Good afternoon. I hope you can all hear me clearly. I am Lucinda Riches, the Chairman of Greencoat UK Wind PLC. On behalf of my board colleagues and the investment manager, I thank you for joining us today. Before we begin, a few housekeeping points about the schedule today. The main session will run to 2:30 P.M. and will include some time for your questions. A break for refreshments will then follow, and we will resume at 2:50 P.M. with two further sessions. First, a conversation of repowering, moderated by my board colleague, Jim Smith, and then a panel on U.K. power at the power market composed of my fellow directors and another representative of the investment manager. We will end then with some concluding remarks, and I invite you, please, to stay for refreshments afterwards if you would so like for any additional Q&A. We will all be around.
To begin, many of you have been investors in UK Wind for a long time, and thank you for that. Others are newer to the company, so welcome. But all of you will recognize that a great deal has changed since the company listed in 2013. The U.K. electricity market has changed, the cost of capital has changed, and the opportunities open to renewable infrastructure investors have changed. Throughout that period, UK Wind has continued to increase its dividends with inflation, generated substantial cash flow, and reinvested GBP 1.1 billion back into the portfolio. The shareholder experience over the last few years has not been easy. Changes in power prices, low wind resource, and rising gilt yields have created volatility across the listed renewable sector. Our model has remained resilient and has continued to generate robust cash flows and has given the company optionality to invest in its future.
That matters, we think, because we believe investors are increasingly distinguishing between businesses on three key characteristics: on scale, on the ability to self-fund growth, and on the credible route to deliver it. We believe that UK Wind, by design, already has all of these three things. Today, we are not here to talk about changing the financial proposition. UK Wind will continue to target a well-covered inflation-linked dividend with long-term value created through disciplined reinvestment in the U.K. wind market. What has changed is the range of ways to deliver this. When the company was launched, reinvestment largely meant buying operating wind farms. Today, there are more ways to put capital at work within UK Wind: investing in assets under construction, extending the lives of operating wind farms, and repowering of older sites. We believe a good part of that opportunity sits in the portfolio we already own.
Each of these opportunities broadens the sources of return available to UK Wind. Together, they allow us to build a more durable portfolio with longer asset lives, a broader mix of return drivers, and more options to contract revenues. The board, working very closely with the manager, has spent a great deal of time ahead of today evaluating the opportunity set as we see it. We have looked broadly. We have looked at other technologies, we have looked at other geographies, and we have tested these opportunities against the same standard, the risk-adjusted return for our shareholders and whether it sits within our skill set. Our conclusion is that the most attractive opportunities are already in our expertise and within UK Wind. We of course remain open-minded, but that is where we are and see the best value today.
So over the next 45 minutes or so, Matt and Steve from the manager will take you through the broader opportunity set, the capabilities to execute it, and what it means for our portfolio's cash flow over the next several years. Thank you.
There it is. Let me just skip through to I think you've seen the agenda. You know what's happening today. Lucinda's described that well. There's a picture of Lucinda. Let's get started. So as Lucinda said, today is very much about evolving how we deliver UK Wind rather than fundamentally changing its investor proposition, and that's recognizing that there's a much broader opportunity set than when UK Wind listed in 2013. So Steve and I are going to walk through UK Wind's businesses, its advantages, the expanded opportunity set that we see, the scale of those opportunities, and how well-positioned we are to execute, and ultimately what that means for shareholders in the portfolio. We'll run for about 40 minutes or so, and there'll be ample time for Q&A afterwards. If you'd like to log a question in the room, raise your hand. We have a microphone.
If you're online, there should be a portal that allows you to do that. So perhaps just to start with a reminder of UK Wind's business model. That'll be familiar to most of you, but it's worth restating. So UK Wind was designed from first principles to be a simple model with a focused exposure to the U.K. wind market, delivering inflation-linked dividends and additional self-generated capital to reinvest back in the business. It gives us the aim of keeping capital in real terms over the long term. So how is that delivered? We own a high-quality portfolio of U.K. wind farms. They generate more cash than we need to pay the dividend, and that's what gives us the organically generated capital to invest. And since IPO, we've generated about GBP 2.6 billion in net cash generation. So that's money that we have something to do with, to allocate.
