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QD view – JLEN Environmental Assets – a world of possibilities!

This week, I had the opportunity to join a capital markets day for JLEN Environmental Assets (JLEN). The event, which was well attended, provided us with a useful update on JLEN’s strategy (which was welcome in light of current market conditions).

We also had a presentation from Sten Falkum (CEO of Hima Seafood) and Heidi Kyvik (Ceo of Eyvi) on Rjukan, JLEN’s new investment in controlled environment aquaculture; a presentation from Tim Galbraith (associate director of Evermore Energy) on the Cramlington Biomass plant; and a presentation from Adrienj d’Ormesson (an investment manager of Foresight Group) on the opportunities the manager expects to see in the hydrogen market.

The event was filmed, so expect to see it soon in the videos section of JLEN’s website (click here), but I thought it would be useful to provide our readers with an update as there are interesting read-throughs for anyone interested in the renewables space and sustainable infrastructure more generally.

I would also recommend that, if you haven’t seen it already, readers take a look at our recently published note on JLEN (click here to read), which takes a look at the fund’s recent investments in a grid-scale battery storage project in Aberdeenshire (expected to commence commercial operations in the fourth quarter of 2024); a 2.1 hectare UK glasshouse construction project drawing low-carbon heat and power from an existing anaerobic digestion plant owned by JLEN; and the aforementioned aquaculture project, which is currently under-development in Norway.

JLEN – managed by Foresight

It’s been just over three years since the team managing JLEN, led by Chris Tanner and Chris Holmes, moved across to Foresight along with the fund. With the benefit of hindsight, this has been a very good move for JLEN as Foresight has much greater resources and experience to bring to bear in both sourcing new investments for the portfolio and in managing the assets. The aquaculture investment, for example, is a co-investment alongside another Foresight managed fund and it is difficult to see how JLEN would have got access to this kind of investment under its previous management arrangements.

Since moving across, JLEN has extended its sectoral reach achieving greater portfolio diversification. It now has exposure to 10 different technologies (wind, solar, anaerobic digestion, waste management, water treatment, bioenergy, low carbon transport, battery storage, controlled environment and hydro-electricity) and the managers are looking for more.

Attractive yield with a high level of inflation linkage

Crucially, as a vehicle designed to provide a decent level of income, it is targeting a dividend of 7.14p per share for the year ending 31 March 2023, which is a 5.9% yield on the current share price. JLEN’s strategy has always been to target projects generating predictable, wholly or partially index-linked cash flows, which seems prescient today – 62% of lifetime portfolio revenues are linked to RPI and the managers would generally expect to see decent uplifts elsewhere.

Of course, a key question on investors’ minds is the outlook for the discount rates used in the valuation of assets in funds such as JLEN, given an environment of steeply rising inflation and expanding gilt yields, and what impact there might be on asset values as a result. The managers acknowledge that there is a risk that discount rates could rise at the margin (pushing down the NAV) but observe that there is still a decent premium over prevailing interest rates (the overall weighted average discount rate of the portfolio was 7.3% at 31 March 2022); discount rates across the sector remained elevated and did not fall in lockstep with interest rates as they fell, so would not be expected to rise in lockstep either; and recent market transactions continue to support the view that attractive infrastructure assets remain in high demand with institutional investors. For example, we have previously commented that around 90% of global infrastructure is in private hands and that private markets appear to be valuing these assets more highly than listed markets. Inevitably, there is an arbitrage opportunity between the two (by taking listed assets private), which should provide some support to current market prices.

Price caps and windfall taxes

Another key question for investors is what impact government the government’s proposed price caps will have on the renewable energy sector. This is a key reason why some of these funds have moved to trading at discounts and JLEN’s managers concede that this is still a significant unknown. In common with its European peers, the UK government had little choice but to put in place price caps to protect the end consumer, but this has come at a great cost for a government that had already significantly expanded its deficit to protect the economy during COVID. One hangover from the mini-budget is that bond yields remain elevated and the government needs to work harder to balance its books, which means recouping some of the costs of the latest intervention. However, it has a difficult balance to strike.

