Q&A – Foresight Solar Fund: Weathering the storm of uncertainty

A period of bad weather in the UK and tumultuous macroeconomic headwinds have hit Foresight Solar Fund's Q2 2024 revenues.

In the three months of Spring [2024], parts of the country saw more than double, and in some cases triple, the long-term average monthly rainfall.

However, the solar investment company is not out for the count, with strong growth plans and operational competencies to leverage, the road to profitability is on the horizon.

Managed by Foresight Group, Foresight Solar Fund, boasts a portfolio of 61 assets, across solar and battery energy storage systems (BESS) in the UK, Europe and Australia.

Across these markets it has energised 1.1GW of cumulative capacity, amounting to £1.1 billion (€1.3bn $1.4bn) in deployed assets.

inspiratia spoke to Ross Driver, managing director at Foresight Solar, about these plans and the state of renewable energy landscape.

With over 20 years' experience in the industry, Driver joined Foresight Solar Fund in 2021 and oversees delivery of all aspects of the investment mandate.

Foresight Solar Fund ended Q2 [2024] with revenues of £74.5 million, only 6.6% behind budget. What was the reason for this deficit?

It was down to how bad the weather was. If you are based in London or the UK, you realise the first half of this year, particularly the first quarter, was pretty rubbish in terms of weather - we had a lot of downpours.

The fact that we are only 6.6% below our own budget estimates for revenue shows that, given this was one of the worst periods on record, it is not such a bad result. It shows the resilience of solar as a technology and our expertise as a company.

How is Foresight Solar Fund mitigating these kinds of weather risks moving forwards?

It all depends on where you set your budget. We have been operating for about 10 years, and we've been below budget two or three of those years. We know our portfolio very well and how it operates. So long as we are setting our budget and expectations at a reasonable level, it should only be those years when the weather is a lot worse than expected that we should be seeing production fall below expectations. So long as you've got your predictions right, solar is a very steady and stable industry.

How would you describe the UK renewables landscape at the moment?

The way we view the steps that the new government has taken since coming into power is really positive. It has set the tone for renewables to thrive with the contract for difference (CfD) auctions. In particular, the government added 50% to the budget for this year's CfDs auction – that is a really good first step.

Everything we are hearing is that the new administration really wants to focus on pushing forward the deployment of renewable energy as a whole. There is also a move to bring the energy system operator under national ownership. One of the problems that we are still seeing is that there are so many applications tied up in the grid connection queue at the moment, if that move can help them clear a pathway, we think that is a great thing. To find the 'zombie-type' projects that are going nowhere, remove them from the queue and free up capacity for more solar is really needed.

Can you speak to this challenging period for alternative asset classes?

It is the macroeconomic side of things that is having the biggest impact now. That's not just Foresight Solar, it is all the listed renewable funds, all of the wider equity infrastructure funds and the alternative asset classes.

The way the government ramped up the base rate last year made it the largest increase in the Bank of England rate in over 40 years. Our dividend yield has historically offered a spread against that. That spread got eroded as the rates rose. Our discount rates did not rise quite as much because they are based on what we think the assets are valued at. That is part of the reason all funds have been trading at a discount, so I think fundamentally that is not going to change until we start to see gilt rates coming down.

To get ahead of the Bank of England's move and prepare ourselves for when equity markets reopen, we have been selling assets and paying down debt, as have a lot of the market. It will take things like that to be done at the macroeconomic level for things to swing back.

Is the global inflationary landscape making the company more risk adverse?

The thing that we are taking a risk on right now is power prices. When I joined Foresight Solar, we were just coming out of the pandemic and the energy prices were on the floor, about £25 per megawatt hour. That kind of level is not sustainable because nobody is going to make their money back for investing tens of millions of pounds into solar and wind farms if they will not be able to receive a return. But on the other end of the spectrum, the Ukraine crisis saw power prices go unsustainably high.

This is where something like the CfD mechanism makes a lot of sense. Most infrastructure investors would give away all the upside for a bit of protection on the downside. Infrastructure investment is about predictability. We like to give out safe, stable returns, which is why a CfD mechanism makes sense.

How has it been developing projects in geographies outside of the UK?

We benefit from being part of Foresight Group, which is international. We have a very active office in Madrid and many of the projects we have in Spain in the solar and the battery storage space were unearthed through bilateral discussions led by our local office. We also have a large presence in Australia, and that is somewhere Foresight Group is looking to invest as well. We have recently worked on a couple of big projects in Greece and hired some team members there. So, we tend to go where the company has boots on the ground.

Why solar specifically?

The fund was set up originally as a pure solar investment vehicle. You have funds that are a lot more differentiated and invest in several different things. But usually, it helps to have a specialised angle. If investors actually want to go and get into those other asset classes, like hydrogen, there are going to be specialised funds that they can buy into. Knowing what your investor appetite is, you could potentially scope the opportunity for complementary technologies.

For us, battery storage was an obvious one to go into because, as solar projects get bigger, they will have batteries co-located with them, and that will be part of balancing the supply and demand on the electricity grid.

We know that Foresight Solar aims to expand into the developers' market. What are the benefits of this?

It is the level of returns you get. When the solar market first started, the level of returns we were able to get by buying operational solar projects would still easily meet the dividend targets for the fund.

Over the years, we have progressed and gotten comfortable with buying projects and constructing them because that gives us an additional level of return for taking on that additional risk and managing it through construction. If you go in at an even earlier stage - as we have done for several years through other funds - and establish development partnerships to bring projects through development, the potential for greater returns is even higher.

What are your growth plans in the long and short-term?

The biggest thing at the moment for the listed funds is narrowing the discounts and getting back to trading at net asset value . This will be down to macroeconomic factors that, between us and the non-exec board, we are trying to position ourselves for. It is unclear how long that is going to take to change.

So, I think we are just aligning Foresight Solar's strategy with optionality in mind. The benefit of investing in development-stage pipelines is that at some point, the market is going to change and there will be the opportunity to raise money again, either through the public markets or bringing in capital from elsewhere. Despite persistent tailwinds, we remain optimistic and can see a path to a brighter future.