GBP 1.5 billion of that has gone to inflation-linked dividends to shareholders, and GBP 1.1 billion has gone back into the portfolio. And over that period of time, UK Wind has also matured as a business. So remember the first phase of this, which you can probably see better on the slides than on the screen. But the first phase was proof of concept. Well, UK Wind was the first of its kind to list in the U.K., the first renewable devoted investment trust. So the first period of time was around proving that the concept works and that it can deliver. The second phase is building scale. So by generating, raising, and allocating capital wisely, the business grew appreciably to the end of 2023. And at that point, it provided about 2% of all the U.K.'s electricity.
UK Wind owned about 6% of all U.K. wind farms, and it powers over 2 million homes. That's also in a market that itself was growing at the time and is still forecast to continue growing. We'll talk about that part later. As Lucinda Riches referenced, the last period is more about resilience, and we recognize it's been a challenging period for shareholders. Fundamentally, if you look at UK Wind's business model, here's what it could do. We could still increase the dividend in line with inflation, and we have. We still generated excess capital to reinvest back in the business. We could comfortably refinance our debt, as we've proven consistently over time. We could also recycle assets and also allocate capital more flexibly to suit the needs of the time.
Lastly, it was also a period of time where the board and the manager demonstrated a strong alignment with the shareholder experience by being the first to lower fees to the lower of net asset value and market cap. For me, this is what a durable model looks like, and it's a function of design. Again, this will be very familiar to many of you. Own operating wind farms, generate electricity, generate cash, GBP 1.5 billion in dividends. We're one of a handful of FTSE 250 companies to have continued paying an increasing dividend every year since IPO. Beyond that, crucially, GBP 1.1 billion to reinvest back in the business. We see reinvestment as the crucial feature going forward. Why is that? It's no secret that unless you can do something with these assets at the end of their lives, they do come to an end.
That part we're going to talk about a bit later in more detail. They're fundamentally depreciating assets. What does this chart show? This shows that over time, if you don't reinvest in your portfolio and you just own the assets that we presently own, didn't generate anything more than your dividend, fundamentally, the net cash generation, the cash available to shareholders, is going to decline over time. In other companies that have lower dividend cover or 1.1 x dividend cover and no other routes to raise capital, be that drawing debt that's been repaid, issuing equity, or finding third-party equity, that is what those investors own. That by design is not what UK Wind is. We'll show you some more detailed charts on this later that represent where we're heading as a business with the new investment themes that we have.
Fundamentally, by reinvesting and generating that excess capital from our portfolio, we can add to the cash flows to shareholders over time. That's how you support a growing dividend. We increasingly believe that shareholders are recognizing the characteristics that are going to define the successful companies in this sector. First, scale. Scale gives you relevance. Scale also gives shareholders liquidity. It also fits inside model portfolios. It's a really important factor. The second is to be a self-sustaining business. That's GBP 1.1 billion back into the business thus far, and GBP 0.9 billion-GBP 1.4 billion over the next five years to reinvest back in the business. Also the ability to execute on an attractive market opportunity. We're in a market that's growing. It's forecast to double in the next decade. This is a significant market in which we can provide attractive returns.
We increasingly see investors recognizing the distinction that provides and distinguishing between companies that are trying to create these characteristics and companies that already possess them. UK Wind is already there by design. That is one of the advantages that we have. What does that mean for, say, the next five years? A chart that, again, is familiar to many of you. EBITDA of GBP 3.3 billion- GBP 4 billion. If you pick the midpoint, that is roughly 1.5 x our market cap today. GBP 2.2 billion- GBP 2.7 billion of net cash generation. The midpoint is basically our market capitalization. After paying a dividend that is going to increase in line with inflation over the next five years, there is GBP 0.9 billion- GBP 1.4 billion to reinvest back in the business.
The question therefore isn't whether UK Wind will generate capital to invest back in the business, the question is what to do with it. Before we dive into the broader sources of return, historically, UK Wind has delivered its returns and can continue to do so by buying operational generative assets that generate cash, more cash than we need for the dividend, and that creates the virtuous circle. That is a perfectly fine way to deliver UK Wind. What we are recognizing today, and indeed in the work that we have done over many months with the board, is that there is a broader opportunity set available to us and that is attractive. What is that? Operational assets really there is the baseline. You think about construction assets, I think it doesn't warrant that much explanation. These are assets that are not yet operational, but they will be.