Renewable generators, with their largely fixed cost base, have been a great beneficiary of elevated power prices and so are a natural target, be it for a windfall tax or price cap. Currently, the government plans to recoup some of the cost of this by capping prices for non-fossil fuel generators, but as yet has not quantified the level. JLEN’s managers think that, should a revenue cap transpire, this will be intended to capture ROC assets and so JLEN, with its diversified portfolio will see limited impact on the generation portion. However, the managers also think that if a windfall tax ultimately prevails, this will target electricity generation more broadly and around half of its generation assets would be affected.

ESG – still in focus

In some parts of the market, there has been talk of ESG objectives being diluted as the world tries to adjust to higher energy costs and an oncoming recession, but not so with JLEN. This remains a core of focus and it is keen to drive forward its reporting in this area, so expect to see more. It is now an Article 9 Fund under the EU’s SFDR.

Hima Rjukan – A fishy business!

Hima Rjukan is a project to develop a land-based aquaculture facility in the Rjukan Valley in Norway for Hima Seafoods. It will be the world’s largest land-based trout farm and will use RAS technology that recirculates pure, clean mountain water. Hima developed the first land-based aquaculture facility in Norway in 1980 and also built the world’s current largest facility, at Leroy, standing at 18,000sqm (Rjukan will be 27,000sqm). JLEN’s total investment is expected to be up to about £40m over the next three to four years.

The project is a play on population growth. The world’s population is estimated to increase from 7.6bn today to 9.8bn by 2050 and, if we are to feed all of these people, it is estimated that food production will need to increase 70-80%. Significant technological development has made land-based trout one of the most if not the most efficient source of meat-based protein. To give some colour, the feed conversion ratio for Hima Trout is 1.1-1.15. That is, for every 1.1-1.15kg of feed, you get 1kg of usable protein. In comparison, 1kg of chicken requires 1.7-2.0kg of feed, 1kg of pork requires 2.7-5.0kg of feed and beef requires 6.0-10.0kg of feed.

However, it’s not just feed that Hima Trout scores highly on. It is also far and away the best for Freshwater consumption and emissions. Hima Trout generates 4.1kg of CO2 per kg of edible product, whereas beef generates 60kg per kg of edible product.

Readers may be surprised that trout, a fresh-water-dwelling animal, comes out best for freshwater consumption. This reflects the efficiency of the RAS system, which recycles 99.7% of water at all times. The intake and outtakes (just 03% of the water used) is fully treated using UV so as to prevent contamination and RAS technology is built on simple components and so is very scalable, irrespective of the size of fish.

The Rjukan facility, which is now fully funded, has production capacity of 8,000 tonnes per year with first harvest expected in early 2025. It is expected to have a breakeven price of NOK46 per kg, which is lower than sea-based aquaculture facilities, allowing for healthy margins and steady profitability over the longer-term. A clear advantage of the RAS system is that it is closed and so doesn’t have the cost of fighting the various viruses and pathogens that sea-based facilities are exposed to. It also avoids the problem that feed and other matter escapes into the surrounding water, which has been a significant criticism of sea-based farms. In contrast, the Rjukan facility is able to collect the residues and sell this as a high-quality fertiliser, giving it a much better environmental footprint.

In addition to its superior environmental credentials, the controlled environment is expected to yield a better quality product that will attract premium pricing. It is also a 100% escape free facility, has no transport of live animals and will use almost 100% renewable energy. Eyvi’s RAS system also has the lowest energy consumption in the market.

Cramlington Biomass – Hot stuff!

Cramlington Biomass is a relatively new member of JLEN’s portfolio, having been acquired out of administration in June last year. The project, which began operations in 2018, is a combined heat and power plant that can generate up to 26MW of electrical power (enough to power around 50,000 homes) and 6MW of heat. In acquiring the project out of administration, JLEN was able to reset various agreements to its benefit. The project is fuelled by woody-biomass on a long-term supply agreement and is designed to avoid CO2 emissions of 56,000 tonnes per annum when compared to a gas fired plant.

