The financial year of 2022 was the renewable investment company Foresight Solar Fund’s (FSFLs) “best year since IPO,” seeing inflation help mitigate the Electricity Generators Levy (EGL) and the company’s unaudited Net Asset Value experienced a slight increase.
Following the release of Foresight’s Q1 financial results for this year Solar Power Portal caught up with managing director at Foresight, Ross Driver, to discuss the company’s highlights from Q1 2023, geographical diversification and the UK Government’s net zero strategy.
Could you talk through the highlights of Foresight Solar Fund’s Q1 23 NAV results?
Foresight Solar carried the 2022 momentum into the first quarter of this year. Following what was our best year since IPO, the last three months have proved the resilience of our strategy and we’re comfortably on the way to deliver the targeted dividend cover for the year.
In the first three months of 2023, FSFL net asset value fell slightly to £757.5 million. The reduction was primarily driven by a drop in power price forecasts and by lower-than-expected electricity generation because of adverse weather, particularly in the UK.
It’s interesting to note that, although wholesale power prices to the end of the quarter were considerably below last summer’s highs, they were still 80% above the first quarter average of the last decade. This historically elevated price environment was favourable for us to continue forward-fixing electricity sales at attractive rates.
Price hedges across the UK portfolio averaged £197/MWh for the period, generating cash to comfortably underpin our 7.55p dividend target and substantially insulating FSFL from the fall in merchant power prices.
Lastly, recognising the discount to NAV at which the FSFL’s shares have traded – despite our strong performance and significant prospects – the Board announced a share buyback programme with an initial allocation of up to £10 million. The programme is an attractive opportunity to increase FSFL’s exposure to the existing portfolio at return rates higher than the current discount.
Why has Foresight chosen to pick up pace with its battery energy storage portfolio and target two-hour duration assets?
Firstly, we chose to do this as the revenues and the case for them is more supportive now. We have been running energy performance certificate (EPC) tenders over the last year and one of the things that's changed is the cost structure of the cells themselves – the pricing for two hours has become more attractive as they can see the markets going in that direction.
Two-hour duration is also more attractive for an arbitrage energy trading revenue set-up, and we’re seeing it now borne out in the revenue forecasts from the consultants as well.
For these reasons, we've been targeting sites that have the ability to charge for two hours. This has meant that it’s taken a little bit longer to get EPC contracts there, to move to this and check everything through. But we target closing them out soon, and there will be an uplift to returns – given that we acquired them on what would have been considered a one-hour basis – if we build them at two-hour capacity.
Looking at this year, is Foresight continuing to focus on geographical diversification?
Yes, we will. An example is the acquisition we made in March, when we secured a 467MWp pipeline of six development-stage solar projects in Spain. We’re regularly reviewing development-stage opportunities because we believe they offer a potentially attractive way to recycle capital with modest upfront payments.
We’ll go where we see the opportunities. There’s going to be a large amount of roll-out of solar and storage coming through new markets across Europe, and a number of gigawatt-level markets are being developed too.
I think with interest rates rising in Europe, it makes sense for us to develop internationally. We see Germany, Italy, Netherlands and Poland as interesting, as we'd like to be in markets where we feel we've got a good presence or good partners.
The UK is our home market, and we want to be doing more here, but the one bugbear is that the UK Government hasn’t done anything to necessarily make it easier for us to invest here rather than anywhere else. I think there was a trick missed there to be honest.
What was your reaction to the Government’s new net zero strategy?
The only real mention of net zero in the strategy was in regard to nuclear, so we got our hopes up but nothing much came out.
I think what we need is just stability and certainty. We had very little of that last year in the UK, and the effects were plain for all to see. There was a buoyant fundraising market in the first half of the year, with about £3 billion of capital raised from the wider renewables and infrastructure funds, but this collapsed in the second half and hasn't come back.
There were rebates for oil and gas companies to invest in their sectors but nothing for renewables. So, I think the biggest help would be certainty. At least there is still a lot of appetite if that can be fixed.
On the one hand, the renewable sector wasn't ever expecting these kinds of power prices so nobody's arguing about paying their fair share out of the receipts. I think it's more the fact that we've got hit with a windfall tax and we've got no rebates for investment, unlike oil and gas – that's what the frustration within the sector is generally about.
What impact do you anticipate the Electricity Generators Levy (EGL) to have on Foresight Solar?
In the third quarter of 2022, with the information we then had, we estimated the effects of the tax on our net asset value. Fortunately, that forecast wasn’t too far off what the government ultimately unveiled and it translates to a downside impact of about 8 pence per share.
Whilst there are still questions about the efficacy of the EGL, its effects on the FSFL’s valuation are priced in. Given the high proportion of contracted revenue, we have a strong degree of certainty on the additional tax we’ll need to pay over the next three years. After that period, power price forecasts trend toward the £75/MWh benchmark price, limiting the EGL’s impact.
Does the National Grid ESO’s shift to a more battery storage focus make any difference to what Foresight is considering in terms of battery energy storage projects?
It doesn’t change our strategy. We do see that it's become a very popular and attractive market, but I think that's also because we're still only at 2.5GW and we're probably going to need about 35GW of it to actually balance out.
There are interconnectors, but we're not as interconnected as the rest of Europe. So, I think batteries, for now, at least until there are longer duration options, are going to be the backbone of balancing the grid.
If you look at REMA, it was very quiet about things like battery storage and it's interesting to see what REMA will do on this front. For example, if you were to split the generator market from the gas price market, where do batteries sit in that? I think REMA is a very worthwhile piece of work because we need to make the grid and the whole market fit for the 2030s with the big push towards renewables. But we also need to consider how batteries fit into this mix.
The current framework in the UK for battery storage remains arguably the best and clearest in Europe. If you look at countries like Spain, which should be a very obvious market for battery storage, it's still waiting to get the regulation and the regulatory clarity around how those products are going to fit in. Spain is a market we’re watching very keenly.