The National Grid has forecast its lowest-ever summer peak electricity demand on its transmission grid of 37.5GW due to the amount of solar PV generation (see above). The system operator said UK capacity in the sector rose to 4.4 gigawatts in February from 2.4 gigawatts in the same month of 2014. Levels are expected to reach 5.5 gigawatts by February 2016.
In the UK we’ve been taking exposure to wind and solar assets already connected to the grid. The opportunities we’ve found are inflation-linked and have cash-flows around 60% derived from government subsidies. Generally, we’re getting an internal rate of return of 7-9% with a dividend yield of 6-7%.
In our view, there’s good legal and political protection from retroactive changes to prices, which means it’s difficult for the government to reduce subsidies for existing assets. One of Newton’s themes – “State Intervention” – is both a benefit and a risk here, but in the UK we feel fairly confident. The government is keen to build out its renewables infrastructure given EU commitments, so to retroactively change subsidies would dis-incentivise future private sector investment.
Paul Flood – Newton, a BNY Mellon company