Greencoat UK Wind (#UKW) Make £ whilst the wind blows.

Introduction

●        Greencoat  UK Wind  (#UKW) own 49 wind farms across the UK, both Onshore & Offshore. Details of which is laid out in the table below (FY24 Report). Throughout this blog post, I'll continuously refer back to this table.

●        This is a really important table, and once you understand the data in this table, you understand the business, the opportunity & risks.

●        UKW can be thought of in different segments, with different risks attached to them.

1.       The utilisation of the Wind Farm, which can be impacted by several factors, including the age of the asset, how windy it is, whether the asset is either offshore or onshore & which country is the farm based).

2.       Power Prices & Assumptions. UKW has a mixture of commercial agreements. Some are fixed prices and others would be flexible, depending on the market conditions.

3.       The Investment Manager - how they reward themselves and what their strategy is for UKW.

 

1 - Utilisation

How to Calculate

To calcuate how often the wind farm was running in FY24 (which I'll refer to its 'Capacity Factor' you need to know the following.

●        Net MW – Total capacity of the Wind farm, adjusted to UKW's ownership stake.

●        Net GWh -  Total Energy generated by the Wind farm  (in FY24), adjusted to  UKW's ownership stake.

●        8760 (the number of hours in a year).

The calucation is as follows

Capacity Factor=  Net GWh/ (Net MW x 8760)

For example, with Andershaw.

Net MW = 35

Hours in Year = 8760

Net GWh = 97.8, or 97,800.

Capacity Factor=  97800 / (35 x 8760) = 0.3189 or 31.89%

 

 

Avg. Capacity Factors

(taken from ChatGBT)

In the UK, the average  capacity factor for wind farms is typically around:

●        Onshore wind farms: about 25–30%

●        Offshore wind farms: about 40–50%, with newer offshore projects sometimes reaching 50%+.

Capacity factor means the actual output over a period compared to the theoretical maximum if it ran at full power 100% of the time. There are a couple of main issues affecting Capacity Factor;

●        Infrastructure Development: To mitigate curtailment and improve utilisation rates, significant investments are being made in grid enhancements and energy storage solutions. However, these developments are ongoing and may take several years to fully address current limitations (Source: Green energy gets switched off as power systems fail to keep up)

●        Offshore wind is higher because winds are stronger and more consistent at sea.

●        Ideal wind speeds vary from year-to-year (wind farm can't function if its actually too windy as well....)

This is all very subjective though.

●        Historical Performance (2018–2022) for Offshore Wind farms: The average capacity factor for fixed-bottom offshore wind farms ranged between 37.4% and 45.7% (Source: Written questions and answers - Written questions, answers and statements - UK Parliament)

●        Projected Performance for 2025: Newer offshore wind farms are expected to achieve capacity factors of approximately 61%, attributed to advancements in turbine technology and optimal site selection (Source: Written questions and answers - Written questions, answers and statements - UK Parliament)

●         Onshore wind farms in the UK typically have capacity factors ranging from 25% to 30%.​

●        Regional Variations: Areas like Scotland benefit from higher average wind speeds, resulting in capacity factors that can exceed 35%, enhancing the efficiency of onshore installations in these regions (Source: ‘This is the future’: why turbines that float could be the new wave in British wind power | Energy industry | The Guardian )

 

UKW: Capacity Factors

Below is UKW Capacity Factors over the years. 

Overall

Onshore

Offshore

Summary (Using Chat GBT figures)

If we think Onshore Windfarm is 25-30%, then UKW Capacity is at the higher end of the estimates.

If we think Offshore Windfarms if 40-50%, then UKW Capacity is at the lower end of the estimates.

 

Wind

Obviously windfarms are influenced by having ideal wind conditions. Taken from FY24 Report;

 

UKW Performance vs Avg. Wind Speed (2013 to 2024)

 

Summary

●        The Average wind speeds over last 10 years hasn't helped the business and to me, the trend doesn't look like its moving in UKW direction.

(Source = Energy Trends: UK weather - GOV.UK)

●        Another concern is that the performance gap (Wind speed vs UKW wind generation) seems to be growing, from a net positive 2013-2015 to performing below avg. wind speed for the last 8 years.