Risk-wise here, what we are talking about is projects that are going to get built. It is just a question of when and how much it is going to cost, not a digital risk that they won't exist. Life extension, we have a standard asset life of 30 years. Technically, many of our sites will last longer than that. There is work that we can do to generate additional capital and cash flow for the portfolio in opportunities that already live inside our portfolio today. Lastly, repowering. At the end of the journey, ultimately, is there some new site that you can create out of the things that you already possess? The grid is a very important part of that. That is typically an enduring connection. You will hear a lot more about that today, as well as a separate session on that Jim will lead.
How do we think about these investment opportunities and their characteristics? I guess when it comes to thinking about portfolio composition, the first thing to observe is that no one of them is any particularly better than the other, but they all offer different things. What are the things that we think about? Principally, what yield will we get from this asset? We are fundamentally a dividend-paying business. To not think about that would obviously be daft. What effect does that have on the net asset value of the business over the long term? What kind of returns can we get? That is obviously important. You don't invest at the right returns, you will not deliver your investment proposition to shareholders. Lastly, revenue profile.
There are a number of different ways to manage the revenue in the company, and you will hear some more about those later, and there is a separate session this afternoon on the power markets and policy that I promise will be interesting. Another way to manage your revenue profile is to buy the assets that you want to compose together the blend that you are looking for. These are the characteristics that we are looking at these new investment opportunities across.
I guess just first as a baseline, operational assets, familiar to everyone who understands UK Wind and the sector more generally. You have a decent cash yield from day one they are operating. As we showed earlier, these assets are depreciating unless you can do something with them at the end of their lives, be it extend them or repower them, and that will not work for every asset.
Base case returns, so we can compare the risk-adjusted returns of the other investment opportunities that we have. That is our portfolio-level average rate of return. The revenue profile is variable. You could choose to buy an asset that is largely fixed in cash flow composition or one that is entirely merchant, and we have done both. That is there more as a baseline, and also to say that nothing about today makes operational assets unattractive. They are always going to be the core of our portfolio, and indeed the end destination of the things that we are doing today is to create operational assets. We just feel there is value to be created along the way. Construction assets. As I said, these are assets that are going to get built. They will have planning, land, grid, and a route to market.
It is really a question of managing the risk of when they get built and how much it is going to cost. Anyone who has done home improvements knows that those are the two ingredients to think about and to price. What do you pay away for a construction asset?
You have to build it. During that period of time, you are not earning any return. There is a period where there is zero cash return to you. On a portfolio basis, that is manageable. We will look at that in a minute. The NAV effect. If you spend GBP 100 million building a wind farm, if you have done your job well, then at the end of that journey, when it is operational, it should be worth a lot more than that. I mean, not GBP 300 million, but some decent function of it. Fundamentally, these are assets that appreciate in value. They will then start to decline.
Initially, they can add to the net asset value of the business. How much risk and reward do we think about? There is a range here. One could buy a construction project where it is fully wrapped by somebody else. They are taking the risk of timing. They are taking the risk of costs. The other end of the spectrum, those are your problems to deal with. The job that Steve and I have with the board is to measure the right return we should expect for those risks. That is the calibration exercise. What kind of revenue are you buying? Typically assets that are being built today or about to be built are beneficiaries of contracts for differences, so 15-20 years of CPI-linked income. These are typically going to be highly fixed by nature.
Life extension, this is probably the clearest example of creating value from things that we already own and things that we already understand. These are assets where we have operated them for a decent period of time. You understand the wind regime, you understand the land, you understand the local environment.
There is a lot that you already know. How do they behave from a portfolio composition perspective? If you are thinking of life extending something, it is already an operational asset, so it is already yielding you cash. If we pretend for a second that it is a wind farm that is, say, 20 years old, it has got 10 years left, and that comes up a little bit back to the acquisition that we announced this morning. Then if you can add another five years of cash at the back end, then that is obviously going to appreciate the net asset value .
It is appreciating in the beginning. Depending on how much cash versus the cash you already own you are adding, there is an uplift in the returns that you are getting. Why? Well, you have just created some new revenue, and it is not desperately costly to do so. What do you do with those hours that you have created? You could choose to contract them on a short-term basis, a medium-term basis, or long-term basis. There are lots of options. That is why we have written variable. Lastly, repowering. That goes one step further. Creating a new wind farm out of an old wind farm, there is inevitably a period of time where you have to take down the old wind farm and put the new one up. It is a bit like construction. You lose some revenue at the beginning.
