World - Wind partnership with Equinor is first step on long road for BP

Ground-breaking offshore wind partnership between Equinor and BP has different implications for each company, but both are heading in the same direction

BP’s first venture into the offshore wind market provides a floor for the company’s promise of reasonably robust returns on renewables investments, a modelling exercise by equity research firm Redburn has suggested.

The UK giant on Thursday agreed to pay $1.1 billion for a 50% stake in Equinor’s Empire Wind and Beacon Wind projects, located off the states of New York and Massachusetts, respectively.

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Empire Wind will provide 2 gigawatts of power-generation capacity, about 800 megawatts of which is due onstream in 2024 and a second phase preparing for solicitations, while permitting reviews are beginning for Beacon Wind, which will have potential for more than 2.4 gigawatts.

Energy transition drive

BP reset its course towards the energy transition this year and is pursuing a strategic objective of net-zero carbon emissions by 2050.

The supermajor recently announced plans to invest $5 billion annually in renewable energy, aiming to reach 50GW of capacity by 2030, up from just 2.5GW in 2019.

These objectives are underpinned by expected returns of 8% to 10% from its low-carbon electricity investments, while legacy investments in oil and gas are supposed to sustain overall returns at 12% to 14% through to 2030.

IRRs under scrutiny

Redburn’s modelling suggested that the first phase of Empire Wind should supply an overall rate of return (IRR) of 6.8%, rising to 9% if project financing were to cover 70% of capital expenditure.

The model — which assumes $3 billion of gross capital expenditure and a disclosed 25-year power purchasing agreement offering a strike price ranging from $99 per megawatt-hour to $159 per MWh — produces different results following Equinor’s sell-down.

In BP’s case, Redburn assumed that two-thirds of the $1.1 billion consideration relates to Empire Wind Phase 1, and factored in development capex to come up with an IRR of 3.4%, rising to an equity return of 6% if the project is 70% project-financed.

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