Orsted: Sunrise Wind Project Likely to Be Ditched After Failure to Get Extra Subsidies; Shares Cheap

We confirm our DKK 600 fair value estimate for no-moat Orsted ORSTED after the New York State Public Service Commission denied the firm’s request for a hike of the subsidy for the 0.9-gigawatt Sunrise Wind project off the New York coast that it co-owns with Eversource. Shares are materially undervalued.

In light of the jump in risk-free rates and construction costs since the end of 2021, Orsted and other offshore wind developers requested a material increase in the price of offshore wind renewable energy certificates they obtained when they won their projects off the New York coast between 2019 and 2021. These certificates are fixed across the life span of the projects. On average, Orsted and its peers were requesting a 50% hike to the certificates they initially got. Orsted was calling for a 27% increase of its certificate of $110/megawatt-hour in 2024 prices.

After the commission’s announcement, Orsted said Sunrise Wind’s viability and ability to be built is extremely challenged. In January, Orsted wrote down half of the project. Due to the rising political backlash against the costs of the energy transition and already high certificate price we did not expect Orsted to be successful, but assumed Sunrise Wind would be built. Should Orsted scrap it, which seems the likeliest option, this would shave DKK 5 off our fair value estimate or less than 1%, which is immaterial.

This announcement increases concerns that Orsted will walk away from its other U.S. projects Revolution Wind, Ocean Wind 1 and 2, and Skipjack, totaling 3.9 GW on a gross basis and 3.55 GW on a net basis. Should it do so, the valuation impact would be limited at DKK 38 (including Sunrise) or 6% of our fair value estimate because we’ve already drastically reduced our assumptions of value creation from those projects. In any case we don’t think Orsted will scrap them all as they have different features to Sunrise Wind. Also, Sunrise Wind is the only project for which Orsted requested a certificate hike.