Latest Investment Manager's Report

Regulatory and Market Changes

There have been a number of regulatory developments over the second half of 2015 but it is important to note that the changes to the Renewables Obligation scheme have no impact on the Fund's existing operating assets or any of the projects under exclusivity. In relation to the immediate pipeline, the single project under development will qualify for 1.3 ROC banding upon its imminent completion through Scorpii Solar as noted on the investment summary on page 7.
 
In the Budget on 8 July 2015 changes were announced to the Climate Change Levy ("CCL”) with the removal of Levy Exemption Certificates ("LECs”) impacting both existing and new solar investments from 1 August 2015. This announcement led to a c. 3% reduction in future cash flows at project level.
It should be noted that the CCL announcement represented a change in tax policy, in that it removed an existing tax benefit for electricity sourced from renewable sources, rather than a subsidy change. The
impact of this change is fully reflected in the fund's NAV. In July 2015, the Government held consultations around solar PV growth and its provisions for banded support for new solar PV under
the Renewables Obligation Scheme ("RO Scheme”). Following the consultations, the Department of Energy and Climate Change ("DECC") announced in December it would close the RO Scheme to new solar PV of 5MW and below from 1 April 2016 onwards, subject to certain Grace Periods.
 
The decision by DECC was driven by the significant increase in the installed capacity of UK solar in recent years, expected to exceed 10GW by the end of March 2016. DECC had previously flagged that it would continue to monitor the deployment of new installations and the subsequent impact this would have on the Levy Control Framework ("LCF”). We believe this confirms DECC’s continued intention to
introduce changes that support the future sustainability of the LCF, without impacting the existing support mechanisms for renewable energy investments already in place.

Power Prices

UK power prices continued a downward trend throughout 2015, driven in part by lower gas prices due to stockpiles of liquefied gas and above average winter temperatures during Q1 and Q4 of 2015. As a result, the Company has revised downwards its forecast power prices by an average of c.13% over the period, with a greater revision being seen in the front end of the curve. This has led to a reduction in NAV. It should be noted that the impact of falling power prices on the portfolio is mitigated to a certain extent by the fact that a large proportion of portfolio revenues received are from subsidies and associated green benefits which are fixed and index-linked.

Ordinary Shares

UK Assets

Four plants in Kent, Somerset and Wiltshire are the principal assets of the Ordinary Shares fund and are all trading successfully and benefiting from index linked Feed-in Tariffs (FiTs) over 25 years. The favourable differential between the yield on new ROC based plants and the cost of the bond means that investors in Foresight Solar VCT’s Ordinary Shares fund are benefiting from higher dividends and greater capital appreciation as a result of this refinancing. This has enabled 130.0p per share to be restored as the target total return of the share class despite the negative impact of the Spanish assets (see below).
 
This was the first period that materially benefitted from the Capacity Agreements with the Turweston solar project. These agreements substantially take the form of the original agreements in place with
the four FiT assets. Turweston is a 16.45 MW site and benefits from 1.4 ROCs. Following completion of Turweston in December 2014, the Ordinary Share class became fully re-invested.
 
During the period under review production from the four FiT sites was approximately 4% lower than expectations due to lower levels of solar irradiation. The technical efficiency of the plants continued to exceed expectations. The performance of Turweston mirrored that of the FiT assets.

European Assets

Although the Foresight Solar VCT Ordinary Shares fund is predominantly comprised of UK solar assets, the Company also has exposure to several assets in both Italy and Spain accounting in aggregate for approximately 8% of the portfolio value. The Spanish and Italian assets achieved production levels slightly above expectations despite suffering from poor irradiation during the period. The Italian solar sector is now stabilising as it adapts to unfavourable regulatory changes and increased risk, driven by the government's desire to reduce the cost of renewable energy to domestic electricity consumers, who indirectly fund the subsidies.
 
Foresight has analysed the impact of these changes in legislation across the portfolio and recently completed refinancing of the Italian portfolio following the 31 December period end. This has led to a more efficient debt package which will result in a small increase in carrying value for the Italian portfolio and will facilitate ongoing distributions from the portfolio.
 
The Spanish asset owned by the Company has also been negatively impacted by changes in legislation, which have effectively placed a cap on the returns that Spanish solar assets can generate. This cap has been set at 7.4%. (Calculated as 300 basis points over the average of the 10 year Spanish Government Bond yield). The Ordinary Shares fund's exposure to the Company’s only Spanish asset is 3.0% of the
portfolio value. A provision of 50% is in place against the cost of the Spanish asset held by Foresight Solar VCT plc.
 
The Investment Manager is progressing compensation claims for the retrospective legislative changes in Italy and Spain but the outcome, quantum and timing of any compensation is currently difficult to redict

Exit

Despite the impact of the Italian and Spanish assets on the share class, alongside the continued decline in forecast prices in the wholesale power market, we continue to believe that the 130p target for the Ordinary Shares Fund is achievable. The Board will write separately to shareholders to set out the relevant timescales and exit opportunities from this share class

"C" Shares

Investments into Saron and New Kaine, sized at 6.3MW and 1.9MW respectively, were completed during 2015. The Fund has a third asset under exclusivity that, upon completion, will see all of the C share class fund fully deployed.
 
During the period under review production from the two UK sites was approximately 5% below expectations due to lower levels of irradiation. The technical efficiency of the plant continued to exceed expectations. It has taken longer to fully deploy the 'C' shares than expected partly due to the relatively small size of the 'C' share investee companies required to satisfy the VCT rules. Solar project sizes have been at 5MWs on the whole driven by the ROC subsidy requirements and associated project development activity which creates an investment size bigger than some of the £4m investee companies but not big enough to attract bank lenders to the projects. This delay has had an impact on returns as has the competiveness for projects generally. The current 'C' share NAV reflects these challenges generally including the impact of power prices as mentioned above.

US Assets

During the period the C Shares fund acquired an equity share of a 3.6MW portfolio located in Lancaster, California, a region which benefits from some of the highest levels of irradiance in the world. The EOSOL project has been operational since 2013 and to date has performed above investment base case projections.

Outlook

With deployment now almost complete across both share classes our focus has shifted to optimising the financial and technical performance of the sites. Our six-strong in-house technical team continue to develop initiatives to improve production levels and we continue to see benefits from a growing portfolio of solar assets through reduced overheads and improved commercial terms across a number of maintenance contracts. As we get closer to the 5 year anniversary of the Ordinary Shares fund, we will actively consider further refinancing opportunities in order to optimise value ahead of or in conjunction with any sale.
 

Jamie Richards
Head of Infrastructure
Foresight Group
29 February 2016


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