What you are gaining is typically a far more productive site with larger turbines that better harvests the wind resource available at that site. It is obviously additive to the because you have just created a brand-new 30-year asset out of one that you had already written down to close to zero. It is hugely additive. The returns will depend on the quality of the site that you can confect out of the ingredients you inherit. What would the cash flow look like? As I said, most new sites today are being built under long-term allocation round contracts for differences, so likely highly unfixed. Bringing these all together, the way that we look at these is complementary building blocks for a portfolio. No one of them is particularly better than the other necessarily, and it could change over time.
You see points in the markets where certain operational assets trade at prices that are really attractive and times when they do not. The point is, this gives us the choice of where to allocate capital dynamically over time, and as you will see later, improve the durability of UK Wind’s returns.
I will just bring that to life a little bit with some, I guess, deliberately kind of cartoonish examples. What this is showing is we invest in a GBP 1 in a construction asset, what happens? Then we will look at repowering, and then we will compare it to an operational asset. As I said, there is a period of time where there is no yield on your investment. Why? Well, you are building a wind farm. It could be 12 months, 18 months, 24, 36. It depends on the complexity. There is a period of time where there is no yield.
If your entire portfolio was this, it wouldn't very well work for us, would it, right? You wouldn't have the cash to pay your dividend in the near term. This is not the entire portfolio. This is an example as a building block of how we can compose together the cash flows to deliver UK Wind's outcomes. As I said earlier, you spend your money over time, but ultimately, at the end of the journey, you have an asset that's more valuable than the one that you paid, in this case, a GBP 1 for. Why? Well, you've taken risk. You're compensated for that. If you had a ruler, I don't, you'd draw a line and you would see that it really sort of delays the depreciation. That GBP 1 is still worth a GBP 1 out until about 10 years or so.
That's quite different with a mature operational asset. Let's think about buying an operational asset and repowering it. Again, you'll hear a lot more about how to do that today and the risks and how we judge them. At the beginning of owning an operational asset, we've assumed here it's only got five or six years left. Well, this NAV's going to go down to zero. Why? Because you've run out of the cash flows that you've bought. That's obvious. The compensation is in the near term, your yield's pretty high. If you've got five years left, roughly 20% yield per year because you're degrading the asset value as you go. You have a decent period of yield, but you have your NAV running off.
The way that you would do it is you would line up your repowering ahead of that moment because these things take years. It involves planning. It involves working with the grids. You may need extra land. You line that up so that you then have as short a period as possible of taking down the old site and putting the new one up. What does that give you? Well, it's kind of like a construction exercise, right? A period where you don't have any yield, then a pretty steady yield after that, and a big increase in net asset value. Why? You just created a valuable asset. If you think about how you could compose these things together, that is what this slide is trying to show. Again, it's in a deliberately cartoonish way.
We've spoken about construction assets, meaning that you don't have a yield for a period of time. That's completely manageable if you compose it with the right set of assets. It squiggles around a bit, but more or less, it isn't particularly different to owning an operational asset from a yield perspective. I think on a NAV perspective, with a broader investment portfolio, you can see that there are opportunities to add value, and that in itself defrays the depreciation of standard operational assets. That's what this can provide. I'll just summarize and then allow Steve to come up. A good question would be, well, why are you doing this?
Operational assets are a completely fine way to continue delivering UK Wind's proposition. As we've just demonstrated, with the right composition and good risk management of a broader set of investments, you can alter portfolio outcomes for the long term, and that's what we're in business for. We're a long-term business that thinks over decades as horizons. That's what this can offer. To summarize, described how UK Wind is advantaged as a business with scale, self-generated capital, a large target market, and increasingly, we see that investors are distinguishing between businesses that possess these characteristics and those that are trying to create them with any number of risks, changes in strategy. UK Wind is already there. That is what UK Wind is by design. We now have more ways to deploy. It's much better to have four ways to get there than one.
