Octopus Renewables Infrastructure Trust plc Investor Presentation. Throughout recorded presentation, investors will be in listen-only mode. Questions are encouraged, and they can be submitted at any time by the Q&A tab situated in the right corner of your screen. Just simply type in your questions and press send. The company may not be in a position to answer every question it receives in the meeting itself. However, the company can review the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Chris Gaydon. Good afternoon to you, sir.
Thank you, and good afternoon , too, and thank you for joining this presentation. My name is Chris Gaydon, and today I'm joined by my colleagues, David Bird, Gen Legg, and we'll be presenting the annual results for Octopus Renewables Infrastructure Trust for 2024. We thought we'd start by reminding you of ORIT's key differentiators, and in particular, the diversification that we built into the portfolio. ORIT is the only genuinely diversified investment trust of meaningful scale in the renewables and energy transition space. We think diversification is particularly important because it offers some protection against concentrations of risks to things like grids, weather patterns, and increasingly important is local regulatory regimes. Diversification is not our only differentiator. We're also part of Octopus Energy Generation, which provides a, which is one of the largest renewable energy specialist investors. We have over 150 professionals in the team.
Many of us are drawn from industry and have experience of building wind and solar farms across the globe. Our mandate also has the opportunity to earn some additional upside through the construction and development allocation that we have. In particular, that development allocation gives us optionality on the pipeline projects that they are developing. We will be able to invest into those once they become, once they get to a ready-to-build stage. Finally is Impact. We consider that Octopus Renewables Infrastructure Trust is an Impact Fund. We do lots and lots of work with local communities, and that is on top of the clean energy that we produce and which goes to supporting the fight against climate change. This year, 2024, represents Octopus Renewables Infrastructure Trust's fifth year anniversary. When it comes to our mandate, we have delivered exactly what we said we would do.
We have been selling some assets, but during the five years of Octopus, and so with ORIT's existence, we've invested into 45 assets across eight different countries and five technologies. We have delivered a total return of 31.9% and returned GBP 128.2 million to shareholders. We've also delivered Impact. I mentioned the clean electricity that we've produced, but we also do a lot with local communities. Things like just transition and retraining, mental health charities, planting forests into urban areas, and also rewilding and environmental initiatives are some of the things that we're involved with.
Now, we as the manager fully appreciate that equity markets are incredibly difficult at this point in time and that it's not easy for investors, but we do think that ORIT continues to have a highly relevant mandate, and we think it's one that will be of increasing relevance in the months and years ahead. I'll just touch on some of the key financial highlights from the year. Our generation has increased to 1,240 gigawatt hours as the remainder of the Ballymacarney Solar Complex just north of Dublin and the Breach Solar Farm were brought online. 2024 is also the third year in a row that we've been able to increase the dividend in line with inflation.
We were able to deliver a dividend cover of 1.24 times, and that's calculated on operating cash flows after debt repayments. If we were to calculate that same number before debt repayments, the dividend cover would be 1.85. We've also delivered a positive NAV return of 2.5% during the period. 2024 has seen improvements and increases across a large number of our metrics. With the addition of the Ballymacarney Solar project in Ireland and Breach Solar Farm, our number of assets, total Megawatts, and generation have all increased during the year. We have also been busy putting in place fixed price offtake arrangements, and that has led to an increase in the percentage of fixed revenues over the next two years. As a result of all this, we have seen increases in both revenue and EBITDA. I have already mentioned our dividend performance.
Looking ahead for 2025, we have again sought to increase the dividend by CPI. Finally, on leverage, our leverage number has increased from last year as a result of that acquisition of the Irish Solar Complex. However, as we have recently put out in a recent RNS, we are looking to bring that number down below 40% by the end of this year. Now, with that, I'll hand over to David.
Thanks, Chris, and good afternoon, everybody. I wanted to walk through a bit more detail around the approach that we've taken during the year to capital allocation and indeed our priorities as we move into 2025. The real key thing here is the discipline that we have shown in that capital allocation. In particular, if you work through this slide starting at the top left, you can see the operational cash flows that have been generated by the portfolio of GBP 62.3 million. That was enough to cover the dividends 1.85 times before the deduction of scheduled principal repayments on the debt in the portfolio. We've also been able to successfully realize cash from the sale of assets, which I'll go into in a bit more detail later. We've realized just over GBP 60 million there from selling our Swedish wind farm, Ljungbyholm.
We did have existing commitments to meet during the year in relation to the Irish solar portfolio, and those were funded by a combination of some debt that we put in place with those assets, along with RCF drawdowns during the year of GBP 87 million. Together with cash reserves within the broader group, those are the sources of capital that we've used during the year. As you move across to the right, you can see that we have delivered through a combination of the fully covered on-target dividend and the share buybacks that were initiated around the middle of the year, a total return to shareholders of over GBP 40 million. As well as the scheduled principal repayments on the long-term debt, the sale of the Swedish site allowed us to repay the majority of the RCF drawdowns that we've made during the year.
