Octopus Renewables Infrastructure (ORIT) announced annual results to 31 December 2020, with the following financial highlights:
- “ORIT’s IPO took place on 10 December 2019 raising £350m
- 100% of the net proceeds from IPO are now committed
- NAV total return of 2.4% over the period since IPO
- Total shareholder return of 15.9% over the period since IPO
- Gross Asset Value (GAV) of £441 million as at 31 December 2020
- The company achieved its target dividend of 3.18p per share for the period and reconfirms its dividend target for the year to 31 December 2021 of 5p per share
- £150m revolving credit facility secured in November, to provide further financial flexibility
- Ongoing charges ratio of 1.15%”
Operational highlights were as follows:
- “Five acquisitions made during the period, with diversification across 24 assets, four countries, onshore wind and solar PV, and operational and construction assets
- Construction of the Ljungbyholm wind farm in Sweden on schedule
- 278 GWh produced by the operational assets during the period
- Once fully constructed, the portfolio has the potential to power the equivalent of 114,000 homes with clean energy
- 79,000 tonnes of carbon emissions avoided”
Market Outlook
The outlook statements provided by ORIT’s investment advisor are shown below:
COVID-19
“2020 has been dominated by the effects of the COVID-19 pandemic, and the disruption to lives and livelihoods continues. The impact on the Company however has been limited, mirroring the resilience of the renewable generation sector as a whole. For the operational assets in the UK and France, operations and maintenance teams were able to continue attending site even during lockdowns, owing to the essential nature of electricity generation. In Sweden, site works have been able to continue uninterrupted as no lockdown was imposed. The Investment Manager leveraged strong relationships with the turbine supplier and construction manager to ensure that, for the Ljungbyholm site, the impacts on global supply chains have not delayed turbine delivery schedules.
Whilst the reduction in economic activity led to reduced power demand and hence lower power prices, renewable generation showed itself to be less affected than other industries. Unlike other infrastructure sub-sectors output volumes were not reduced, as the zero-marginal cost nature of renewables meant that assets continued to generate despite the reduction in demand. The reduction in power prices was mitigated across the sector and within the Company’s portfolio by the high proportion of revenues contracted with governments or other entities whose ability to pay has not been affected by the crisis.
Investment activity has also continued. Some processes were delayed in the initial wave of European lockdowns, and remote working has slowed the pace of some transactions as well as at times presenting challenges during diligence, such as ability to attend site visits. However, the Investment Manager has still been able to source a significant volume of investment opportunities during the period and has fully committed the IPO proceeds as well as raising a revolving credit facility and arranging the re-financing of the French solar portfolio, which completed after the period end.”
Brexit
“Uncertainty surrounding Brexit persisted throughout the period. With the transition period in effect from 31 January 2020, there was limited effect on operations of the portfolio or on the Company’s investment activity during the period, however a lasting Brexit trade deal remained in doubt until late in the year. The Investment Manager implemented contingency planning including increasing stocks of critical spares in the UK where these are sourced from Europe, in case of delays or tariffs being imposed.
Whilst a Brexit trade deal was reached, the impacts of Brexit reach beyond movement of goods. The Investment Manager implemented a significant level of foreign exchange hedging on investments denominated in Euros to protect against foreign exchange volatility driven by Brexit uncertainty. Given continued uncertainty regarding the future of the UK’s double tax treaty network now that the UK is no longer covered by the EU Parent and Subsidiary Directive, investments have been structured to avoid holding companies in countries such as Germany where withholding tax on dividends may apply, for example by replacement of the German holding company acquired with the French solar assets as part of the refinancing of that portfolio.”
Asset Valuations
“The relative resilience of the renewables sector, combined with increasing appetite amongst investors for assets demonstrating strong impact and/or ESG credentials, has led to significant demand for renewable generation investments, particularly for operational assets with fixed revenues. This increasing demand has led to a downward trend in discount rates over the period, which has been reflected in the 0.5% reduction in the discount rate applied to UK solar assets held by the Company since their acquisition in March.
The reduction in discount rates offset the impact on market valuations of declining power prices across most power systems in the first half of the year, both in the short term as the impact of COVID-19 on power demand led to very low prices in Q2 in particular, and in longer term forecasts as advisors updated their assumptions on long term gas prices and levels of new renewable capacity.
