Intrinsic value of Offshore Wind

Context: in 2023 the market was stunned by a record bid for Offshore Wind licences offered by BP and TotalEnergies: just a bit less than 2 bn EUR/MW. The bids were (and still are) outrageous for traditional offshore wind developers: taking into account average capacity utilisations and LCOE of offshore wind the total cost would be around 120 EUR/MWh while market assessments for Offshore Wind are in the range of ~70-80 EUR/MWh (10 Year as-produced PPAs).

Basically it looks like oil giants are losing around 40-50 EUR/MWh? Not rightly so. In this article I will argue that there are at least three key components which make up a higher intrinsic value of Offshore Wind.

?? 1. Lower Development Costs (most important in my view)

Integrated oil companies possess technological expertise in building offshore platforms and conducting deep-water and soil investigations. As oil field developments reach maturity, these companies can leverage their existing technologies and skilled staff for offshore wind projects. This advantage translates to lower development costs and efficient project execution.

?? 2. Optimization Capabilities of Refineries (very significant imho)

Both BP and TotalEnergies have announced plans to consume vast majority of offshore wind production internally. Obvious point: green power from offshore wind can help reducing the usage of gas in oil refineries and lower greenhouse gas (GHG) emissions (cost reduction). However offshore wind combined with natural gas offers substantial optimisation benefit:

Between Gas Consumption and Power Injection:

• When gas prices are low, emission allowances (EUAs) are not particularly expensive, and power prices are high, refineries can consume gas and inject power into the grid.
• Conversely, when power prices are low (or negative) and gas/EUAs are expensive, refineries can consume power.

In other words refineries effectively act as virtual batteries, balancing energy supply and demand based on market conditions.

? 3. Integration with Retail / Petrol Stations (least important but not negligible)

?? Integrated oil companies can integrate wind power into their network of petrol stations. Tariffs can be dynamically adjusted based on hourly power prices, wind production, and the company's own usage (as mentioned in point 1).

?? The gross margins from superchargers (electric vehicle charging stations) are not negligible. Some research suggests gross margins of around 30%.

? Ensuring a high number of cars charging at petrol stations is crucial to maintaining coffee margins ??.

Other components which are at least as important as 3. are:

• Low WACC
• Diversification of business (away from oil exposure)
• Optionalities (Green Hydrogene etc.). Although I do not believe that Germany will produce competitive green hydrogene in a long run.

In summary, integrated oil companies bring unique strengths to the offshore wind sector, including optimisation capabilities, integration opportunities, and cost efficiencies. Their transition toward renewable energy industries, including wind power, photovoltaic, and hydrogen energy, positions them well for the future.

?? Please comments below.