Asset Age

As technology improves, wind farms can become more efficient.

Under 5 Years

●        It's interesting that Assets under 5 years old aren't performing against the assets between 5 to 10 years. Reviewing the data further, all assets under 5 years are based in Scotland & are onshore.

●        When reviewing the Assets under 5 years, the worst 2 performing assets are the ones UKW said in FY24 they sold 40% each to an investor for NAV. Clearly  that is good to review and sell out of the under-performing assets, but these were two were constructed by UKW (not bought from another developer). They were also sold at construction cost only, which means this might have been a poorly thought through strategy?

 

Between 5 to 10 Years

 

 

Over 10 Years

●        Assets over 10 years perform worse in overall capacity factor, which is understandable. There is a worry of if UKW balance sheet depreciation actually reflects the declining performance of the asset.

 

Thoughts

●        As you've seen on the wind chart above, UKW has gone from performing ahead of market vs average wind speeds to performing below expectations. Indeed, their recent Q1 FY25 states Net cash generation of £118m despite Q1 generation 18% below budget (reflecting low wind resource).

 

2 - Power Prices

The Market

●        Clearly Power Prices has a material impact to UKW and its cash generation. UKW has long term power price forecasts, provided by a 'leading market consultant'

●        Wind farms usually get lower prices than regular (baseload) power because wind isn’t constant and can flood the market when it’s windy, pushing prices down. So, UKW apply a 10-20% discount to the predicted prices to reflect this (FY24 the discount was 11%).

●        During FY24, the portfolio captured an average price of £64.64/MWh versus an average N2EX index price of £72.45/MWh (11 per cent discount).

●        Here is a useful link to find more about N2EX index price. Nord Pool | N2EX Day-ahead prices. You'll see below, the lines in red indicate UK prices and as you'll see, they are trending ahead of 2024. 

N2EX Day-Ahead Prices (2024)

N2EX Day-Ahead Prices (2025)

 

●        UKW also go on to say that, above the N2EX -10/20% , a further discount is applied to reflect the terms of each Power Purchase Agreement (PPA). The terms for each windfarm and their PPA can be found on the 1st table in my introduction.

●        Taken from FY24 Report;

Review of Electricity Market Arrangements (REMA)

(FY24 Report)

The Company notes that in December, the Government published an Autumn Update on REMA. Policy choices are expected to be made by mid-2025, and the central issue is whether to adopt either a zonal electricity market design, or to re-design the current national market

●        In my opinion, this is a big risk for UKW. This review, which is due in the next couple of months is trying to address some key challenges with the UKs current electricity market. Its looking to address how to keep the grid stable at times of low or high wind out-put & to protect consumers, especially after 2021/2022 energy price crisis.

●        REMA is looking at a few options, Zonal Pricing & Reforming National Pricing. Both options could have a downside risk to UKW. If Zonal Pricing is introduced, UKW state themselves that they achieve less than the market due to them only operating in windy conditions, where electricity generation is high. If Zonal pricing is introduced, I believe this N2EX discount will be significantly higher.

●        FY24 Report - Modelling the lower long term power price would equate to approximately a 21 pence reduction in NAV per share  (up from 17 reduction stated in their FY23 Report).

Thoughts

●        I believe that UKW has a big risk in 2025 from REMA and the potential impact this might have to UKW. This might be a storm in a teacup, but its hard to accurately predict long-term power prices until this review has been completed. This forecast has the potentially to materially drag down the NAV of UKW.

●        The upside is that once the market review is complete, this should allow investors to move forward with certainty and should bring the share price closer in-line with NAV due to a significant risk now known.

3 - Debt

Overview

●        Taken from FY22 Report for gearing, limit 40% debt vs Gross Asset Value (GAV).

●        UKW is at its limit in terms of debt. Indeed, the FY Q1 report, they have actually now gone above the 40% limit, at 40.2%.

●        The business stated aims from FY24 report is to reduce their Revolving Credit Facility (FY24 £270M at a rate of 6.35%).

●        Breakdown of debt over the last 3 years is as follows;

Debt	FY22	FY23	FY24
Amount	1780	2375	2244
% of GAV	31	38	39.7
Revolving Credit Facility	200	400	270
Company Term Debt	900	1390	1400
Hornsea	680	585	509

Mark-to-Market

Taken from FY24 Report ; As part of the debt refinancing, the Company migrated its interest rate swaps to Holdco.