The combination of these opposing factors has led to asset prices in the market remaining broadly stable or slightly increasing over the course of the year.”
Decarbonisation and the investment opportunity
“Whilst governments have been necessarily preoccupied with the immediate response to COVID-19, many have also recognised the opportunity for a ‘green-led recovery’, which should serve to add to the existing momentum behind decarbonisation and ‘net zero’ and increase the scale of the investment opportunity for the Company over the coming years. As well as new or extended support for renewable generation via Contract for Difference (“CfD”) or grid capacity auctions, a number of countries have announced ambitious targets for green hydrogen production, which will create significant increases in demand for renewable electricity. The EU targets for electrolyser capacity imply incremental demand on European power networks roughly equivalent to the current total power demand of the UK.
Announcements of note during the period included:
· UK announcement of CfD auctions to be held in 2021. Whilst the allocation to different technology pots is yet to be determined, the 12GW capacity announced suggests a significant allocation to ‘Pot 1’ which includes onshore wind and solar, given the expected capacity of offshore wind which will be available to bid into its new dedicated auction pot.
· Spanish Royal Decree confirming a series of auctions for renewable capacity expected to procure over 3GW of generation per annum between 2021 and 2025
· France increasing auction targets for renewable capacity to be procured in its energy roadmap up to 2028, finalised in April 2020
· EU Hydrogen Strategy targeting 6GW of renewable-powered hydrogen electrolysers by 2024 and 40GW by 2040
· German Hydrogen Strategy targeting 5GW of renewable hydrogen by 2030 with a further 5GW by 2035
· UK Energy White Paper targeting 5GW of hydrogen electrolyser capacity by 2030
· France allocating €30bn of its ‘Relaunch France’ coronavirus recovery package to ‘ecological transition’ including ensuring France is at the forefront of green hydrogen
Following the end of the period the UK government has in its 3 March 2021 Budget further demonstrated their commitment to supporting the energy transition. The Chancellor of the Exchequer announced the launch of a new UK Infrastructure Bank, and an amendment to the monetary policy remit for the Bank of England to include an objective to “transition to an environmentally sustainable and resilient net zero economy”.
As well as the significant opportunities in construction-stage assets arising from existing support schemes and auctions, the ever-increasing enthusiasm amongst governments and other institutions for supporting decarbonisation, alongside projects brought forward on a merchant basis or with support from corporate offtakers, is expected to drive a healthy supply of investment opportunities over the coming years. Attractive opportunities also remain amongst operational assets. Research from BNEF suggests significant fragmentation in solar ownership and scope for consolidation, with only 9% of utility scale capacity outside China held by the top ten owners.
Notwithstanding the strong supply of assets, investor demand is also increasing rapidly, driven by a number of factors, including ESG, and a desire for stable yielding assets, not correlated to equities and with resilience to economic demand shocks. As such, competition for assets has increased. The recently implemented change to the Investment Policy to permit up to 5% of GAV to be invested in Development Renewable Energy Assets is designed to give the Company and its investors the benefit of access to a proprietary pipeline of construction-ready investment opportunities.”
Investment pipeline
“During the period the Investment Manager has reviewed opportunities across a large number of geographies, including the UK, Ireland, France, Germany, the Netherlands, Spain, Portugal, Italy, Sweden, Finland and Poland, and continues to see significant deal flow across these and other jurisdictions. French, German and Irish projects typically benefit from long term, government backed, fixed price offtake agreements, whereas those in Spain and the Nordics are typically reliant on merchant power market revenues or shorter-term utility or corporate power purchase agreements (“PPA”). Operational UK projects typically have a mixture of government subsidies via the Renewable Obligation Certificate regime (“ROC”) and power market revenues. Whilst UK onshore wind and solar projects are expected to be able to secure CfD tariffs in forthcoming government auctions, there are also projects in the pipeline with corporate PPA or merchant revenue strategies.
The pipeline of investment opportunities remains healthy, and as at the date of this report the Investment Manager has secured exclusivity or submitted non-binding offers in respect of assets valued over £1bn.”
ORIT: Octopus Renewables Infrastructure reports inaugural annual results