Total debt repayments of GBP 86 million. You can see at the bottom in gray, the new investment that we've made during the year, most of which related to that Irish solar portfolio, but we've also had some final construction payments on the Breach Solar Farm, for example, and some payments into our existing portfolio of developers, as well as some new investments, again, which I'll cover later. Looking ahead into our priorities for 2025, we have committed to increase the level of cash return to shareholders, partly through the increased dividend target of GBP 6.17 per share, but also through an increase of GBP 20 million to the initial GBP 10 million buyback program, so a total buyback program now of GBP 30 million. We will also continue to focus on reducing gearing in the company.
We've targeted reducing gearing within the entire group to less than 40% of gross asset value within calendar year 2025. As well as bringing the total headline number down, we've already been active on reducing the cost of the borrowing within ORIT. Since year-end, we signed a GBP 100 million five-year term loan facility secured against the highly contracted assets that we have in the U.K., which had no debt on them previously. That's delivered a material saving on interest cost compared with the revolving credit facility that we've repaid using those proceeds. When we look at that revolving credit facility, its maturity date had been February 2026. We have recently extended that until the middle of 2028, as well as reducing the overall size of the facility to GBP 150 million. That reduction in commitment fees should save ORIT around GBP 850,000 per year.
In terms of new investment, all else being equal, we would expect less in FY 2025, and we will be focusing on areas where we think the highest of returns should be available in order to compete with other capital allocation priorities, principally the buybacks and the reduction of gearing. You can see examples of that already during the year where we have made follow-on commitments to support some of our existing developer investments, in particular BLC and Nordic Generation. If I go into a bit more detail around the investments that we have made during 2024 and the first quarter of 2025, we've already touched on the Irish solar acquisition, which was by far the largest use of capital during 2024. We bought that site on a forward purchase arrangement, which means we were committed to make the acquisition once the sites were operational.
Those commitments were already made back in 2022 and 2023. What we spent in 2024 was really following through on commitments we had made sometime before. With that acquisition, we now have 241 MW of operating solar capacity in Ireland across five sites, and they represent the largest operating solar complex in Ireland at the moment. The other investment that we made in 2024 was a follow-on investment into Simply Blue Group, which is a developer of floating offshore wind and sustainable fuels headquartered in Ireland. We provided a EUR 7 million investment in their most recent funding round in the summer of 2024 to support that business as it continues to develop its projects and seek longer-term significant strategic funding that will be needed to take these very large projects through the development cycle over the next few years.
I've mentioned that since the end of the period, we've made two investments into developers. The first of these was into Nordic Generation, who are developing onshore wind and solar projects in Finland. We increased our commitment to that business, which has seen really strong progress on its pipeline, to enable them to bring new projects into the pipeline and keep taking the existing projects through into the ready-to-build stage, some of which we would hope to come through over the next 12 to 18 months. Finally, BLC, which is a developer of solar projects and batteries in the U.K. Again, they have brought a pipeline of projects through to the stage where they have land rights and offers to connect to the grid.
The additional GBP 1.5 million we have allocated to them will allow them to really accelerate the most far-developed projects through and ensure that they can get through the planning process in order to get the most favorable grid connection dates. I want to spend a bit of time now going into a bit more detail about the large asset sale that we carried out during the year. This was the sale of the Ljungbyholm Wind Farm in Sweden, which completed in the second half of the year, realizing proceeds of EUR 74 million, which was a EUR 1.7 million uplift to the holding valuation at the time the sale was agreed. This project really is a classic example of what we set out to do when ORIT was launched just over five years ago.
It was actually the first investment that we ever made back in March of 2020. At that time, with the uncertainty of COVID looming, we were able to utilize our expertise and get really strong protections into the construction contracts around what might happen and how we'd be protected if there were delays because of COVID. As it happened, actually, we were able to deliver this project on time and on budget, notwithstanding various issues with supply chain and with construction crews being stuck in quarantine. Again, utilizing that large team of industry specialists with strong connections throughout industry to unblock things when they arose.
With the project having been delivered on time and on budget in the middle of 2021, we continue to be very active through the operational stage, putting a 10-year corporate PPA, power purchase agreement in place on the project to provide a level of revenue certainty in a period of very volatile power prices. As well as the strong operational performance of the site, that enabled us to deliver a successful exit in 2024. Over the four and a bit year hold period, we delivered a return of 11.3% to investors. If you look at that together with some of the asset sales that we completed in 2023, we have now realized proceeds of GBP 161 million from our capital recycling activities, all of which were delivered at an uplift to holding values, giving an aggregate NAV uplift of GBP 3.2 per share.
