For the UK portfolio, we use multiple sources for UK power price forecasts. At the short end (up to three years), where PPAs exist we use the PPA prices that have been achieved. For periods where there are no PPAs in place, we use the short-term market forward prices. After year two we use a rolling blended average of three leading independent energy market consultants’ long-term central case projections. This approach allows mitigation of any delay in response from the three independent market forecasters used by the Company (“Consultants”) in publishing periodic (quarterly) or ad hoc updates following any significant market development.
For the Italian portfolio, a leading independent energy market consultant’s long-term projections are used to derive the power curve adopted in the valuation.
The power price forecasts used also include a ‘solar capture’ discount which reflects the difference between the prices available in the market in the daylight hours of operation of a solar asset versus the baseload prices included in the power price estimates. This solar capture discount is provided by the Consultants on the basis of a typical load profile of a solar asset and is reviewed as frequently as the baseload power price forecasts. The application of such a discount results in a lower long-term price being assumed for the energy generated by NESF’s portfolio.
Power Price Assumptions
Given the recent volatility in power prices and, at the time of calculating the NAV, the possibility of a price cap or windfall tax on renewable generation being implemented by the UK government, the Company discounted the forward power prices as supplied by its market consultants which it uses in the calculation of its NAV. The Company does not consider that the short-term power price forecasts are a reliable reflection of the power prices which are likely to be received for future generation, therefore where prices have not been fixed/hedged, forecast power prices are discounted to capture this underlying uncertainty and to reduce risk associated with future cash flows. The discounts outlined below were applied to the Company’s NAV analysis, leading to a reduction of 7.5p / share in the Company’s NAV.
|Time period||Discounts applied to unhedged portion of portfolio power prices|
|Q4 2022||No discount has been applied|
|Q1 2023||50% discount|
|FY 2023/24||35% discount|
|FY 2024/25||25% discount has been applied in Summer 2024 price, and 20% discount has been applied to Winter 2024 prices|
|FY 2025/26||10% discount|
|FY 2026/27||No discount has been applied|
Following the period end, the UK Government announced initial details of a windfall tax on low-carbon electricity generators in the UK, as part of its Autumn Statement on the 17 November 2022. Full details are expected to be clarified through the legislative process during December 2022. Under the temporary tax, which takes effect from 1 January 2023 and runs to 31 March 2028, low carbon generators will pay a surcharge of 45% on in-scope revenues exceeding £75/MWh. The tax will be calculated at group level for each accounting year, based on aggregated generation and revenues for that year, less an allowance of £10m.
Based on information available at the date of publication, the Company considers that the methodology used to derive the Company’s NAV as at 30 September 2022, and based on the assumptions outlined above, takes account of the potential impact of the windfall tax levy.
The windfall tax will not be applied to the Company’s government subsidised revenues which makes up c.50% of the Company’s total revenue profile, it will also not be applicable to revenues generated from energy storage assets, an area where the Company is strategically positioned with a secured pipeline to rapidly expand and diversify its future revenue sources.