Enterprise Investment Schemes (EIS) in the UK that own domestic rooftop PV systems are being snapped up by secondary market investors – a growing trend despite dramatic changes to the government’s feed-in tariff (FIT) programme.
Geographically dispersed portfolios of assets have been bundled together and purchased by pension funds and other institutional investors – largely as these offer a stable income stream. This maturing market has seen a steady increase in the number of solar panels installed following the introduction of the FIT in 2010.
As the EIS schemes have looked to divest their assets and realise value following a three-year qualifying period, buyers have been able to reassess their previous understanding of risks associated with rooftop solar such as fluctuating weather conditions, technological faults and lack of reliable income history.
Their improved risk profile is largely due to the availability of data and influential analytics, which can provide a more accurate estimation of future portfolio yield and therefore income forecasting. This has been used in several transactions pertaining to substantial domestic PV portfolios, effectively being a repeatable methodology that is used as a key input to determine the likely ‘market price’ for these systems.
The importance of formulating a robust basis for establishing the estimated future income is essential for entities both disposing of or acquiring these assets. The establishment of an agreed yield is critical for setting the price.
Further comfort on long term operational risks can be derived from a review of O&M/lifecycle fund arrangements (including incident call outs), findings from asset quality inspections of built systems and a sample review of portfolio documentation (the drawdown packs). Summary information can be initially prepared for the seller with the expectation that it becomes a key document provided to stimulate interest and inform prospective buyers about the assets.
Reliable and consistent data is where the real value lies – and paying attention to the smallest detail is key to establish the true value of a portfolio.
Recent transactions in this sector include:
- John Laing Environmental Assets (JLEN) acquired an operational solar portfolio with a capacity of 6.5MW in November 2015 for £18.8 million. The portfolio comprised of 796 systems (residential rooftop, commercial rooftop and commercial ground) with 25-year FIT contracts.
- Gravis Capital Partners added a portfolio of domestic solar panel installations in March 2015 valued at £59.73 million with a 21-year FIT.
- Oxford Capital Partners sold a 6.7 MWp portfolio of residential solar installations to Spring Capital Park in September 2015 with the portfolio comprising of 2,367 residential systems in South West England.
- Aviva Investors acquired an 11.36MW portfolio of residential solar PV in August 2014. The portfolio covers around 3,700 properties and is in addition to an existing purchase Aviva made of an 8.6MW portfolio in July 2013. Its total investment to date has been approximately £76 million.
These secondary market transactions are a good indicator that the types of risks associated with these portfolios are increasingly well understood by the investment community. They benefit from the innate risk management qualities of distributed portfolio assets while the FIT is government backed with annual RPI adjustment. Changes to the FIT mean that new installations of domestic PV will be much reduced, but there is evidence of existing installations being aggregated to makeup investment portfolios and secondary market activity is set to continue. If anything, the change in FIT seems to have increased secondary market interest in this now established asset type.
New installations are to be capped from March 2016 through to March 2019 in a bid to control renewable energy subsidies. Another blow for the solar market was the closing down of the Renewables Obligation (RO) for solar PVs operating at a capacity of 5MW and under – a move that did not sit well with the investor community, predominantly because solar is hailed as the cheapest low carbon energy source.
However, it seems this has not deterred investors. Certain commercial rooftop developments remain viable and considerable activity is evident it is rumoured that Banco Santander is eyeing rooftop solar investments despite changes to energy legislation, and the bank is currently exploring avenues to finance the sector.
Across the pond, the US solar market has seen a boom with figures indicating that the industry will grow by over 30%. This has been largely attributed to net metering, a billing mechanism that allows homeowners to generate their own electricity and feed any excess electricity back to the grid.
Unfortunately, the same system has not seen much success in the UK because of the complexities surrounding VAT. Nevertheless, discussions are being held around such schemes, primarily due to the increase in domestic rooftop solar PV systems.
It is a fair assumption that new rooftop solar will certainly be of continued interest over the next few years, especially if there are investors or companies out there willing to explore innovative ways to finance portfolios that benefit both buy-side and homeowners.
Meanwhile the demand for secondary market domestic roof top assets will continue as existing owners realise the demand from both institutional and private investors. For technical and other advisors operating in this space activity remains buoyant as portfolios are prepared for sale and the parties subsequently supported through the process.