We have not stopped there. We have committed to continue to actively recycle capital within the portfolio and are targeting at least GBP 80 million of sales proceeds during calendar year 2025 to support those priorities of returning cash to shareholders and bringing gearing down below 40%. As well as the new investments and the sale of assets, we've also been very active in managing the individual assets that are retained within the portfolio. A highlight here has been on the revenue management side of things and the new contract that we put into place on the Crossdykes wind farm , which is a 46 MW wind farm in Scotland that ORIT owns 51% of.
This new contract, which is with Sky Media Group, fixes the power prices for most of the generation from that project for 10 years. Critically, it also retains the benefit of inflation linkage during that period. This is just one of a number of corporate sales agreements that we have entered into for ORIT' s portfolio. Another notable one of these is the contracts for all five of the Irish solar sites, which each have a 15-year fixed price agreement with Microsoft. Those contracts, together with some other hedging activity, mean that we have a very high degree of fixed revenues. 84% of the power sales are fixed price for the next two years. I am now going to hand back over to Chris to give some more detail on the portfolio.
Great. Thank you, David. Here we have our portfolio map, and you can see that although we have sold our Polish and Swedish wind farms, we still have a highly diversified portfolio. We are confident that we will be able to maintain that strong diversification as we continue to recycle assets. In our annual report this year, for the first time, we have provided some quantitative analysis on the benefits of diversification. We show that having that diversification leads to a 40% improvement in downside uncertainty compared to if ORIT was a single country, single technology fund.
Now looking at that diversification in numbers, the portfolio is spread across five different countries. We continue to have an even balance between solar and on- and offshore wind. After all the construction activities that have taken place over the years, the portfolio is now almost entirely operational, really except for the developer allocation. Now looking at some operational highlights for the year. Once again, we've seen year-on-year growth in the portfolio, and in particular with the addition of the Ballymacarney Solar Complex in Ireland and also the Breach Solar Farm in the U.K. That has led to strong increases in solar capacity and increases in revenue and EBITDA for the portfolio as a whole. The onshore wind, we've seen some reductions as a result of the sale of the Polish and Swedish assets.
You can also see that there's been a below-budget performance in general related to both lower-than-forecast wind and irradiance and also some construction teething issues. To dive into that budget performance a bit more here, you can see the impact of lower irradiance and lower wind across those technologies. In terms of the site-specific issues, most of these are now resolved. For example, we've got very strong availability now that the Cumberhead wind farm is up and operating. We've been able to fully re-panel and re-energize the Saint-Antonin-du-Var project in France. We've had some issues with some main bearings on the wind turbines at our two Finnish wind farms. The good news is that the first of those wind farms has had all the main bearings replaced and is fully operational. The second one is going through that replacement program now.
The costs of that are budgeted, and in any case, it's the turbine manufacturer who is taking the responsibility to do those repairs. This chart really just shows the positive trajectory that we've seen in terms of ORIT's portfolio over the five years of its existence and serves to show how far we've come during that period. Finally, for me, just a few words to say on Impact. We continue to consider that ORIT is an Impact Fund. We produced enough power in 2024 to power the equivalent of 284,000 homes or displace almost 300,000 tons of carbon during the period. We do lots and lots of community benefit and engagement activities, including planting urban forests and working with charities that help people retrain into the green economy and also mental health charities. Now with that, I'm going to hand over to Gen.
Thanks, Chris. Good afternoon, all. I'll start by talking about the dividend performance. In 2024, ORIT delivered a fully covered dividend of 6.02 pence per share, which was in line with the target set out at the start of the year. This target represented a 4% uplift on the prior year and tracking against inflation for the third consecutive year. In terms of coverage, the dividend was comfortably covered by 1.24 times by operational cash flows. If you exclude the principal debt repayments, coverage rose to 1.85 times. As mentioned earlier, we've already announced a further increase for 2025 of 2.5% in line with 2024 CPI, bringing the dividend to 6.17 pence per share. This next slide shows ORIT 's consistent track record of growing dividends. FY 2025 will mark the fifth increase with the last four all in line with inflation.
Once again, we expect the FY 25 dividend to be fully covered by operational cash flows consistent with all previous years, and that will offer an attractive yield of around 9.1% based on the December closing share price. Now moving away from dividends to the board of financials, at the year end, NAV stood at GBP 570 million or 102.6 pence per share. That is down slightly versus prior year, but the company still delivered a positive NAV return in the year of 2.5%. After including the debt at the SPV level and through the RCF, gross asset value sits at around GBP 1 billion. That brings us back to where we broadly were at the beginning of the 2024 reporting period following the sale of the Swedish wind asset and the acquisition of the Irish solar portfolio.
