Orsted: Vattenfall Halting Large U.K. Offshore Wind Project Casts Doubt on Hornsea 3

Swedish utility Vattenfall announced on July 20 it had halted its 1.4 gigawatt Norfolk Boreas wind project off the U.K.’s east coast, driving a GBP 400 million impairment. The firm cited a 40% rise in the cost of the project since it was awarded at round 4 of U.K. contract-for-difference auctions in July 2022 along with four other offshore wind projects including Orsted’s ORSTED 2.8 GW Hornsea 3. All projects awarded at the round-4 CFD allocations have the same strike price of GBP 37.35/MWh in 2012 prices. Accordingly, Vattenfall’s announcement fuelled speculation Orsted will follow through by driving a 3% slide in its share price on July 20. Should this be the case, the negative valuation impact would be limited, so we maintain our DKK 780 fair value estimate for narrow-moat Orsted implying a material upside to the current share price.

It’s likely Hornsea 3 experienced a similar rise in construction costs as Norfolk Boreas. A difference is that Hornsea 3 is located in the vicinity of Hornsea 1 and 2, Orsted’s existing wind farms. As such, Orsted claims that it will be able to lower unit operating costs by 25% for Hornsea 3 compared with Hornsea 2 thanks to scale benefits and synergies. We estimate Hornsea’s 3 internal rate of return at 8.4%, assuming a 20% increase in construction costs. Factoring in Norfolk Boreas’ 40% increase would lower our IRR estimate to 6.6%—meaning the project would still be accretive as our weighted average cost of capital estimate is 6%—and would shave DKK 9 off our fair value estimate or 1%, which isn’t meaningful. Should the U.K. government not provide additional support for offshore wind developers in the upcoming 2023 autumn budget, Orsted might not sanction Hornsea 3. Based on Hornsea 3 capacity and the remaining months until the autumn budget, this could lead to a GBP 1 billion impairment. The negative valuation impact from foregone free cash flows would shave DKK 17 off our fair value estimate or 2%, which also isn’t meaningful.