How concerned should UK retail investors be about the solar sector?

 
 
By Ricardo PiƱeiro, Director, Foresight
 
Recent news from the government is leading investors to believe that the UK renewables industry is entering a dark period of transition.  Proposed policy changes have introduced uncertainty around a sector traditionally - and correctly - associated with attractive and predictable returns for investors.

Planned reforms include, most notably, a consultation on an early end to solar subsidies under the Renewables Obligation (RO) regime for sub 5MW solar farms, a consultation on cutting solar feed-in tariffs, postponing the latest Contracts for Difference auction, and, from a tax perspective, the removal of the Climate Change Levy  for the renewables sector.  

As the market struggles to gauge the real impact of these changes, investor sentiment is, we believe misguidedly, in decline.   

This loss of confidence is premature. Despite shifts in the landscape, UK listed Foresight Solar Fund Ltd (FSFL) continues to identify attractive assets. It has visibility on a minimum of 300MW for sale in coming months, and is on target to deliver our stated dividend for the year ended 31 December 2015, having previously and consistently delivered returns in line with our dividend policy.

FSFL is one of the largest investors in operational, large-scale solar power plants in the UK and currently operates a 16  asset portfolio with a net installed capcity of 348MW.  15 of the 16 assets are fully operational and received Renewable Obligation Certificate ("ROC") accreditation ahead of the 31 March 2015 ?cliff edge? deadline.

While we do recognise a need for greater clarity on subsidies, and more visibility on the government's longer term plans - both would no doubt go some way in reassuring the investment community - FSFL remains confident about the future, and invites investors to take a closer look at the current situation.

We expect the government's decision to consult on the early closure of ROCs to new Solar PV projects under 5MW to have little effect on projects already in the pipeline. Opportunities still abound, including a large number of sub-5MW projects currently being built in order to qualify for the end of an RO deadline in April 2016.

In the coming months, we also expect many of the larger solar projects built in the early part of 2015 to qualify for the current RO regime to be sold on the vibrant secondary market. And, while we continue to identify and pursue assets that meet our target internal rates of return at project level of between 7% and 8%, we also intend to improve operational efficiencies of plants in our existing portfolio to generate better returns.   

It is not only FSFL that continues to deliver. Foresight Group has more than £250 million of VCT, EIS and BPR funds invested in the sector. Earlier this year, the Group offered investors in its first Solar EIS Fund the opportunity to exit their investment at a tax-free return of £1.33 from a net cash investment of 70p after tax relief, exceeding the original target return and delivering a tax free uplift for investors of c 90% in just 4 years representing an IRR of 21%.

Solar remains an exciting opportunity for investors seeking attractive returns. We believe FSFL continues to operate a low risk strategy to the sector by taking no development or blind pool risk, whilst providing investors with a sustainable and increasing dividend together with the potential for capital growth over the long-term. Investors need to look past the political noise, and take a closer look at the sector?s strong immediate prospects.