Having dipped a toe in the water of solar
infrastructure with my purchase of Bluefield Solar and Foresight Solar earlier
this year, I decided to complete the set and add NextEnergy Solar Trust (NESF.L) to my
green portfolio (thanks to a nudge from Richard).
This is the largest of the three with assets of
£730m and the company has recently been elevated to the FTSE 250. Launched in 2014, the
trust operates a portfolio of solar 'farms' located mainly across the South of
England however in 2017, they acquired the Solis portfolio in Italy which
accounts for around 25% of total operations.
According to the latest annual report to end March
2019, the company performed well over the previous year with energy generated being 9% above budget mainly due to more sun than average. Total return for the year including dividends of
6.65p was 11.8% (FTSE All Share 8.8%). Over the 5 years since launch, the
average annualised return is 9.5% p.a.
Around 2/3rds of the existing portfolio benefits
from the usual government ROC subsidies. The
rest of the portfolio revenues are derived from purchase power agreements with
utility companies. These government subsidies are no longer available for new installations however the company has decided to move ahead with a new subsidy-free
5.5MW solar unit at Hall Farm in Leicestershire which is due to be completed
shortly. They will then start work on a second 50MW project in Bedfordshire
which will be the largest in the whole portfolio. Like Bluefield, they are
working on a strategy to extend the life of existing assets and negotiate lease
extensions and planning approvals which should help to increase net assets.
It will be interesting to see if this subsidy-free
strategy can generate comparable returns but it is quite likely due to the
falling costs and increased efficiency of the PV technology. One area which
could benefit these companies is storage - battery or otherwise - because it
will be a big advantage to store energy when abundant and sell it when there is
higher demand. I am guessing these companies will already be looking into this
area.
Dividends
The company pays quarterly dividends and the
target for the current year is 6.87p - an increase of 3.3% on last year. I have
purchased the shares at 120p in my Halifax ISA so the fwd yield is 5.7%. As can
be seen from the chart, the share price has been fairly stable over recent
years and I will be happy with any modest increase in addition to the
dividends.
The shares currently trade at a 10% premium to
underlying NAV of 110p which seems to be broadly in line with the others in
this sector.
Ongoing charges are 1.1% which seems on a par with
my other solar funds. There are a number of large institutional shareholders
including Prudential, Artemis, Investec, Baillie Gifford and Legal &
General
In just a few short years, investment in
renewables has moved from niche/risky to mainstream/solid as we transition
quickly from fossil fuels to clean energy. Solar and wind can now compete on
cost alone with natural gas and nuclear and this makes it easier for policy
makers and government to promote renewable energy as a larger part of the mix.
A recent analysis from Carbon Brief suggested almost
50% of our electricity will come from renewables by 2025. This includes wind,
biomass and hydro/wave as well as solar but it means that capacity for solar
should expand from currently 5% to approx. 10% over the coming few years.
Hopefully the likes of NextEnergy will secure a share of this growth.
The UK is to host the IPCC COP 26 gathering in
Glasgow next year and I expect to see further government policies to increase
renewables which will demonstrate leadership on climate and back up the recent
decision to move to net zero emissions by 2050.
Of course as with most investments, the sector is
not without risks. I suspect the main one would be a decline in the prices NESF
could secure for supply of electricity and the need to revise its long term assumptions which would have
a negative effect on NAV. There are also political considerations both here and
in Italy so these aspects have to be weighed in the balance.
This addition takes my 'green' allocation to over
50% and I am pleased to say that following the recent disposals of Vanguard
Lifestrategy and HSBC Global Strategy funds, my portfolio is now fossil-free and climate-friendly (more on this in a future post).
As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!