Share price performance continues to be a challenge across the whole sector, and ORIT's total shareholder return was -18.3% for the year. Whilst that discount to NAV persists, the strong prices achieved through our capital recycling program highlight the robustness of the company's valuations, reinforcing that the share price does not reflect the fair value of the underlying assets. On debt, gearing increased from 39%- 45%. That is mainly due to the acquisition of the Irish solar assets or share buyback activity offset by the Swedish wind disposal. Long-term portfolio debt remains low cost and well protected as it is hedged at around 90%. This means that even with base rates at elevated levels, our average cost of debt was 2.7% and 4% when including the RCF borrowings.
As already mentioned, post-year end, GBP 100 million of relatively expensive RCF borrowings have been refinanced into a fully hedged lower cost facility. This brings the overall borrowing cost down to around 3.7%. It is also worth recalling that earlier in 2024, our gearing was expected to exceed 50% once commitments were fulfilled. However, now that we have met those significant commitments, gearing has been brought back down to 45%, which puts ORIT in a much stronger position going forwards. Whilst we are confident that the level of fixed revenue support leverage at these levels, we are committed to bringing debt down to around 40% of GAV during 2025. Now looking at the valuation bridge in a little bit more detail, over the year, NAV per share fell by 3.4 pence from 106 pence to 102.6 pence.
Aside from the expected deductions from dividends and costs at the fund level, which you can see on the right-hand side of the bridge, the main valuation drivers were first, a small gain related to the sale of the Ljungbyholm Wind Farm, resulting in a NAV increase of GBP 1.4 million, an uplift of GBP 0.9 million from unwinding the construction premium as the Breach Solar Farm entered operations. Thirdly, a positive impact from the new PPA signed at the Crossd ykes wind f arm. Beyond these, other movements, which mostly sit in the balance of portfolio return column on this slide, largely reflect the expected return on the portfolio over the period, a review of our development portfolio valuations, adjustments to short-term cost assumptions and valuations, and actual performance across the assets.
Together, these factors, along with broader macroeconomic and price updates, which I'll cover over the next few slides, explain the overall movement in NAV in the year. Inflation assumptions remain relatively stable during the year, resulting in a net impact on valuations of GBP 1 million. Our long-term inflation assumptions remain at 2.25% for the U.K. and 2% for all other European markets. On FX, sterling strengthened against the euro in the period, resulting in a gross GBP 17.1 million negative valuation impact. However, the company's FX strategy worked effectively, delivering a GBP 14.6 million gain that effectively offset that FX impact. During the period, merchant power price forecast decreased slightly, resulting in a small negative impact of around GBP 1 million.
That said, ORIT is well insulated from this due to its highly fixed revenue base, with fixed revenues over a two-year period increasing from 81%- 84%. The average price achieved across all revenue streams also improved, with the shift being mainly driven by the sale of the more merchant-exposed Swedish asset and acquisition of the Irish solar farms, which benefit from an attractively priced PPA. Despite a decline in merchant prices, ORIT 's overall generation-weighted price actually increased. Lastly, on green certificate pricing, which covers REGOs in the U.K. and guarantees of origin in Europe, these remain broadly stable with a slight uptick and capacity market forecast declined slightly. Lastly, on discount rates, there were no changes to the core discount rates applied to the portfolio asset valuations during the year.
However, the weighted average discount rate fell from 7.2%- 7%. That decrease reflects lower overall risk in portfolio, primarily due to two factors. Firstly, the removal of construction risk premium from assets that were in construction and now operational. The higher fixed revenues, which overall carry a lower risk and therefore attract a lower discount rate. It's worth noting that this average discount rate only applies to operational assets where a DCF is used as the valuation approach. It therefore excludes the return benefit from FX hedging at the company level, the higher returns expected from developer investments, and the return improvement, which should be expected from additional leverage at the RCF level. Taking those additional three things into account, the expected return across the portfolio before PLC costs is 8.1%. With that, I'll hand back to David.
Thank you, Gen. I wanted to switch focus to look ahead at what we can see coming up. We've got a couple of slides here giving a bit more detail around the revenue landscape. We've talked a couple of times throughout the presentation about the high level of fixed prices and contracting that we have over the next two years and how that's increased from 81%-8 4% during calendar year 2024. What you can see from this chart is that that highly contracted revenue stack really continues out for the foreseeable future. We have more than 70% of our revenues fixed price in nature, whether through government support schemes or fixed price power sales to corporates and utilities right out until the early 2030s.
We've got that over 70% level. Even going out into the early 2040s, we already have some revenues which are fixed price in nature because of the nature of our mandate and the fact that we have built new projects which benefit from new 20-year government support schemes in France and Germany, for example. We've also got a strong track record of adding new fixed revenues to our portfolio. We are confident that we'll be able to keep increasing the level of fixed revenues that we have good visibility on out into later in the 2030s by putting new corporate PPAs on a rolling basis as we move forward. As well as that high level of fixed revenues, we also have a high level of explicit contractual inflation linkage within our sales arrangements. Almost half of the revenues are inflation-linked over the next 10 years.