●        As a result, the Company  is no longer required to cash collateralise against any unfavourable positions of its interest rates swaps, which  was beneficial to the Company’s use of capital.

●        A further consequence is that the Group must now reflect the fair value of its interest rate swaps in its Aggregate Group Debt for its NAV calculation as well as within its loans and borrowings on its Consolidated Statement of Financial Position

●        This supports UK aim to "£1 billion of capital to allocate over the next five years" (FY24).

Company Term Debt

●        The rates are increasing and it appears the strategy is to look in majority of debt longer term.

●        The actual business isn't too exposed to interest rate changes in the short-term with earliest maturity date of debt being in Nov-26. Weighted avg. cost of debt is 4.68% (FY23 4.59%). No Debt due in current requirements, which should mean big increase in cashflow.

Hornsea Debt

●        Hornsea Debt fixed at 2.6% until 2036.

 

Thoughts

●        Debt seems on the surface a potential concern, with the company at its limit at 40% of debt vs GAV. However, when drilling down further, it eases my worries. The no debt maturing this year, it free's up significant cashflow foy FY25 for the business, along with Mark-to-Market, the business has more capital to pay down debt over medium term.

●        £500M is limited to Hornsea1, at 2.6% until 2036.

 

4 - Investment Manager

 The Company’s aim is to provide investors with an annual dividend that increases in line with RPI inflation while preserving the capital value of its investment portfolio in the long term on a real basis through reinvestment of excess cash flow

Dividend

UKW pays a once a quarter dividend that is linked with RPI inflation. The Dividend Cover will reflect how much they are paying out vs how much they have to either invest in future wind farms or pay down the debt. The Dividend cover stated aim for the business is 1.7 times from FY22 report, but they also forecast in future that dividend cover will be 1.9 times.

 

●        You can see during the energy price crises, how much additional revenue this was bringing into the business, and that 2024 was back down to what they were achieving in 2019/2020

 

Management Fee

Taken from FY24 Report;

We also recently announced that we have agreed a change in the way that we remunerate the Investment Manager. Given that the shares have traded at a discount for some time now, we believed that it was appropriate that the Investment Management fee was linked to the value of the shares managed, so we changed the basis of remuneration to the lower of market capitalisation and NAV. This change took effect at the beginning of 2025. In addition to fostering even stronger alignment with the Company’s shareholders, the revision in fee structure demonstrates sector leadership and strong corporate governance.

●        Clearly this aligns well to shareholders so a thumbs up from me.

 

5- Thoughts

●        Whilst investors accept that a number of factors are outside of the companies control, and therefore will want to only buy the shares when they're at a discount to NAV. UK government policy, Power Prices & declining wind all will have a big impact of the long-term prospects of UKW.

●        The Dividend for now seems secure and the business feel that they can generate a lot of free cash to aid the business, either grow the NAV through buy-backs, or reduce Debt-to-GAV ratio. The upcoming Electricity Market Arrangements review, scheduled for mid-2025 will give the market future direction to help bring the share price and NAV closer together. However, this review has the potential to seriously impact UKW ability to generate cash, especially if zonal pricing is introduced.

●        The chart below is the most alarming in my opinion, showing the business's performance vs wind generation is consistently below expectations for the last 8 years. Has the business acquired too many assets during peak years, which is now proving a drag as we leave the UK-price crises of 2022 in the mirror?

●        Has the business acquired many assets which might need to be valued down because of declining UK wind speeds witnesses in recent years vs the 20 year average? Or are we reading too much in the UKs short-term wind decline.

 

Q1 2025 NAV Report

●        FY25 Q1 was 18% below budget / Net cash generation of £118m

●        FY24 Q1 was 15% below budget / Net Cash generation of £127M

●        UK wind speeds for Q1 FY25 vs Q1 FY24 is a 13.89% decrease YoY & a 17.34% decrease vs 20 year average.

●        Net Cash generation was only down 7% due to some PPAs being under fixed-price agreements.

Useful Resources

UK Wind Speeds

●        Energy Trends: UK weather - GOV.UK