You can get there with one. Having four ways that you can allocate dynamically across at different moments of time, depending on the relative attraction, for us as portfolio managers, is a very attractive feature of what this provides us with. What does that give you? A more durable portfolio, more ways to add value for shareholders, and fundamentally longer life assets with more options as to how you can contract the cash flows of the business. Steve's going to build on that and show you the market size, our ability to execute in these areas, and then what it means fundamentally for shareholders in terms of cash flow over the long term.
Thanks, Matt, and good afternoon, everyone. As Matt said, I'm going to talk around some broader detail on the toolkit that we have and what this means for UK Wind and its performance metrics going forward. Firstly, just wanted to recap on what we've learned so far today. Lucinda said earlier, we've done a thorough market review of all the options available for UK Wind. We've looked at different technologies, we've looked at different geographies, and we've looked up and down the value chain as well. We've concluded that the best risk-adjusted return opportunities for UK Wind remain in wind in the U.K. Our financial discipline remains unchanged. We're going to keep our approach to gearing. It's worked in the past, we're able to refinance, and it's going to work in the future.
We're going to prioritize a well-covered dividend, and of course, the inflation linkage will remain. We have clear hurdles for investment. The move with this broader toolkit will be scaled gradually. It's going to be funded out of self-generated capital, which means that we will be growing slowly into this new world for UK Wind. Naturally, we're going to remain selective in terms of those new opportunities to make sure that the risk-adjusted returns work for every single opportunity that we pursue and that it complement the overall portfolio. Matt talked around the broader toolkit earlier on and why that's attractive to us, giving us a more durable proposition for UK Wind. It leaves three questions. Firstly, do we have the capability to execute this broader toolkit? Secondly, what are those opportunities in practice, and what does the market actually look like?
Thirdly, how will we allocate capital between those different opportunities? The first question is, can we do this? Do we have the capability? Matt and I have spent many years working in this field and personally have worked on over 70 projects delivering 1.8 GW of renewable energy capacity. We think that is pretty significant. We have a wider team as well within UK Wind who has also worked on these types of opportunities that span the full life cycle of renewables from greenfield development all the way through to approaching construction, into construction, and then actually at the back end, and even some repowering as well. Me personally, I spent a significant part of my 20-year career working on development and construction opportunities.
That has included buying pipeline, selling pipeline, looking for routes to market, applying for CFDs through competitive auctions, and also looking at construction as well, as you can imagine. Indeed, my last role, I was leading the development and construction activities for a pan-European developer. It is fair to say I have got a bit of experience in this field and maybe even some scars to bear as well. I will look to bring those to UK Wind. In addition, the manager, Schroders Greencoat, has a huge amount of experience here. We have invested in over nine different technologies and deployed GBP 2.3 billion of capital into development and construction. We have an in-house development team dedicated to working on development and construction, and we are currently building hydrogen projects, battery projects, solar projects, and of course, wind projects.
We think that really gives us the credibility to be able to go and execute on this new toolkit. It is more of a hygiene factor. Having said that, the next thing is talk around what these new opportunities look like. I am going to try and give you a bit more depth and color on that. Construction assets. We have talked a bit about this already. Since 2013, in the U.K., the majority of renewables have been procured through what are called contracts for differences, CFDs. They do those through allocation rounds, and they end up with 15 or 20-year contracts, inflation-linked. Obviously, that matches our dividends. We think this is really attractive. Indeed, allocation rounds five to seven, where projects have been allocated at the moment, have around 3.8 GW of supported onshore wind projects.
We think the size of that opportunity is especially attractive to us, and which means that that is why we are going to be focusing on onshore wind in terms of construction. We have been actively originating opportunities this year. The team have been working very hard, and the relationships that we have with utilities and developers really make sure that we see the vast majority of pipeline out there, and in some cases, even bilateral deals as well. We have worked on about 350 MW so far. Currently only got about 100 MW left in the pipeline, and the reason for that differential is that we have not always seen risk being priced right, and we are not willing to move our discipline there, and so we are happy to pass on opportunities where we do not see the right risk-adjusted returns.
Matt also talked around the difference in terms of premium that we see compared to the operational base case, 50-200 basis points. That might seem like quite a large range, but that is because not all construction projects are the same. You can have a fully wrapped construction project where price and time and all the risk is taken by the counterparty. You would expect to earn a lower return. On the other end of the scale, there can be specific issues that you have there. You might not have a time guarantee, you might not have a cost guarantee, and for that, you are taking more risk, and therefore you would expect to be able to earn a better return. Our job is to make sure we price that risk correctly. We believe we have got the experience, we have explained it already.
