Foresight Solar Fund’s recent annual results showed a solid performance, with its portfolio performing 3.9% above budget due to strong irradiation as well as record asset availability. This comes following a quiet year for the company after 2018’s rush for acquisitions, with the company focused on asset optimisation.
Solar Power Portal sat down with Ricardo Piñeiro, head of UK Solar at Foresight Group, to discuss the rise of subsidy free solar, the return of the contracts for difference auction (CfD), and the effect of the Targeted Charging Review (TCR).
Can you see the recent announcement of the return of the CfD making a difference to solar?
In our view it always felt a bit arbitrary not to allow established technologies like onshore wind and solar to participate in the CfD auctions because we always believed we could be competitive. It's politically driven, clearly, so this announcement was encouraging.
I would say we are cautiously optimistic. I think it's important to understand the full terms of the future options, to understand if there's any specific sub limits for solar in terms of capacity that can be awarded etc. I think we need to obtain more information before we can understand the implications for the sector of the new CfD auction, but it is definitely encouraging.
For the Fund more specifically, it all depends on the level of returns. So I suspect these auctions will be competitive as the recent offshore wind auctions have been. The industry has become more competitive; I think restriction costs have continued to decrease. So I believe the CfD auction process can be competitive, however, the question is, will return from CfD solar be sufficient for Foresight Solar Limited (FSL) to be in the position to acquire, and that's the key question for us at the moment. But we don't have sufficient information to understand if this will result in a new potential source of acquisitions or not.
Again, it's definitely something we'll review with interest. And hopefully, this will allow for additional growth for the solar sector in the UK.
How active will Foresight be in targeting subsidy free developments going forward?
So Foresight [as a Group] have already been quite active in investing in solar subsidy free efforts in Spain and Portugal, but also Swedish wind, for example.
For our listed fund, it's something that we have been reviewing over the last 12 months, and it is definitely an area of interest. For the Fund, it is just about making sure we can find the right assets that on a risk adjusted return basis it makes sense for the company to invest in. But I would say it's really an area of focus for this year and then years to come.
Specifically in the UK, do you think there are many challenges that remain for subsidy free solar?
I think the key challenges we're seeing at the moment are mainly in terms of the balance between the irradiation profile we have in UK and the current price environment, with the forecasts decreasing significantly over the last few months. So that's creating additional challenges in terms of making sure we can make the returns work in a period where we are seeing a significant amount of negative analysis when it comes to short term power prices.
And then the other thing is that there have been small changes that haven't helped much anyway, for example, the targeted charging review outcome, meaning that we lose the embedded benefits revenue streams. So that could potentially delay the rollout of subsidy free solar in the UK. However, if there's one thing that this industry has already demonstrated over the years is that it's resilient. We went through the change from the feed-in-tariffs (FiT) to the reneable obligaitons (RO), from the RO to the CfD. And during that transition process, the industry continued to be able to decrease construction costs to become more efficient in how to deploy your assets and continue to grow. So in our view, the subsidy free market is a reality, and it will happen, it's just a matter of how quickly the industry will grow considering the challenging market that we're seeing at the moment in terms of power prices in the UK. But again, I think it's more of a delay of more significant rollouts rather than a limitation for the industry.
You touched on the TCR just now, which has effected your NAV over the last year, what else was acting on that?
In terms of the overall NAV, I think the key movements that caused that decrease in the NAV was the power price forecast changes. That was a key factor. If you look at our mass movement during the course of 2019, that's the key input that changed. The TCR has been something that we have been flagging to investors for more than a year. However, we took the decision not to change our valuation methodology until Ofgem confirmed that the changes have been implemented. So what we have been doing is to quantify and let investors know how much impact would be. When this was then confirmed in November last year, what we've done is remove all embedded benefits for our assets, and this had an impact of 1.6 pence pershare to our NAV. So it was not the biggest change in the NAV. I think the power price forecast change had a lot more impact, to the NAV than the TCR has.
We've removed all those embedded benefits from March next year, but again, this was expected. We don't expect this to be a surprise for investors considering that we've been flagging this now for more than a year.
Looking forward into 2020, what's next for Foresight?
It's an interesting market at the moment. I think there's a transition happening between the traditional subsidised markets and full merchant projects. From our perspective, the focus will continue to be to maximise our production, continue to optimise where possible our operations either legally through revised contracts or at technical level. I will continue to try to identify new areas for both.
We expect the UK market to - in terms of secondary markets - continue to be extremely competitive. So it might be too expensive from our perspective to buy existing asset in the secondary market, so we'll have a more opportunistic approach. If the right opportunity arises, we'll definitely look into it. One are with potential for growth will be subsidy free markets either in the UK or other European countries, or even, for example, the CfD could be an opportunity, and there are other European markets that still have subsidy mechanisms that could be of interest for the company.
It's just making sure that whatever opportunities we're reviewing deliver an attractive return profile for the company at a period where we have to be conscious that the market is expensive and interest rates are relatively low. So it's just a little bit expensive at the moment.