Bokrum Riffgrund III: financing a 900MW subsidy-free wind farm

inspiratia sits down with Peter Highmore, Director, Partnerships and Corporate M&A at Orsted, to discuss the financing strategy for the 900MW Bokrum Riffgrund III project, one of the largest merchant offshore wind farms in Europe

Not only did it make headlines for one for the first, large-scale, offshore wind developments to be awarded contracts with zero-subsidy bids, but Bokrum Riffgrund III has had two recent back-to-back successes. The first is its 50% divestment to Glennmont Partners in late October, and the second is that in the beginning of November, it landed a corporate PPA (CPPA) contract with a 25-year lifespan – the longest seen for offshore wind globally.

Orsted has had to make slight adjustment to its tried and tested farm down strategy to produce a financing structure that has attracted big corporates and liquidity from third-party investors. inspiratia speaks with Peter Highmore, Director, Partnerships and Corporate M&A at Orsted, for more details about the project's financing strategy.

Background

Bokrum Riffgrund III is located in the economic zone of Germany's North Sea, 72km off Germany's coast, with a total capacity of 900MW once complete.

The development finds itself as the fourth largest offshore wind farm under Orsted's pipeline, especially after the three clusters were merged under the Bokrum Riffgrund III name in September 2019.

The towering installations will be equipped with 83 turbines, each with a planned capacity of 11MW.

Orsted was notoriously awarded the projects – at the time separate developments – in Germany's 2017 and 2018 wind auctions with a bidding price of €0 per MWh each. This had mixed reactions, some celebrating the confidence in offshore cost competitiveness, whilst others questioned the long-term viability of zero-subsidy bids.

Orsted has previously stated that larger wind turbines, better wind speeds, transmission infrastructure under the responsibility of TenneT, and strong corporate PPA outlook in that period motivated its bidding price.

M&A deal structure

On 25 October [2021], Orsted sold a 50% stake in its Bokrum Riffgrund III project to Glennmont Partners, resulting in a deal value of approximately DKK 9 billion (£1.02bn €1.21bn US$1.41bn).

The scale of the project and zero-subsidy put Orsted's 'farm down' strategy to the test. This is a strategy that has been implemented over 10 years in Orsted, were the developer sells stakes to third-party investors – usually in the construction-stage – whilst they maintain a long-term operation and maintenance agreement and secure a route to market for the project.

According to Orsted's Peter Highmore, a few things have driven this structure, "one being that Orsted typically looks to pro-rata consolidate its assets, and to do so we need to show joint control of the assets with an investor. So having a 50-50 shareholding structure, and a governance regime that reflects joint ownership helps to allow us to achieve that accounting treatment,"

"[Secondly,] by arranging the project financing for our incoming partner at a holdco level, it allows Orsted to fund our share of the project using our generally preferred balance sheet funding approach via debt issuance at our topco level."

However, given the novel fully-merchant status of Bokrum Riffgrund III, the timing of Orsted's farm down process was switched up. Instead of taking a final investment decision (FID) on a project and then running a farm down process – as has been the case on a number of their previous projects –, the farm down process for this project was run pre-FID as one of the many methods being pursued to help manage the merchant exposure.

"Part of this is obviously being addressed through corporate PPAs, another through hedging strategies, and another is the divestment which offloads some of that risk and simultaneously generates some up-front income from the sale" commented Highmore

Although the process occurs earlier for Orsted, the exposure to the partner remains as normal because they still come in during construction with a "wrap" that insulates them from the construction risk.

PPA structure

The change in timeline unsurprisingly prompted internal hustle to source PPAs, which is already a challenging task given that at the time the projects were first awarded in 2017 and 2018, it was unprecedented to think third-party investors would want to be exposed to such merchant risks.

What Orsted has successfully managed to do is provide a structure with a good balance for offloading some of the merchant risk to Glennmont Partners and their lenders, whilst also providing enough protection for Orsted to continue to make Bokrum Riffgrund III an investable and bankable proposition.

Highmore explained, "Rather than try and expose Glennmont and its lenders to a number of individual corporate PPAs, each of which potentially on slightly different terms, Orsted stands in the middle, effectively providing a PPA with a number of different features to the project company, and then managing the risk in the background through a number of means, including corporate PPA offtake and utilisation of our short and medium-term market trading capabilities."

This allows investors to rely on Orsted's experience in the sector and credit rating, and also provides more direct flexibility to structure that PPA for the purpose of an M&A deal – as has happened. Simultaneously it helps Orsted mitigate exposure on their own share, and get comfortable in providing a PPA to an investor to enable the farm down.

"From a lender and investor perspective, they only have to do an analysis on the PPA [Orsted] provides, whilst Orsted [as the intermediary adds value] by managing the complexities of the different PPA features," commented Highmore.

Orsted has already snagged some big names under corporate PPA contracts:

The PPA that facilitates the M&A process is a mixture of a fixed, merchant and collared tranches.

A fixed-price tranche is based on a pay-as-produced PPA, and the route-to-market tranche is where you get paid whatever the market price is less a fee for facilitating the access to the market. Then there is a collared tranche where the developer is paid the floor price if the market price is below the floor level. Conversely, if the market price is above a certain level, in this scenario the investor will be paid the cap whilst Orsted benefits from the upside between the cap and market price.

"You play around with the different percentages and the pricing of each of the tranches to create a balanced risk profile that matches up to the investors' required return hurdle rates," said Highmore.

Outlook and merchant appetite

Lenders are commonly hesitant to participate in merchant projects, and the length of contract tenures restricts the volume of debt that can be raised and level of efficiency of the capital structure. So the recent inclusion of BASF under a 25-year CPPA contract is a significant development for Bokrum Riffgrund III, as well as the offshore wind industry in terms of generating greater merchant appetite from lenders in future.

The collective banks took various approaches to value the risk, and according to Highmore very few took the same approach, which resulted in the eight banks that participated in the deal – sub-billion euros of debt. In comparison to other mega deals Orsted has executed in offshore wind, this is a relatively small number of banks. However, the deal itself acts as a good test case for a replica deal.

The transaction in some ways creates a club of lenders which, hopefully through the process, will have a good learning curve to transfer to their credit committee and the wider market. In addition, the process highlights how the industry is thinking a bit more holistically to get comfortable with merchant projects.

Participants

Orsted will remain as the EPC of the project, providing operations and maintenance services over a 20-year contract.

Natwest provided financial advisory on the debt side whilst equity was ran in-house at Orsted.

German law firm Hengeler Mueller advised Orsted, and Linklaters advised Glennmont Partners.

As with its past divestments, Riskbridge acted as Orsted's hedging adviser.

Subject to approval from the German authorities, the hope is for Bokrum Riffgrund III to reach financial close before the end of the year [2021] and commissioning to take place in 2025.