Just noticed this in Greenfield’s December factsheet published on 31 Jan: “Blended portfolio discount rate reduced from 7.9% to 7.5% (unlevered)”.

So the discount rates have bunched up a bit further and Greenfield is no longer so much of an outlier it would seem.

See: https://www.greencoat-ukwind.com/~/media/Files/G/GreenCoat-UKWind/documents/NAV/NAV%20Factsheet%20Dec%202019.pdf

Thanks for the link to the report – enjoyed reading that.

In summary, then: it is about decreasing subsidies v cost of plant v price of electricity (plus amendments to discount rate, yield, inflation…)

In respect of electricity prices:

– short to medium term, looks okay (re: NextEnergy Solar 76% of revenue i.e power with ROCs/FITs to March 2021; Bluefield has 64% of revenue covered if power price falls to zero; though on p. 40 “ Nonetheless, power prices remain a key factor in NAV appraisal. In Bluefield Solar’s case, it assumes a ca.£32m each way impact on revenues arising from 10% changes in power prices”

UK gas and Day Ahead prices are very volatile at the moment –the author doesn’t really touch on this (not sure of the relevance of the bar chart on p. 21 – a very cursory mention of ‘gas input driver’ which appears to take in gas usage).

– He talks about the need for them arranging attractive PPAs…well, yes, but what is a PPA? It is a LT bi-lateral agreement based on market/commodity prices (and likely to be % discount)

– I did smile when reading, on p. 21, ‘power price projections to 2040’: “it was compiled by two leading independent energy market consultants”. This phase is in almost all the companies’ annual reports. This ‘group think’ card seems to have been well played (as it is/was in their interest)

– Of course, there should be a premium on these types of investments in a low-interest rate environment – just what level, and should sentiment turn re perceived impact of lower electricity prices becoming more widespread / mainstream news

– Of course, lower power prices is leading to a cut in the NAVs which leads to even higher premiums

However, I do wonder if what will actually cause a drop in the share price will be if one of these companies makes a cut to their dividend?

Am now wondering if I should be in Greenfield UK Wind rather than Bluefield Solar.

I would be interested to hear your views, and up-coming commentary (on all matters IT – my SIPP and ISA are solely IT based).

My final 2p’s worth:

“it would be no surprise if a bidder were to emerge – and especially one seeking to acquire a portfolio of valuable renewable energy assets” – Shell?

I came across a research note from Hardman on Twitter which has a comparison of the discount rates used.
https://www.hardmanandco.com/research/corporate-research/uk-renewable-energy-infrastructure-funds-a-20-20-vision/

According to the table on page 39, the main 6 funds vary between 7.0% and 8.1% at the moment, although 5 are between 7.0% and 7.5% and Greencoat UK Wind is somewhat of an outlier at 8.1%.

A snippet from the report:

I wasn’t planning to write up BSIF’s interims, but given recent events I might do a quick piece on them. Looks like they have set the date as Tue 25 Feb.

Sorry for the delay in replying.

Yes, saw that previously, and looked mainly at the next page (p.7), where they illustrate their ‘Revenue Generation Process’.

Key figures here are the subsidies’ (ROC/FIT) rate v the PPA (£80.20/MWh v £52.00/MWh).

The PPA price is worth 39% of the total price. Assuming for the moment that the PPA price = wholesale market price (it isn’t) and then amend it by the 10% sensitivity analysis then this leads to a 4% decline the headline rate (i.e. £127.60/MWh v stated £137.60/MWh). If we change the PPA to say current 2023 baseload prices (as far out as ICE goes) and use £40.00/MWh then this leads to a 9% drop in revenue.

(The PPA price will be made up of commodity + Embedded Benefits (EB); the main EB is BSUoS and Ofgem announced just before Christmas that this will be scrapped from April 2021. This is calculated each half hour but worth approx £2.50/MWh. This has caused considerable anguish in the renewable generation community)

What to make of this? I couldn’t get much further, as then I read about companies ‘changing their discount rate’ (on CityWire, I think) and we can see this would also have a meaningful impact. The largest influence is generation (or yield) and this naturally is quite varied, month to month, year to year.

As the era of subsidy free renewables is here (or nearly) then clearly it becomes a balance between falling cost of new plant and equipment v. lower power prices. I don’t suppose anyone really knows the investment return answer to this (given so many variables). Interesting that players are looking to expand into Spain and Italy, though.

As I say, looking forward to results / analyst commentary later this month (incl your write up).

It will be interesting to see how these recent price moves end up affecting the PPA chart that BSIF publishes. That’s always been considerably less volatile than the wholesale price and seems to have been more or less flat from June 2014 to June 2018 on the latest verion they published (page 6 of http://www.bluefieldsif.com/media/148208/BSIF-Annual-Results-Presentation-2019.pdf)

Enjoyed the article (as usual – great blog).

Re:” I’ll be watching much closer after this week’s events.”

You can get UK OTC Day Ahead power prices here:
https://www.nordpoolgroup.com/Market-data1/#/n2ex/table

You can get UK forward curve / futures prices here:
https://www.theice.com/about

Need to register (free), and then look for ‘UK Base Electricity Futures (Gregorian) – UK Grid’.

For example, current rolling 12-m baseload is £42.00/MWh; this time last year, £60/MWh (recent highs £70/MWh)

Basically, everything down on the back of the UK/Europe being awash with gas (e.g. storage in Germany is still 90% – unprecedented for time of year) and recent months of high renewable output.

Low gas prices / high wind generation = lower power prices (remember The Economist’s front page from a few years ago? Something like: Renewable Energy’s Dirty Little Secret).

Then there is the impact of the Balancing Mechanism (under whelming for small generators so far) and the recently re-instated Capacity Market (yesterday’s T-3 auction closed at £6.44/kW (way below currently years’ around £20/kW)

Re: “Of course, the fact that these figures [NAV] are updated infrequently can help us. We’re less tempted to react to every tiny bit of news”

Is this working in the favour of the investor or the investment manager, though?

As I said, enjoyed your summary, agree with your observations, and also hold
BSIF, GRID and JLEN. Am wondering about TRIG and UKW – might wait on see results on 18th and 27th Feb first.