yet. In July, Vattenfall scrapped the Norfolk Boreas project and booked a GBP 0.4 billion impairment. Now, we see two options. Either the government maintains its austere stance ahead of the 2024 general elections and endures the burden of being labeled as a climate villain or it grants tax breaks in the form of capital allowances at the next autumn budget for offshore wind projects awarded last year so they can be sanctioned. This includes narrow-moat Orsted’s giant 2.8 GW Hornsea 3 project. Given the price inflation, we expect the project to be value-neutral. Should it be scrapped, we calculate that Orsted could have to write off up to GBP 1 billion driving a DKK 21 negative valuation impact per share. Still, this is largely priced in after the 34% share price fall since the announcement of the U.S. impairments on Aug. 30. We confirm our DKK 670 fair value estimate.

Orsted’s woes have entailed an unjustified read-across for RWE and SSE SSE, offering good entry points in those two quality names for which we confirm our fair value estimates of GBX 2,200 and EUR 55, respectively.