That is something that's been really powerful when we've come to set the dividend increase with the Board each year and has allowed the Board to increase dividends in line with inflation for four years in a row. Looking at the bigger picture now in the sector, looking at the listed Renewable Energy sector, it's clear that share prices are not where we would want them to be and that share price performance right across the industry has been disappointing.
That does not reflect the fundamentals of the renewable energy industry more broadly, where we continue to see a huge market opportunity and one where ORIT's mandate and our focus on delivering new projects and on having a broad geographical mandate means that we can be nimble and find the most attractive markets, the most attractive opportunities to deliver benefits for investors from those massive tailwinds in the broader renewable industry.
It remains the case that governments right across Europe are hugely supportive of the energy transition and recognize that building new wind and solar is a huge benefit, not just for decarbonization, but also for bringing consumer bills down and increasing energy security by reducing reliance on imported fossil fuels. We have also demonstrated now a track record of growing generation and with it portfolio revenue in EBITDA year- on- year. We have been able to use that operational cash flow to deliver fully covered dividends year on year and keep growing those dividends.
With the shares trading where they are now and the new dividend target, the yield is in the high 9%, which we think represents a really attractive level when you consider that inflation linkage that we have within the portfolio and that we are also able to deliver capital growth through that earlier stage investment, in particular those developer investments, which have attractive pipelines ahead of them, which we can choose to build if that makes sense from a capital allocation point of view, but equally can sell to realize cash and consider reinvestment into more development or other activities. Overall, therefore, whilst we recognize the deep discount that the shares have been trading at, we are confident that that does not represent the fundamental underlying value of the assets.
We have delivered a number of asset sales at an average 12% above net asset value, all of those asset sales above our holding value. It is not just us. If you look across the industry, a number of trusts have been selling assets, and the overwhelming majority of those asset sales have been above net asset value. We think that there continues to be value within our portfolio and that where the share price is now, investors should not see that as a sign that the portfolio is misvalued, rather that the shares are mispricing the value of the portfolio.
That is great. Thank you very much for the presentation. Ladies and gentlemen, please do continue to submit your questions, and you can do so just by using the Q&A tab that is situated on the top right-hand corner of your screen. Just for the company, take a few moments to view the questions that have been submitted today. I'd like to remind you that the recording of this presentation, along with a copy of the slides and the published Q&A, can be accessed via your investor dashboard. As you can see, we have received a number of questions throughout today's presentation. Momentarily, I'll hand over to Charlotte to share the Q&A, and then I'll pick up from the team at the end. Ladies and gentlemen, please do bear with us.
Can I just check everyone can hear me now?
Yes, we can hear you clearly, Chris. Over to you.
I think that's better. I'll start again. Robert, thanks for your questions. Now, Spain, like many markets around Europe, has a grid network that was originally built for large centralized generation and is struggling to keep up with the proliferation of decentralized renewable generation. That, as a result, has caused many delays for new projects to connect to the grid. In Spain, in particular, the market there, the developer community, it's almost stalled at the moment, waiting for the Spanish government to announce the timing of the next grid auction.
The U.K., on the other hand, we have in recent years received very long-dated grid connection dates. However, the U.K. is making good steps towards rationalizing that grid queue and trying to prioritize high-quality projects that are advanced and are in locations where energy is needed. We are seeing some good positive developments there. There are other markets, Finland, is one where we have some development exposure.
There, the Finnish grid operator is very quick in connecting projects. I think the response is it's a bit of a mixed bag. Each market is moving at a different pace. To your question around has it stymied the lack of, sorry, the build, operate, and sell business model, for us, we continue to see lots and lots of projects that are ready to build with a reasonable grid connection date. In that sense, it has not really slowed us down. Yeah. To the second question here, how much of our capital has been allocated in research and development enterprises that do not return earnings to our company?
We do not invest into R&D companies in a sort of technological sense. We do have an allocation towards development. That is 5% of gross asset value. We've invested into five different platforms that are bringing on the next generation of wind and solar projects, hydrogen across our markets. Those projects, those development investments typically do not yield much during our ownership. When we have successful projects, we are able to sell those and then crystallize a development gain as a result. That gets reflected in the NAV. For the next couple of questions, I might hand over to David to answer those.
The next question, David, is for several quarters, wind generation and irradiation have been overestimated. Is there a case of a step increase in the discount rate to reflect this reality?
Y eah, thanks for that question. I think actually 2024 has been relatively unusual in having both wind speeds and solar irradiation below long-term expectations. We've seen quite a pattern, not just in the sort of previous four years of ORIT's existence, but for years before and where more often than not, when the wind speeds are below long-term averages, actually it's a sunnier than average year and vice versa. 2024 has been quite an unusual year in that regard. We have seen some others in the sector updating wind forecasts recently, perhaps some with sort of more mature portfolios, including assets that might have been built 10 or more years ago.
