GCIVox sector special: five companies making the right investments in renewable energy
In the 12 months to June 2023, the UK got its electricity from the following sources: 40% gas, 29.2% wind, 15.3% nuclear, 4.8% solar, and 5.2% biomass. Yes, even in cloudy Britain, solar accounted for 4.8% of total energy generation in the past year.
However, the country's true renewables potential lies in its massive wind resource. The UK's exposed position in the Northeast Atlantic makes it one of the best locations in the world for offshore wind. Combined with ever increasing efficiencies and the falling cost of wind turbines, wind has become the cheapest and most profitable source of electricity in the UK with wind power records being set regularly.
While environmental concerns and Net Zero goals have accelerated the transition to renewable electricity generation, as usual it is the economics that have been the primary driver of Britain's and most other countries' rapid transition to renewable generation in the past decade. As the price of solar panels continues to drop - down 85% in the last 10 years - deployment in Southern Europe has been expanding at record rates, especially as governments seek to diversify away from gas. Last year, the IEA confirmed that solar was the cheapest electricity source in history.
[source: Coro Energy]
Wind is not far behind. It is in fact now more affordable than gas (by pre-energy crisis prices) in countries that have been blessed with ample wind resources. In Northern Europe, wind turbines are being deployed in record numbers all across the North and Baltic seas with 116 GW of new capacity expected to be built between 2022-2026.
It should be noted that until energy grid storage systems are deployed at scale, renewables can never account for all electricity generation. However, while it is still a fledgling industry, grid storage has seen consistent growth as well, as the economics increasingly make sense for energy providers go in that direction amid plummeting prices for Li-Ion batteries, and the emergence of other new technologiess such as () vanadium flow batteries.
It has been clear to investors for a while now that renewable energy is not simply a tool to combat climate change, but rather a superior and cheaper technology compared to fossil fuel generation. While the big names in the industry are subject to constant coverage, we would like to bring your attention to some lesser known players that are making significant investments in renewables in the UK and abroad, and in our estimation are positioned to benefit materially from the steady growth of the renewables sector in the coming years.
[source: Coro Energy]
Prospex Energy
(), an investor in European gas and power projects, recently announced the development of Project Helios, a photovoltaic hybridisation solar project to be built adjacent to the company's El Romeral natural gas power plant in Spain. Prospex said Project Helios would increase output from El Romeral by up to 60% and was progressing "well ahead of the final investment decision", scheduled for consideration in June 2023.
Project Helios will occupy 20 hectares adjacent to the El Romeral power plant. The project will consist of a solar array with a maximum output of 5 MW. The existing grid connection has an 8.2 MW output allocated to El Romeral, which is currently utilising only 2.7 MW. Prospex says further grid capacity is available to accept increased output within the existing infrastructure.
The project is the result of Prospex's hybridisation plan, i.e. using resources and income from electricity generation from conventional natural gas production to reinvest in renewable energy generation from a photovoltaic plant. That is a prudent transition as electricity prices across Europe have begun to normalise. Solar deployments in southern Spain currently have an ROI of only 3-4 years, making this an ideal hedge for the company.
Project Helios will allow Prospex to increase its power export in the near term alongside a capacity increase expected from drilling new gas wells on the existing El Romeral concession. In March 2023, Prospex submitted a revision to its application to drill new wells on the concession, which is currently making its way through an Environmental Impact Assessment.
Prospex has already reaped the benefit of higher energy prices in Spain, with its El Romeral plant now running 24/7 following optimisation and automation upgrades last year. By adding 5 MW of additional capacity, Project Helios will materially increase the output of the power plant, availing of its existing connection to the Spanish national grid.
In its most recent full-year update, Prospex reported a total net book value of £16m, up 240% from £6.6m in FY21. Investors continue to cheer on the company, with its share price rising 348% in 2022, and currently up 83% in the past 12 months after some consolidation following normalisation of gas prices.