The feedstock has been developed to maximise the use of inferior wood products such as forestry residues, arboricultural arisings (this might be the waste wood left after tree surgery) and IEDX exempt grade A wood pallets. All of these are sustainably harvested or collected and fuel delivered to the plant is generally sourced within a 100 mile radius. Once consumed, the resultant wet ash can be repurposed for land spreading as an alternative to lime. This is a more sustainable and cost-effective alternative that also avoids the ash going to landfill.

The key focus since acquisition has been to gain a full understanding of the availability losses on the asset and to develop cost effective solutions to eliminate these. As part of this process, a full review of fuel supply and procurement was undertaken, which has led to the development of a long-term fuel strategy form the plant. This has led to a number of upgrades at the plant as well as process improvements. The fuel supply agreement was completely renegotiated and Cramlington now sources all of its fuel through a single supplier, which has led to a reduction in the overall fuel cost. A new fuel preparation and processing area has also been constructed, along with an improved access road, while improvements have also been made to the onsite logging yard. As a result of the improvements, the average electrical output has remained much more stable, with the highest average electrical output from the plant being achieved in Q3 2021 and Q2 2022 (the plant is now running much closer to its capacity). Furthermore, the plant exported its greatest number of MW’s to the grid in August 2022.

Hydrogen is the future

Hydrogen technologies offer opportunities for the decarbonisation for sectors that are otherwise hard to adjust to net zero because of the high levels of energy required. It also offers practical benefits to the energy system as a whole. Recognising this, the team at Foresight have been doing a lot of work on the hydrogen market and its potential uses over the last six months. Hydrogen is the most abundant element in the universe and has a high specific energy per unit of mass (around 2.6x that or petrol, for example), making it suitable for storing and then releasing vast amounts of energy.

Traditionally, hydrogen has found uses in refining and primary chemicals, but it has applications in various energy intensive applications including, iron & steel production, light duty vehicles, heavy duty vehicles, rail transport, shipping, aviation, power generation and in heating (these applications are at various stages of readiness).

As we have discussed previously, there are different types of hydrogen – grey, blue and green – the classification depending on its means of production. Green is the most environmentally friendly source (renewable energy is used to power electrolysis to break water into its constituents – hydrogen and oxygen) and this is where Foresight is focusing its efforts.

Foresight say that electrification and decarbonisation are driving the hydrogen market shift. They identify the key drivers for the hydrogen market as being: the electricity price (by 2050, more than 50% of hydrogen supply will be from electrolysis and so the electricity price for a low levelised cost of production will be key); renewable energy (85% of hydrogen supply will be low carbon – blue or green – by 2050, so the ongoing roll out of renewables is important); and transport and export will be crucial (cost competitive energy sources will be key and the ability to transport hydrogen will be a key enabler in shifting production away from demand based renewable energy access). However, demand for hydrogen is expected to triple by 2050, which will create an array of investment opportunities.

Foresight sees two main approaches to hydrogen production. The first involves producing hydrogen in developed industrial hubs with existing local demand, which allows the hydrogen to be dispatched locally, with zero or minimal transport costs, making the hydrogen economic to produce. This would likely lead to the decarbonisation of existing industrial processes. The second is to produce hydrogen in low cost energy hubs with export capabilities. These would likely be in low-cost and remote land areas with access to deep-sea ports or pipelines that benefit from very strong renewable energy resource. Hydrogen is transformed into transportable derivatives (for example, green ammonia, e-methanol and other e-fuels) that can be shipped globally and remain competitive due to the low energy costs. An example of this is a Japanese investment in Australia in an operation to produce green ammonia, which can be used as a fuel to replace coal capacity in Japan.

Foresight’s thesis is that investment success will be achieved for projects that can reduce the levelised cost of hydrogen, and they are in discussions with dozens of developers globally to identify projects that fit JLEN’s investment thesis. If the cost of hydrogen can be reduced, this will lead to greater adoption, allowing hydrogen to have a greater impact on decarbonisation.

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