The listed large-scale solar investor New Energy Solar is facing a write down in the value of its US and Australian solar portfolio, blaming a fall in the projected wholesale electricity prices in both countries.
New Energy Solar owns 14 solar farms in the US, and two in Australia, including the 55.9MW Manildra solar farm in NSW, which sells power to EnergyAustralia under a 10-year power purchase agreement, and the 110.9MW Beryl solar farm, which sells power to the Sydney Metro project under a 15-year agreement.
The flagging of the write-downs of its portfolio value – of up to 10 per cent – presage problems for other investors in the wind and solar sector, adding to growing issues such as contract disputes, cost over-runs and grid delays. (Although New Energy Solar notes that the problems are much smaller than those affecting the fossil fuel industry).
It a statement to the ASX, New Energy Solar says that even though more than 96 per cent of its revenues in the next five years are protected by long term power purchase agreements, which have a guaranteed price, the fall in spot electricity prices and the ongoing impact of Covid-19 is reshaping views of the future market.
“Electricity generation, transmission, and distribution has not been significantly disrupted by the pandemic, but there has been an impact on supply and demand in electricity markets, particularly the industrial demand for energy commodities,” the company said.
“Consequently, current electricity “spot” prices have declined, by as much as 30% in California and New South Wales when compared with the same period last year, as have short and long-term electricity price forecasts.”
“Based on draft valuations incorporating updated long-term electricity price forecasts, NEW expects the impact on the value of its portfolio to be a reduction in the order of 8% to 10% below the value used in preparing the audited results for the financial year ended 31 December 2019,” the company added.
That equates to between 12c and 15c per stapled security. The company has already been forced to cut its dividends last month after component issues at the recently completed Beryl solar farm contributed to lower than expected revenues for the 2019-20 financial year.
The recent announcement of a sale of a 50 per cent stake in the Mount Signal 2 solar farm is being delayed by the discovery of a new “performance issue was identified which will require repair”. It says “if the sale proceeds,” it is now likely to be completed in the fourth quarter of 2020.
New Energy Solar highlighted that energy demand had been particularly hit in the industrial sector, with some manufacturers forced to cut activity in response to Covid-19. The company has sought to work with large energy users by offering fixed price power purchase agreements from the solar farms it owns, and so cuts to energy usage have had flow on effects for future revenues.
New Energy Solar operates as a type of ‘yieldco’ and is looking to build a $500 million portfolio of solar farms across Australia and Northern America, distributing income back to shareholders through a solid dividend yield.
New Energy Solar highlighted that the adjustments being made to the valuations of its solar investments were in line with other write downs being recorded by other solar power companies, and were just a fraction of those being recorded by oil and gas companies.
“These adjustments in long-term electricity price forecasts are not inconsistent with the reductions in long-term forecasts of 5-10% announced this year by other renewable power companies and with the recent reductions in long-term forecasts of oil and gas prices of 20-25% announced by major energy companies,” the company said.
Last year, the New Energy Solar board suggested that Australia was a challenging market for investors looking to buy into the Australian market as shift competition meant that profits were tight. Investors have instead looked to more lucrative markets, like the United States, where investors can achieve better returns and where New Energy Solar has amassed most of its solar portfolio.
The company expects to provide a more detailed assessment of the impacts when it announces its first half results for 2020 later in August. New Energy Solar shares had fallen by around 8 per cent on Wednesday morning, following the announcement.