Savannah Energy
() is an Africa-focused energy company that is a strong believer in Africa's transition to renewable energy. While Savannah's portfolio is still primarily in the oil and gas sector, the company is aggressively diversifying into renewables, aiming to become one of the largest renewable energy development companies in Africa over the next 2 years. With a rapidly growing pipeline of solar, wind, and hydro power projects, Savannah aims to have 1 GW+ of renewables projects in motion by end of 2023 and 2 GW+ by end of 2024.
In March 2022, Savannah announced its inaugural renewable energy project, the 250 MW Parc Eolien de la Tarka wind farm project in Niger. This is targeted to increase the country's on-grid electricity supply by up to 40% with project sanction expected in 2024. Following the signing of two new renewable energy agreements in 2023, Savannah currently has up to 525 MW of hydroelectric, solar photovoltaic and wind projects in motion in Cameroon and Niger.
Savannah delivered a strong operational and financial performance in FY22, with results outperforming the guidance it set for the year. Total revenues grew by over 25% to US$290.4m with a resulting rise in adjusted EBITDA of 27% to US$222.4m. This makes FY22 the sixth consecutive year of total revenue growth for Savannah's Nigerian business, representing a CAGR of 21% since the business was acquired in 2017.
In that six years, Savannah has doubled its number of customers and increased the share of Nigeria's thermal power generation capacity that it supplies from 10% to 24%. Its Nigerian business continues to be underpinned by long-dated, take-or-pay contracts that have no linkage to commodity pricing and provide stable, predictable cashflows. At the end of 2022, Savannah had over US$3.8bn of future contracted revenues with contracts having average weighted remaining life of 15 years.
Savannah believes the African renewable energy market represents a significant opportunity of 242 GW by 2030, requiring an investment of over US$40bn in 2026-2030, and that its experience in hydrocarbons is directly transferable to this space.
Overall, Savannah's business is growing in all four countries where it operates. The growth trend of the past 4 years is expected to continue into FY24 and beyond, especially as the company's renewable portfolio begins to add value.
Windar Photonics
() is a developer of LiDAR equipment for wind turbines. In FY22, the company saw its revenues increase by 236% year-on-year to €1.9m, with €1.5m of that generated in the second half in an impressive post-Covid recovery. The overall EBITDA loss for the year was reduced to €0.8m in FY22 compared to a loss of €1.1m in FY21, and the company advanced toward an EBITDA breakeven in the second half with a loss of only €0.04m.
Gross profit in FY22 increased by 112% to €0.9m, corresponding to a gross margin of 51% despite substantial cost increases, although gross margin in FY21 was impacted by exceptional items. The company held cash balances at year-end of €1.4m, up from €0.04m a year ago after raising €2.4m through the issue of shares.
Windar's prior R&D yielded benefits in FY22 that boosted its financial performance. The company's combined WindEye and WindTimizer products provide a unique "plug and play" turbine integration solution, focused on increasing generation from existing installed wind turbines. These became more valuable as energy prices soared in 2022 and the industry redoubled efforts to move toward renewables. Further product development was related to Windar's WindTimizer products, which now also cover an analog interface for turbine integrations, expanding the potential total market for the plug-and-play solution within the retrofit market segment.
Due partially to these developments, Windar's order backlog increased by year-end to €4.3m, compared to €2.6m in FY21, and the company's product mix continues to be favourable compared to its order backlog at the start of FY22.
Post-period performance has maintained strong momentum. Windar entered FY23 with a robust order backlog of €4.3m scheduled for delivery in 2023, with momentum in orders rising during the half. At the start of H1 23, the company's production capacity was fully booked for deliveries in the period. As a result, Windar has focused on doubling its production capacity, to be implemented in mid-FY23, with a view to further double capacity in FY24.
Given its R&D investments, the easing supply chain environment, and current industry trends, we expect Windar to build on its revenue performance in FY22 and register further substantial revenue growth in FY23, with a modest forecast gross margin increase supported by ongoing cost reduction measures.
