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NextEnergy Solar Fund leads the way with low-risk yield and solar know-how

Snapshot

  • Owns 90 solar genrating assets in the UK and Italy
  • The investment trust currently has the highest yield in the solar sector
  • Consistently outperforms business plans
NextEnergy Solar Fund -

Quick facts: NextEnergy Solar Fund

Price: 102.4 GBX

LSE:NESF
Market: LSE
Market Cap: £598.97 m
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In an investment environment where many dividends are on shaky ground and bond yields are very low, solar funds provide a very attractive source of income.

NextEnergy Solar Fund Ltd (LON:NESF) says it is the lowest-risk solar fund on the market, has the highest dividend yield and is the only one to have successfully built subsidy-free UK solar plants.

The fund currently has a diverse portfolio of 755 megawatts (MW) of power from 90 assets, mostly in the UK but with eight in Italy.

NESF’s average remaining life for its solar assets is 26.6 years, compared to a closest rival’s being 25.3 years.

Individual projects vary from 1.7MW up to 50 MW, and are mostly in the South-West and Midlands, where there is a more reasonable cost for the sort of low-grade agricultural or industrial land it needs.

The investment adviser to the fund is NextEnergy Capital (NEC), which focuses exclusively on the solar sector with its 190-strong team, and has a proven record in sourcing, acquiring and managing operating solar assets, with its WiseEnergy operating asset management division, which has provided services to more than 1,500 utility-scale solar power plants. 

 

Why solar?

Over and above its power to mitigate CO2 versus fossil fuels, solar energy has several advantages over other renewable power sources.  

For one, the irradiation provided by the sun is much more consistent and predictable over the medium and long term than highly variable wind, hydro and other sources.

Solar panels offer lower risk as they are literally more stable, sitting low to the ground with no complex moving parts, and so with lower repair and monitoring needs to tall, spinning wind turbines or hydro turbines.

Commercial photovoltaic projects can be of varying size, from a warehouse roof upwards, and can be deployed very quickly, with construction of a 100 MW solar plant taking six to nine months versus the complex engineering of a wind farm might take one to two years.

And, as NESF has been the only one to prove so far in the UK, solar energy no longer needs subsidies to be produce sufficient returns.

 

What makes NESF stand out?

The ability to produce the UK’s first subsidy free solar plant is part of what makes NESF’s proposition so special, says NextEnergy Capital chief executive officer Michael Bonte-Friedheim.

“If you look at our demonstrable track record over the six years since IPO, we have outperformed our own acquisition business plans in terms of electricity generated and costs, and have outperformed our peers technically and operationally.

“I put that down to our exclusive focus on solar, our acquisition strategy and our operational asset management expertise.”

The fund’s investment manager, NEC, is “a unique market participant in the solar sector because we understand and are very active across the entire value chain: we develop projects, we invest in solar projects via NESF and other funds, and our asset management business, WiseEnergy, takes on all the asset management tasks around these assets for us in the UK and on behalf of third-party asset owners.”

It seems obvious, but a lot comes down to “buying the right assets and not buying the wrong assets”. 

All the solar funds in the sector acquire solar plants built by third parties – but, Bonte-Friedheim stresses, if you don’t know the technology well enough you cannot know if it has been built as well as it could have.

For example, the configuration of the wiring is hugely important, he says, including quality of the panels and photovoltaic cells, the way the panels are wired together and the buried wires in the right protective tubing, all of which can lead to a notable loss of efficiency if not done to the best specifications.  

NESF’s debt structure also makes the fund lower risk than its peers, Bonte-Friedheim stresses, with the £200mln of preference shares issued this year to repay outstanding debt, “meaning a lower cash cost for the company and provides us with some protection against ongoing lower power prices compared to traditional debt financing used by our peers”.

 

How's it doing?

The portfolio of 90 operating solar assets was attributed a net asset value of £579mln at the end of March, 2020, or 99p per share.

The share price, which along with the rest of the sector was trading at a fat premium in recent year, has dropped to just a few pennies above the NAV per share.

Yet, the shares trade for a historic dividend yield of above 6.5%, based on the past year’s dividend of 6.87p per ordinary share.

For the current year, Bonte-Friedheim and his team are targeting a total payout of 7.05p per share, payable quarterly.

 

Inflection points

  • Third UK subsidy-free plant to be commissioned by the end of the year
  • Fourth and other subsidy-free plants in the pipeline as NESF targets building out 150 MW of new assets by the end of 2021, up from 55 MW currently
  • Shareholders have just approved a proposal for the 15% limit on non-UK assets to be lifted to 30%
  • NESF currently has energy storage batteries co-located with two of its solar plants and the investment manager believes that some time in the future batteries will be able to generate incremental returns and/or risk mitigation for solar generators.

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NextEnergy Solar Fund on track with first subsidy-free plant with more in...

NextEnergy Solar's (LON:NESF) Michael Bonte-Friedheim introduces the fund to Proactive London and talks through its UK and Italian assets. As at the end of March 2019 there were 87 operating solar assets within the portfolio with a total capacity installed of 691MW. He says over the...

on 3/7/19

5 min read