There clearly has been many years of new weather data since then. There have been questions in the sector as to whether climate change is leading to differences in wind speeds, not universally down, but just different areas having some lower, some higher. I think it's valid to be asking about the long-term wind generation forecast. That is something that we routinely reassess. Usually, it only makes sense to do that when you have a project with several years of operational data to carry out that assessment on. Rather than thinking about this in terms of discount rate, I think we've got a table in the annual report which shows in a bit more detail how old each of our assets are and when they might make sense to do a review of the long-term generation estimates, which could go up as well as down.
Certainly, as I say, we haven't seen any sort of consistency of pattern on solar being repeatedly below budget. I think it is fair to say that the last three years have been sort of onshore in the U.K. in particular, below long-term averages, which raises a valid question around whether that's a longer-term pattern. We do not see this as being material for ORIT in the round. One of the important reasons is it was actually fleshed out again in the annual report. There is a bit of a case study on the benefits of diversification.
We, unlike some other vehicles who might be focused on a single technology in a single country, if the weather pattern starts to shift in that country, we are not fully exposed to that. That data analysis that we have summarized in the annual report suggests that in a sort of downside sensitivity, having our broad geographical mandate and having the balance between wind and solar actually reduces that downside scenario by around 40%. A 40% better outcome in a downside scenario through having our diversification compared with single technology, single country.
Right. Thanks, David. Staying with you on this next question. What percentage of solar and wind electricity production is not subject to PPAs and sold on the spot market? I read that battery energy storage revenues have surged in December and January, helped by low wind generation and cold weather leading to higher U.K. demand. Conditions which created multiple instances of price spikes leading to lucrative trading opportunities for storage assets. There are also record levels of dispatch in the balancing mechanism. Is there a case for a build-out of more co-located BESS to optimize pricing?
Hopefully, some of the slides we had towards the end of the presentation helped give a bit of color on the balance between where electricity production is sold on the spot market and where it's fixed. For the next couple of years, only 15%-16% of our revenues are exposed to power prices. Even over the next eight years or so, it's really no more than 25%-30% of revenues over that entire period, which are not fixed price in nature. When it comes to this idea of co-locating batteries, that's something that you sometimes refer to as hybridization. Taking a solar project or a wind project to being one that's a hybrid project, potentially including some battery storage.
We already have one site in the portfolio, the Breach Solar Farm, where we have the rights, we have the planning permission, we have the grid connection to be able to add a battery storage asset if we want to. That grid connection becomes fully live in 2029, so we do not need to make that decision right now. It is the kind of thing that we are absolutely looking at across our portfolio. Where could there be opportunities to add value through putting a battery alongside an existing solar or wind farm? There are all sorts of technical complexities with that, but it is something that we continue to review across the portfolio in the broader context of the capital allocation considerations that we have to look at in the share price environment we are in.
Right. Thanks, David. We have a few questions here along the same theme. This is along the theme of merger or acquisition. Would ORIT consider consolidating with another renewable infrastructure trust to achieve greater scale and reap the associated benefits of scale and costs and diversification? There are a few other suggestions here. Would you consider being a consolidator? TICA grid would be a good acquisition given your low exposure to battery. Yeah, would you consider another merger with another player to narrow the discount?
I think, I mean, we are acutely aware of where our share price is trading versus NAV. There are a lot of things that we are doing to try and close that gap, whether it be our share buyback program. We are looking at reducing our debt. We are also spending a huge amount of time and increasing the size of our team who are focused on the asset performance. The other one which comes up quite often is this idea of merging with another investment trust. Now, as some of you may be aware, we have previously made an approach to another trust, which ended up not proceeding. It is something that we would consider doing. I think we have a differentiated and unique mandate within the sector. I think that places us extremely well to potentially be the consolidator in the space.
Now, when we look at potential targets, we need to consider all sorts of things. First of all, whether the assets represent good value, whether they contribute to our diversification ambitions, and generally whether the portfolio would sort of improve the portfolio that we already have. Lots and lots of considerations. It is something that we continue to talk to our advisors about.
Right. Thanks, Chris. Got a question on discount rates. Your U.K. discount rate is lower than your pure play solar peers and much lower than your pure play wind peer. How do you justify it?
Yeah, I might pick that one up. There are a few things to note there. Actually, Gen covered a couple of them already. When it comes to making sure that you are comparing like with like on published discount rates. At the end of 2024, most of our U.K. assets had no debt on them at all. When you're comparing with, say, a pure play solar fund that might quote a rate of around 8%, we're not showing the increase in return that comes with that leverage. With the refinancing that we've recently done, I think going forward, you'll see a bit more of that. You should see that the rates are actually much more comparable than they may first appear. A second thing to note is the discount rate is just one of many assumptions that goes into our valuations.
