With big ambitions to own 50 GW of projects by the end of the decade, Orsted is in sell-down mode to raise capital for new investments. Just last month it sold a 50% stake in four onshore wind projects in the US with a total capacity of 862 MW to Energy Capital Partners. In Europe earlier in the year it sold 50% stakes in the 1.3 GW Hornsea 2 off the Yorkshire coast to AXA IM Alts and Credit Agricole Assurances as well as Borkum Riffgrund 3 to funds managed by Glennmont Partners.
It will need the cash for its next large investments, which include its plans to develop with Copenhagen Infrastructure Partners four offshore wind farms with 5.2 GW of capacity in Denmark. But what is it looking next to sell down?
The answer is its 25% holding in the 630 MW London Array off the Kent coast, sources say. While Orsted has neither yet got an advisor nor launched a formal sale, the developer is planning to start an auction imminently and hopes to get non-binding offers before Christmas, the sources add. Orsted has already received pre-auction offers from investors familiar with the UK offshore wind market, although it is not clear from whom, they also add.
Orsted, which declined to comment on the rumours, is said by the sources to not want any process to attract publicity. It is concerned, justifiably, about the high level of uncertainty in the energy markets that might disrupt the process.
Meanwhile, London Array’s other shareholders, Masdar, CDPQ and RWE, are said by the sources to be keenly waiting in the wings to exercise their pre-emption rights (via a right of first offer process) should a process formally get underway.
It is not altogether clear that a sale will in fact happen this year. One separate source close to Orsted said the company has not yet made any final decision whether to sell. Nonetheless, there is mounting evidence that suggests selling the 25% stake might strategically be a good option for Denmark’s largest energy company.
The London Array wind farm, one of Orsted’s first projects, was commissioned almost a decade ago, in 2013; the following year it sold half of its 50% stake to CDPQ for GBP 644m. But having grown as a business since 2013, Orsted’s strategy has changed markedly since these early days.
“Since London Array was built Orsted has grown substantially from being a 25% partner to a much larger one. These days it goes in with bigger stakes and farms down 50% to investors,” one source familiar with Orsted’s strategy says.
This was the case with Borkum Riffgrund 3 - and also Hornsea Two, which, according to one of the sources, Orsted sold in order to recycle capital. “Hornsea Two is too big to have 100% on its balance sheet. Selling 50% is Orsted’s standard trick as it means it retains enough to get it into power sales,” the source added.
There are other examples of this in the UK, where today it owns stakes in 13 offshore wind farms with total capacity of 6.2 GW. In 2016 it sold a 50% stake in Burbo Bank Extension to Danish pension manager PKA and KIRKBI A/S, parent company of the LEGO Group, and since has retained 50% of the project. In the same year it sold 50% in Race Bank to Macquarie. Orsted retains 50% of Westermost Rough.
Orsted’s 25% stake in London Array therefore might seem something of an anomaly. Sources also point to London Array being an old project with little strategic importance to Orsted. “Orsted has capital tied up in a project that it could use elsewhere,” says one of the sources.
Another potential motivation for selling is that Orsted does not have an operations and maintenance (O&M) services contract for the London Array offshore wind farm. RWE in February won a 10-year O&M contract starting next year for the project.
O&M projects are important for Orsted. It has such contracts in almost all of the projects it owns worldwide, including Hornsea 2. Three years ago it opened a GBP 10m offshore wind O&M centre in Grimsby, the largest of its kind in the world. The centre manages six offshore wind farms in which Orsted owns stakes in its so-called “east coast hub”, namely Westermost Rough, Lincs, Race Bank and Gunfleet Sands, Hornsea One and Hornsea Two. London Array is conspicuously absent from this list.
Several of the sources say projects without O&M contacts are uneconomic to Orsted. “Having a 25% financial interest alone probably doesn’t make any sense to Orsted”, one adds.
Some sources say right now is a bad time to be selling renewables assets in the UK, given the threat of windfall taxes on the sector. “How do you value a project if you don’t know what the income will be going forwards,” says one. But others say buyers will simply factor any price caps into valuations. Rishi Sunak is due to provide further clarity on any such tax in his autumn budget later this month. The sources say Orsted had been hoping for some time to launch a sale of its stake, but had been delayed while a cable linked to the project was fixed.
There are plenty of investors likely to chomp at the bit to buy a piece of one of the world’s largest offshore wind farms. In September Macquarie sold a 15.5% stake in the 270 MW Lincs project to Octopus. EDPR and Engie’s Ocean Winds sale of a stake in the Moray East offshore wind farm has entered the final round, with interest from investors including TRIG, Equitix and Greencoat.
London Array’s existing shareholders are also likely to be potentially keen buyers too. Masdar, which also owns stakes in Dudgeon offshore wind farm and floating wind farm Hywind Scotland, last month said it plans to increase its investment in offshore wind. While in September RWE and Masdar agreed to partner on offshore wind projects in key markets worldwide, including the UK as well as the US and South Korea.
Orsted’s CEO, Mads Napier, said this month that the company is “very selective in where we invest”. With this in mind, and with huge growth ambitions and shifting priorities, holding onto a small minority stake in a project where it has no O&M upside might not make best sense.
RWE and Masdar did not respond to requests for comment. CDPQ declined to comment.