Coro Energy
() is a UK-based AIM-listed energy company with assets in Southeast Asia and Italy. Like Savannah Energy, Coro Energy's main portfolio currently lies in hydrocarbons, but the company is making heavy investments in renewables supported by its profitable natural gas assets, with the goal of supporting Southeast Asia's transition to a low-carbon economy.
GDP in the ASEAN region is forecast to double to US$20 trillion by 2040, resulting in ever increasing energy demand. To meet emissions targets and this new demand, significant investment in renewable energy and energy storage is planned in the region - up to US$500bn by 2040. Further investment in gas is also needed to replace coal, which emits twice as much CO2 as cleaner burning natural gas, and is still widely used in Southeast Asia. Coro Energy aims to invest in assets and businesses that support this transition.
To accomplish its goals, Coro is leveraging its 15%-owned Duyung PSC in offshore Indonesia, purchased in 2019. The Duyung PSC contains the Mako gas field, a 2C gas resource of 495 Bcf (gross, full field). It is one of the largest gas fields to be discovered in the prolific West Natuna basin, in close proximity to existing infrastructure and markets. Recent progress at the Duyung PSC has included an approved plan of development and a revised CPR, which have resulted in a significant uplift in the company's core NAV. The next step for Duyung PSC is a Gas Sales Agreement.
Meanwhile in Europe, Coro's Italian onshore operations outperformed in 2022 on the back of high energy prices, generating a profit of US$2.6m for the year for the small-cap company currently valued at US$7.4m. Coro ultimately decided to sell its Italian gas portfolio in order to support its investments in Southeast Asia, and a deal was agreed with Zodiac Energy to purchase the assets for €7.5m.
In Vietnam, Coro successfully completed its first rooftop solar project of 3MW last year following the signing of a 25-year Power Purchase Agreement which commenced delivering electricity in October 2022. A further 3.25MW potential acquisition was announced in November 2022. In the Philippines, planning and permitting activities are underway for both solar and wind projects - an application for a WESC (Wind Energy Service Contract) has been submitted and a LiDAR installed to collect data.
Gore Street Energy Storage Fund
The role of utility-scale energy storage in the transition to renewable energy generation should not be underestimated. Unlike traditional sources, solar and wind generation cannot be controlled, necessitating the inclusion of traditional sources in the energy mix to serve demand peaks. In other words, there is a ceiling to how much of our energy we can get from solar and wind before we would need batteries to store the energy and release it when needed.
In this context, it is worth discussing (), London's first listed energy storage fund. The fund invests in a diversified portfolio of utility-scale energy storage projects in Europe and the US, targeting an attractive dividend over the long term. On 9 March 2023, Gore Street Energy announced an interim dividend of 2p/share (currently trading at 100.4p) after its NAV was updated to an estimated 113.5p/share, up 2.16% half-on-half.
Previously, Gore Street Energy had reported a 45% increase in NAV from March to September 2022. During the same period, the fund raised £150m and reported a pipeline of opportunities totaling 1.5 GW. As of January 2023, the fund's portfolio included 26 projects with a total capacity of 973.2MW.
Some notable recent portfolio additions include a 75MW/150MWh energy storage project in Texas with a grid connection scheduled for H1 2024. Gore Street Energy estimated the project to have an unlevered IRR of 10-12%.
More recently in February 2023, Gore Street Energy acquired a 200MW/400MWh energy storage project in California from Avantus in a US$110m deal, representing the fund's largest US acquisition to date. The project will be connected to the CAISO grid, which provides electricity to 80% of California and a small part of Nevada. Grid connection is scheduled for H2 2024, benefiting from a 30% tax credit via the 2022 US Inflation Reduction Act.
Gore Street Energy Fund is diversified across 5 grids with 361.7 MW of projects set to become operational over the next 18 months. While the renewable revolution is well underway, utility-scale energy storage is still in its infancy, and Gore Street Energy is one of the early players well-positioned to benefit from its expansion.
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