The UK government awarded a record 8.4 gigawatts of offshore wind capacity in Allocation Round 7. RWE emerged as the largest winner with 6.9 GW. SSE secured 1.4 GW of capacity. Orsted, the current leader in the UK market, got nothing.
Why it matters: The average contract for difference is GBP 91 per megawatt-hour in 2024 prices. It will be inflated for a 20-year period versus 15 years previously. On the bottom line, we reckon that the projects would achieve a high-single-digit internal rate of return, making them value-accretive.
- RWE created a joint venture with KKR to develop the 3.6 GW of awarded projects where it had no partner. Under the agreement, RWE will be fully reimbursed for its GBP 2.9 billion capitalized development expenses. The awarded net capacity of RWE is 3.56 GW.
- Orsted was the loser in this auction. Its failure was driven by its US woes, which limit its financial leeway. Besides, the group ditched the Hornsea 4 project that it won at AR6.
The bottom line: Incorporating the value creation of awarded projects and the reimbursement of capitalized development expenses boosts our RWE fair value estimate by €8, to €53 per share. The shares look attractive as the market has yet to fully factor in this value creation.
- On the flip side, RWE’s additional offshore wind investments reduce the likelihood of more share buybacks.
- We assume that SSE will farm down 50% of the 1.4 GW Berwick Bank B project it was awarded, in line with its business model. We calculate value creation of GBX 50 per share, which increases our SSE fair value estimate to GBX 2,480 per share from GBX 2,430.
Big picture: The amount of awarded offshore wind capacity in AR7 is the largest ever. Given the generous subsidy price, we see limited risk of project cancellations, unlike in previous auctions.
- After several failed auctions in Germany, the Netherlands, and Denmark and the hostility of the Trump administration, this auction offered relief to the offshore wind industry.
