Greencoat UK Wind (UKW) and NextEnergy Solar (NESF) have revealed the hit they face from the government’s controversial proposals to change the inflation link in renewable incentives, setting out the arguments they intend to use with officials.
UK Wind, the £2.1bn Schroders Greencoat listed fund, the largest in the renewables infrastructure sector, estimates the Department for Energy Security and Net Zero’s first option of switching from the RPI retail prices index to the CPI consumer prices index next March would knock 2.4p or 1.7% off its net asset value (NAV) per share.
The more threatening second option of freezing payments under the legacy renewable obligation certificate (ROC) regime until 2034 could wipe off 10.6p, or 7.5%, from NAV per share that stood at 140.7p at 30 September, it anticipated.
NextEnergy Solar, the £337m investment company offering a 14% yield, the highest of an ongoing fund in the sector, said the simple switch to CPI would cost it 2p or 2% of NAV per share and the effective backdating of CPI over 20 years would bite 8p or 9% off its portfolio.
They are the latest in a line of renewables funds to disclose the impact of the proposed reforms which saw already depressed share prices in the sector retreat further last week.
UK Wind detailed the arguments it would use in responding to the consultation on indexation changes for ROC and feed-in-tariff (FIT) incentives.
It said the “retrospective revision” of the second option would damage investor confidence and ultimately backfire on the government which believes the switch to CPI would save households around £3 a year.
The risk of future government intervention and changing of contracts would result in a slightly higher cost of capital that it said “would substantially increase the cost to consumers of new renewable energy projects and can reasonably be expected to outweigh the purported savings to consumers and so serve to increase, rather than decrease, bills.”
The company said it would remind officials that renewable energy, in particular onshore wind and ground-mounted solar, remained the cheapest and quickest ways to build new generation in the UK. This was important when the country faced the retirement of a quarter of its nuclear fleet and 20% of gas power plants in the next decade.
It also held out the prospect of renewables funds saving households an estimated £30 a year through the voluntary contract for difference discussed in the government’s recent review of electricity market arrangements.
Under this proposal, generators could agree to a fixed electricity price below the prevailing wholesale price. “Generators and investors would receive price certainty through a scheme that is voluntary, and consumers would enjoy a price lower than the current market level without volatility.” The estimated £30 saving would be substantially more than the proposed changes to indexation and would be “value neutral” to investors, it said as it pledged to continue buybacks of its cheap shares once the current £200m programme ended.
NextEnergy Solar said it would emphasise to the government that “implementing either proposal would prove detrimental for all stakeholders, including investors, energy consumers, HM Treasury and the UK economy more widely”.
Our view
James Carthew, head of investment company research at QuotedData said: “On Friday’s “In the Hot Seat” show, I provided some estimates by Investec of the impact of the government’s plan to change how renewables subsidies are calculated. For UKW, the estimate was a 1.8% hit to NAV for option 1 and 6.2% for option 2, the company’s estimate comes out at 1.7% and 7.3%. For NESF, the Investec estimate was -3.0% and -8.5%, and the company is forecasting -2% and -9%. Understandably, both companies will push back strongly against the proposals. We urge you to do the same and respond to the government’s consultation paper.”
