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NextEnergy Solar Fund offers potential upside surprise from higher current power prices

NextEnergy Solar Fund PLC’s (LON:NESF), the high-yielding investment trust, could offer the potential for an upside surprise, according to broker Shore Capital.

Current prices achievable under the trust’s contracted power purchase agreements in the tradeable seasons ahead are substantially higher than market consultants have predicted, the house broker said in a note to clients on Friday.

For example, they pointed out, the NextEnergy Capital (NEC), which manages the fund, has flagged that the current market prices for its estimated output in the 2023/24 period is circa £59 per megawatt hour (MWh), which is substantially higher than the average prediction of the three independent consultants that provide forecasts for the trust of circa £47/MWh for the same period used, which is used in calculating NESF’s NAV.

“Currently NESF, has already entered into hedges for 16% of the expected output as far as the FY2023/24 period and NEC’s power trading desk is continuing to utilise its rolling hedging strategy to increase the proportion of output it is hedging for the 2023-24 period, these will be incorporated into both the NAV and should lead to higher cash flows,” the broker said.

“This is in addition to the c.63% of expected output for 2022/23 that NESF has hedged at prices above the average consultants’ predictions.”

As of the end of March, the net asset value was 98.9p, down from 100.7p three months earlier  after incorporating a reduction due to lower power price forecasts from the three independent consultants and an expected rise in the UK corporation tax rate.

These were partly offset by NESF’s operating outperformance, the acquisition of the 100MW Camden portfolio and a reduction of 0.25% in the unlevered discount rate to 5.75% for UK operating assets.

With the transition to net zero seen as likely to lead to higher demand for electricity, the analysts said this should benefit existing portfolios like NESF’s.

“We see scope for a rise in expected cashflows and stronger NAV total returns going forward, if the improvement that we have seen in power prices persists,” they added.

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