Electricity transmission lines, Poole, UK. Photo by Alex Liivet, via Flickr, licensed under Creative Commons 1.0 Universal (CC0 1.0).
River otters are highly mobile and can travel over 40 kilometres a day, but if food is scarce and you need to travel long distances to find a tasty morsel, then expending that energy has a greater cost in terms of spent energy. It’s a little bit like that with energy prices at the moment, with gas prices up over the conflict in Ukraine and oil prices rising, we’re paying more to get the same.
So I wanted to explore what increases in electricity prices mean for renewable energy yieldcos. If you follow this blog, you’ll know that I’ve previously analysed the financials of UK-listed renewable companies and keep an eye on the Gravis Clean Energy Income Fund. You’d think that renewable energy yieldcos might be correlated with the electricity price…well, that’s the hypothesis I’m going to explore today.
Ideally, I would like to compare the share price of several UK yieldcos to wholesale electricity prices. However, it’s easier said than done – power markets, like the one run by Nord Pool, don’t appear to make their daily data readily accessible. So instead I found some statistics from UK regulator Ofgem. It provides information on wholesale energy prices and, in particular, publishes figures for electricity prices based on day ahead baseload contracts, calculated on a monthly average.
As you can see from the chart, prices dropped to their lowest in 10 years during the start of the Covid pandemic in March 2020, as demand plummeted while many people remained at home. Since then it has spiked and reached the highest level in a decade.
Before making a comparison between wholesale electricity prices and renewable energy yieldcos, it is useful to take a look at the share prices. I’m going to focus here on 6 companies that have all been operating for several years:
- FSFL – Foresight Solar Fund
- BSIF – Bluefield Solar Income Fund
- JLEN – John Laing Environmental Assets
- NESF – NextEnergy Solar Fund
- TRIG – Renewables Infrastructure Group
- UKW – Greencoat UK Wind
Some of these, like UKW, are primarily focused on wind power, others like FSFL, operate solar PV assets, while companies such as JLEN run a mixed portfolio.
The charts illustrate that certain companies, notably BSIF, TRIG and UKW, have seen an uptick in their stock prices since 2018. Others have cratered – NESF hasn’t seen such weakness in the share price since 2016, while FSFL continued deteriorating following the Covid Crash.
Now, let’s combine the two factors together, stock price and electricity price, to see whether there is any correlation between the two. I’ve created scatter plots for each yieldco and categorised them according to year. Colouring the points by year doesn’t really mean much, but gives us a snapshot for a given year, and also allows us to look in a more granular way whether there is any clear relationship between the two variables on a shorter timescale. The line plotted on the charts is a straightforward line of best fit for a linear model. I have also split the periods up for each company since the spike in electricity prices from 2020 onwards contrasted so significantly to historical prices, that had been much more stable in range.
It seems quite clear from these scatter plots that there is no straightforward linear relationship between the share prices of these yieldcos and the wholesale electricity prices. For periods, some of the yieldcos appear to have positive correlation, and at other times a negative correlation – overall, there’s no coherence to the plots. Furthermore, if we ignore the colour-coded categorisation by year, it looks random.
So what’s going on? We’ve overlooked something that plays a crucial role for these yieldcos, and that’s fixed price agreements they strike with electricity providers. These provide stability for yieldcos that need to pay out a regular dividend and service debt, but means that they can’t always maximise the benefit from rising electricity prices in the short-term.
Hedging with fixed prices
Picking apart the amount of fixed price contracts in place for each yieldco takes a little more investigation. Sometimes described as, “power price hedging strategy”, or “price confidence level”, other times referred to as “exposure to merchant power prices”. I’ve done my best to comb through recent reports and updates to get a handle on where each yieldco stands.
In the annual report published in March 2022, the company said 26% of generation was left unhedged in 2021, therefore benefitting from rising power prices. Additionally it said it had secured contracted revenues representing 78% for 2022.