You could get to the same valuation clearly with a higher or lower discount rate if you have lower or higher cash flow assumptions, particularly power price assumptions being a very critical one there. We as a manager at Octopus Energy Generation manage much more money than just ORIT. A lot of those other products that our colleagues are managing have been actively raising and spending money over the last two years. We have very good intelligence as to the price at which assets are actually trading on the market. We are therefore very confident that our valuations are not above where the market is trading.
Indeed, even if we just take a more simple benchmark of our valuations on a pounds per Megawatt basis compared to a pure play peer, we generally see that, for example, our solar valuations on a pound per Megawatt basis come out lower than the most obvious peers. I think there is more than meets the eye rather than just looking at headline discount rates. We then also have those factors that Gen covered, for example, around our FX hedging and our developer investments that mean really that the sort of headline rate that people should be focusing on is more that 8.1% number rather than the 7%, which is not taking into account those real factors that impact on returns.
Great. Next question. Your peers have moved to set their fees as a proportion of market cap or blend of market cap and NAV. Would you consider doing the same?
Okay, I can take this one. We have recently, in one of our recent announcements, stated that we are in discussions with our board around the fee structure and have noted many of our peers having already implemented changes. We will be conducting some shareholder engagement in the very near future on this topic. There is little more I can say beyond that at this point. What I would say is that from the start, ORIT has what we have liked to call a clean fee structure, which means our headline fee is the entirety of the fee.
We do not have any commercial arrangements with any of the assets within the portfolio. That headline fee pays for all of our fund and asset management services that we provide to the vehicle. It is quite a complex topic, actually, when you dig into it. One that, as I say, we are continuing to discuss with our Board and shortly our shareholders.
Right. Thanks, Chris. Comment here. Thanks for the presentation and the performance you have delivered. A couple of questions from this one investor. Given the share prices are mispriced rather than the assets, why bother with share buybacks? Is it not better to keep the cash for investment if returns on the assets are promising?
Yeah, so this really gets to the heart of why you might do a buyback, actually. It's a topic that there's lots of different views on the merits of buybacks. Fundamentally, given that we are confident in the valuation of our assets, with the share price where it is today, we can effectively reinvest in our existing portfolio at 35% cheaper than we could go and buy a similar asset on the market. That's why a buyback can make sense and why it delivers NAV per share accretion for the remaining investors. Where it could make sense to use that cash for new investments is if those investments are higher returning than our existing average portfolio.
That's exactly what we've done with the investments we have made recently, particularly the investments into BLC and into Nordic Generation. Those are development stage investments which we would expect to return significantly higher than the 8% average of the portfolio currently. We really think those do still make sense even with the shares at a different level. That discount and the sort of mispricing actually is why share buybacks are an opportunity rather than a reason not to do them.
Great. Following question, not related though. There's a figure of GBP 24 million for corporate costs mentioned. Can you give us a flavor of what that is?
Yeah. Do you want to pick that up, Gen?
Yeah. The bulk of that is RCF costs. That's all that's there as related to the RCF, including interest and other fees. It also includes running costs of the fund, such as management fees. It also covers kind of general running costs at the holding companies and the assets that include things like accounting fees, audit fees, etc.
Great. Thanks, Gen. How are you managing issues around the wind blowing excessively and producing surplus power? Similarly, with solar, if the sun does not shine as expected, does battery and other storage feature or does all power get sold to the off-takers even if surplus to their requirements?
I can pick this one up. This is something we had a bit of a feature on actually in the interim report, which can give a bit more color. What would typically happen in the market if there is more wind than the grid can use is either power prices can become negative or generators can be forced to switch off. The power price going negative is effectively where power gets sold even if it is surplus to the grid's requirements.
What we set out in the interim report of six months or so ago is that actually our active approach to contracting and the benefit we have within Octopus Energy Generation of having a specialist team of market professionals means that we are much less exposed to that than a generator that did not have those active arrangements. An example of that is in Finland in 2024, we saw quite a few periods where exactly that happened and the power price went negative.
We had entered into a contract where in those periods we would effectively turn the wind farm off, but still get paid the fixed price as if we had been generating. Similarly, in some of our Scottish wind farms, when the grid cannot take that electricity, but we have a fixed price agreement with a corporate to sell them that electricity, the grid operator will effectively make us whole for having to be turned off because the wires have not got the capacity to take that power. There are a number of different mechanisms for what happens in that situation. What is really important is having the expertise to make sure that the investment is protected and you are not just having to keep turning your wind farm off and receive nothing.
Great. Conscious of time, we have a couple more questions. I think a lot of them have been covered through the other questions. A quick one on hydrogen. You have used this word in terms of development efforts, which worries me. I have seen many projects rightly get cancelled because it is too expensive/risky. Any comment on this?
