VH Global Sustainable Energy Opportunities is buying a portfolio of seven solar and two wind assets across Europe. The transaction will be completed in two phases. Once fully operational, the portfolio will have a total installed capacity of 248.4MW and will be expected to generate 489,900 MWh per year.
The first phase of the investment is the acquisition of a portfolio of five assets with a generation capacity of 59.8MW and project rights of four ready-to-build solar PV assets in Spain with a generation capacity of 188.6MW. The price for this is €53m. This gets the company:
- a 3.7MW operational solar PV plant in Spain;
- a 6MW operational onshore wind asset in Sweden;
- a 20MW solar PV plant under construction in Portugal;
- a 10.3MW solar PV plant under construction in Spain; and
- a 19.8MW ready-to-build onshore wind asset in Spain
The second phase of the investment consists of funding the construction of 188.6MW of ready-to-build solar PV assets, for a total amount of €45m in the fourth quarter of this year. The construction is to be fully funded by a European strategic fund (“equity co-investor”) and project finance debt.
Once the second phase is completed, GSEO will be the largest owner of the portfolio with an effective ownership of 43.5%, with the balance split between the equity co-investor and joint venture partners, Spanish Power S.L., a developer and owner of renewable projects in Iberia and Sweden.
The money to fund this is being diverted from money previously earmarked for UK flexible power and carbon capture and reuse projects. This brings similar returns but faster. The company has set out the rationale for making the switch which we reproduce below. [I can definitely see the benefit of boosting the revenue account. However, as part of this, the company has had to try to justify using this cash for new investments rather than buybacks, at a time when its discount is over 35% and has been way too wide for over a year now. There is a range of factors at work but a key one has been the cost disclosure issue that has put professional investors off buying these companies. If that is not resolved very soon, I can see calls for prioritising cash returns over new investments growing.]
Rationale for transaction
The aim of this programme is to continue to support the global energy transition by identifying market dislocations and providing investors with a differentiated return. The three markets targeted in this programme are widely acknowledged to be at the front-end of significant electricity demand in the coming years due to increased electrification of each country, the implementation of decarbonisation targets and the build out of new energy intensive sectors including data centres and AI technology’s significant demand for power.
In Spain, the nationally mandated need to ensure quick penetration of solar and wind generation, the accelerated decommissioning of baseload generation sources such as nuclear power, coupled with a limited interconnection with continental Europe, ensures conditions are aligning to allow investors to secure differentiated returns through pursuing private commercial revenue contracts.
Portugal’s decarbonisation strategy centres around electrification and the expansion of renewables as part of the electricity generation mix. As part of its National Energy and Climate Plan, the country is targeting 80% of electricity generation to come from renewables by 2030 and aims to reach a 47% share of renewables in final energy consumption and 20% share of renewables for transportation.
Sweden is a global leader in decarbonisation and has targets to cut greenhouse gas emissions by 59% by 2030 compared with 2005 and has 100% renewables in its energy mix. A major growth in power demand in northern Sweden is expected, primarily driven by an agenda to decarbonise energy intensive industries by locating these close to cheap sources of renewable energy, such as AI-driven data centres, EV battery manufacturers, and green steel which are expected to increase demand by 19TWh of clean energy.
Construction element of the programme
The mandate of the company is to enable the energy transition, which implies a need to build new assets alongside investment in yielding operating assets. As construction assets in this programme reach completion, shareholders are expected to benefit from further NAV growth and dividend coverage in excess of payout targets.
The first phase of the investment benefits from having two operational projects as well as two short-cycle construction solar PV assets in Spain and Portugal which are expected to be completed Q4 2024. The construction of the Spanish wind asset is expected to begin in Q4 2024, with completion in Q4 2025. The second phase assets are expected to be completed in Q4 2025. Therefore, all the assets are expected to be fully operational by the end of 2025.
To mitigate the construction risk of this programme, in addition to entering into engineering, procurement and construction (EPC) contracts with reputable companies on a lumpsum turnkey arrangement, strong protections have been put in place. Key measures include clawback mechanisms against the joint venture partner in case of delays and costs overruns.
Target return & leverage
Once fully constructed, the portfolio’s levered returns are expected to be in line with the Fund’s target total NAV return. The investment manager has identified a series of value creation initiatives which could be implemented on this programme following its construction, enabling it to target returns in the mid-teens.
Funding to implement further asset value creation initiatives is expected to come from cash generated by ongoing operations across the GSEO portfolio.
Due to the strategic nature of these assets, competitively-priced debt is available at the construction phase. As such, as part of the second phase deployment there would be 20-year debt on the programme with a loan-to-value of approximately 50%. This would bring the total leverage of the company to approximately 15%. GSEO should continue to be the lowest-levered fund within its peer group.
Capital allocation
The board and the investment manager monitor the market regularly to determine the relative merits of deployment of capital into new or previously announced projects. Following a comparative analysis, it was concluded that reallocating the “committed, not deployed” funds from the second UK gas-fired power plant with CCR to this new solar & wind programme provides shareholders with greater benefits, namely:
- It offers shareholders access to yield sooner as part of the investment is already operational, providing yield from day one and a shorter construction period. In contrast, the second UK project would taken at least 18-24 months to become fully operational.
- It offers a higher target return from day one, together with greater potential for value creation.
- It has a lower construction risk profile by having a shorter expected construction period (6-18 months currently, compared to 18-24 months with the UK project).
- It further diversifies the portfolio, both technologically and geographically.
The board has reviewed the capital allocation options available currently, especially in view of the discount the company’s shares are currently trading at. The board always considers the interests of all shareholders. It has decided that the benefits of this investment, at this time, are considerable. It offers important geographical diversification into established energy markets in Europe, the addition of another technology, more individual assets thus reducing concentration risk, the opportunity for future return growth through hybridisation, immediate income and income growth over the next year and thereafter. The company is committed to a progressive dividend and this investment is important in being able to deliver on this.
The board does not rule out further increases to the buyback programme, continuing to have flexibility to do so utilising surplus capital that is unaffected by funding of this investment. The company also remains focussed on adding value to its existing investments and to providing sustainable returns for investors.
GSEO : VH Global buys European solar and wind portfolio