Bluefield said it had a price confidence level of 100% to June 2022 and around 92% to December 2022, according to an interim report covering the six months to December 2021.
Various different numbers are presented for this yieldco in slightly different ways. In a March research note by Marten & Co (commissioned by JLEN), power prices for the wind portfolio were said to be 100% fixed through to March 2022. Note here that wind represents about 29% of JLEN’s portfolio.
Elsewhere, the half-year report for the end of 2021 said fixed price agreements were in place for 100% of the solar portfolio through to March 2023. And, the report also states that as of September 2021, 100% of the electricity generating portfolio was subject to a fixed price contract, with 90% for the summer season of 2022. Remember, JLEN also produces biomethane, so is also exposed to the increase in gas prices.
This company said they had locked in approximately 80% of expected generation for 2023 through fixed price agreements, according to an update published this month. Digging into their interim results reveals their fixed price hedging as follows:
- 2021/22 96%
- 2022/23 75%
- 2023/24 59%
- 2024/25 18%
Around 30% of TRIG’s revenues for 2022 weren’t fixed and exposed to short term electricity markets, according to a market update published in March.
Fixed cash flows were said to contribute 39% of revenues in 2022, according to the company’s annual report. Leaving 61% exposed to merchant power prices.
Although it’s a little confusing with lots of different semantics about locking in fixed prices, I think we’ve arrived at a reasonable sketch of where these yieldcos stand on hedging power prices. In order of exposure to short term electricity prices, based on figures for 2022:
- UKW – 61%
- TRIG – 30%
- FSFL – 22%
- NESF – 20%
- JLEN – 10%
- BSIF – 0% – 8%
For both UKW and TRIG the exposure to electricity price fluctuations appears to translate into the share price. Both these companies have seen a strong increase in stock prices over the last few years. This can also be seen in the scatter plots for the 2020-2022 periods. Although looking back over previous years, does show some peculiarities, both companies show negative correlations for 2017 and 2019 when increasing power prices wasn’t reflected in the share price.
The situation with FSFL is more curious, with a line of best fit for 2022 that is flat, and as previously noted, a share price that has continued deteriorating. Despite leaving 26% of electricity generation unhedged in 2021, FSFL saw no increase in share price, as electricity prices surged. The share price has somewhat rebounded in recent months, increasing some 15% since the start of year. FSFL also has international assets, outside of the UK, accounting for about one quarter of generation, and has started to invest in battery storage assets, which is likely to change the dynamic around exposure to power prices. And it generated 5% less electricity than expected over 2021, according to an update published in February.
My analysis isn’t intended to say that electricity prices don’t have any bearing on yieldco share prices, but the nature of contracted fixed prices means that some yieldcos don’t reflect the electricity price volatility in their short-term share price movement.
The power price strategies that they employ are key, both in reducing the risk from a fall in electricity prices, but also benefitting from any uplift. I’m guessing that these strategies are revised on an ongoing basis, when the companies have more of a clear view on their expected generation and forecasts for future power prices. In their reports, many of these companies have discussed their ability to avoid the crash in power prices during the height of the Covid pandemic, while later on being able to lock in higher fixed prices as the price per megawatt hour increased.
It is obvious that UKW and TRIG are the two companies most exposed to short-term electricity markets. So if you think electricity prices will remain elevated in the future, then, those are the yieldcos to plump for. That’s not to say the others aren’t a good investment, only that the directionality of share prices is less correlated to daily market moves and more dependent on the hedging agreements secured, becoming more of a question about the quality of management in place, their negotiating skills, as well as their ability to forecast and predict how the market will evolve over a period of years. It would be nice to have more visibility on the agreements in place, but most companies only provide broad strokes.
So what other factors are play as the market determines yieldco share prices? Weather is probably likely to have an impact, I’m guessing, as well as the financial performance of these yieldcos. It might be interesting to see whether the amount of sunshine and wind is correlated to the share price of those operating wind turbines and solar assets…maybe in a future post.