Yep, I can take that one. Thanks for the question, James. Maybe just to provide a small bit of context. First of all, our allocation towards developers is only 5% of gross asset value. Our allocation to our hydrogen platform is a small subset of that. You're quite right in saying it is expensive and risky, but we only have limited exposure to it. The other thing that we have done to manage that risk is just focus on U.K. projects which benefit from the U.K. government subsidy regime and ones where there is a clear use case.
I think many of the projects that you see cancelled tend to be very large projects which are sort of designed perhaps without knowing exactly where the customer is or how you're going to get the hydrogen there, whereas the projects where building can be piped straight into their final use case. So we've targeted what we think are the less risky ones. We've already got our first planning consent. We're currently running a sales process for that project. We are sort of having a good old think about what we're going to do next on hydrogen. It is a nascent sector and one which I'm sure will go through many iterations before it becomes mature.
Great. Thanks, Chris. Time for just, I think, two more questions. The NAV seems to be static or slowly declining, and the discount of share price to NAV has been growing in recent years. Do you have any comments on that? Is anything being done to address these issues?
Yes. I think if I start with the NAV, it's true that the NAV's declined in the year, and the same was true in the prior year. We've still delivered a positive NAV total return, but a significant component of that total return has been in the form of dividends paid out of the company. If you look at the valuation bridge that Gen talked to earlier, I think what effectively you're seeing there is that the return on the portfolio of assets just hasn't quite kept up with the total of the dividends we've paid out and the running costs of the company.
Within that GBP 24 million figure that we had a question on earlier, as Gen said, a majority of that, around GBP 13 million or GBP 14 million of that number, was the RCF costs that were paid during 2024, which is why we are so pleased to have entered into that new GBP 100 million loan, which significantly reduces the interest cost. It is around a 1.3% day-one interest cost reduction on that facility. We have also committed to bring down the level of borrowing that we have. We are taking action to trim back those running costs that have been slightly dragging on the NAV over the last year or two. We still have assets within the portfolio, particularly some of those growth assets that we see can continue to support NAV growth even as we continue to pay dividends out of the company.
On the share price side of things, I think we've touched on this a bit both in the presentation and in the questions. We don't think the share price reflects the value of the assets at all, but it's clearly not something that we can or have been ignoring. That discount was certainly behind the launch of the share buyback program and the subsequent increase earlier this year. Clearly, something needs to change in the sector. There's effectively more sellers than buyers, a bit of a supply-demand mismatch in the sector. Perhaps that goes to some of the questions we had previously around consolidation. We've been very active. We're talking to our investors as much as possible. We're always happy to hear views and answer questions on this.
We're certainly not sort of sat here thinking there's nothing we can do about the share price, but equally, we're not in control of it. We will continue to be very disciplined in our capital allocation, prioritizing the buybacks and the debt reduction, and just keep talking to investors to understand their views and how we can help close that gap effectively between the NAV and the share price.
Thanks, David. Conscious of our time, we might have time to squeeze in this very last question. I think we touched on it, but if it's any other views, do you have a view on whether it is incrementally more profitable to invest in an additional Megawatt of wind capacity versus solar capacity? I appreciate it might change by geography and other factors , but I'm wondering why you're proportionately higher on solar and less on wind.
Yeah, thanks for the question. Just from a strategic level, we are aiming to maintain a fairly even split between wind, whether it's on or offshore, and solar. The reason why we're slightly higher on solar at the moment is because of the recent sales of the wind farms that we've made. In terms of whether that sort of additional Megawatt is more profitable if it's wind or solar, it really sort of depends on your appetite for risk.
Wind farms tend to attract higher discount rates because their generation profile is more volatile and because they are mechanical devices that can break down now and then, whereas solar projects are more reliable, but they all produce power at the same time, and that brings with it other risks. We look at each project on its own merits, the market it's in, the stage of development, and make our decisions on that. Thanks for the question.
Great. That closes out the questions. Alessandro, over to you.
Thanks. Thanks for the questions from investors. The company can review the questions submitted today, and we will publish those responses out on the Investor Meet Company platform. Just before redirecting investors, before I do their feedback, I am sure it is particularly important to you all. David, could I just ask you for a few questions and comments?
Yeah. We would just like to thank everyone for their time and for the excellent questions we have had. I hope it has been a helpful presentation. We remain very positive about the sector and for the potential that this company has. Clearly, the share price environment is not great. Any feedback is always very welcome. We, I think, have on the presentation our email address if you need to get in touch. Yeah, just want to say thanks again to everyone for joining and have a good rest of the day. Thank you very much.
Perfect. Thank you once again for updating investors today. Could I please ask investors not to close the session as you will now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? On behalf of the management team of Octopus Renewables Infrastructure Trust, we'd like to thank you for attending today's presentation and good afternoon.