After we price that risk, it is then about execution. Moving on. Life extension. This is the lowest cost form for value creation for UK Wind. Matt mentioned it earlier, around about 300-500 bps extra on IRRs for projects. It is really, really significant. It is a growing market. By 2030, more than 5.4 GW of wind capacity in the U.K. will be 20 years or older. Naturally, each year thereafter, there is going to be more coming into the pipeline. That gives us a great steady flow of opportunities. We believe UK Wind is also a natural home for such assets. They yield high and we have the dividend. They match really, really nicely. We have got the skills to optimize and manage these assets in-house already, managing 49 wind farms already.
From a technical and commercial point of view, we think we are second to none. We also do not even need to look to the wider market. Both Lucinda and Matt mentioned it earlier, we have opportunities in our portfolio. We think we have got more than 20 projects or more than 800 MW of capacity that could be suitable for life extension. As you can imagine, we are busy working on that, thinking about the real estate, thinking about the planning, and thinking about how we are going to maintain those turbines for the long term. In terms of what that means financially, if we were to extend all of those assets by five years, it would add about GBP 0.04 to NAV. You might be thinking, well, that seems a bit modest.
Where is the real value? The real value is actually much longer term because our assets are on average 10 years old. That additional five years is in 15 or 20 years' time, so you discount it back to date, it is much less. Therefore, it is probably more interesting to think about it in terms of additional cash flows. If we were, again, to extend those assets by five years, it would add about GBP 100 million on average per annum to cash flows during the 2040s, really future-proofing the business for the very, very long term.
Actually, in terms of modern projects that we are seeing, both in construction and elsewhere, almost all projects now are being designed on a 35-year basis. That is what the planning is coming with, that is what the leases are there for, and that is indeed what the turbine manufacturers are operating as well.
In terms from a technical risk and from a planning risk, we think the barriers are relatively low. Next on to repowering. The first question is what is repowering? That's effectively building a brand new wind farm on the current land that you have. It's typically going to be with more modern technology, means bigger turbines, typically fewer, mostly because of the restrictions in terms of grid. But what we'll see is a higher output, something like 25%-40% extra output, as these turbines are much higher with larger swept area. That's the area of the turbines where they can harness the wind, leading to a better utilization of the grid connection. Of the 5.4 GW of wind capacity that will be 20 years or older by 2030, 4 GW is onshore capacity.
Again, that's where our focus is going to be because the market is so attractive. Again, there'll be a steady stream of opportunities there for us. Matt mentioned this morning we announced that we acquired the extra 20% in what we call the Willow portfolio internally. That's a combination of five wind farms that we acquired from EDF earlier this week. That is a real live example where we can apply both end-of-life extension and repowering, and we'll come onto that in more detail later on. We think repowering is really interesting for us, and we've actually secured repowering rights across other of our wind farms as well. That's going out with the landowner and securing the real estate as well. That's something that we have a target list and we're working through with our team on a daily basis.
It's important to note, though, that not all of these will be successful. There might be planning issues, there might be real estate issues, there could be issues with the economics as well. But we believe in building this optionality for UK Wind in the future. We understand what the characteristics are of what makes a successful site or not, and we'll be able to execute on that. Finally, in terms of the broader toolkit, operational assets. This remains the core part of what UK Wind does, and it's a really key pillar for us. It's a hugely active market. Each year there's around 2 GW-3 GW of publicly traded wind farms out there. It's a massive opportunity for us. Again, the relationships that UK Wind has built over the past 13 years mean that we see the vast majority of this pipeline.
We've looked at a number of assets this year, and we're not always seeing the value at the moment, so we're not actively pursuing that. One of the benefits of this broader toolkit means that we can go after the best risk-adjusted returns at any one time, and we will continue to do that. The principle will remain the same. We're looking for that pricing. We're looking for portfolio fit. We're looking at things like where the location is, what the turbine type is, what the revenue stream is, and also having an eye on maybe in the future, can we look at extending asset life and/or repowering. Together, this toolkit gives us, not an obligation to buy, but the opportunity to look at a wider range of opportunities for UK Wind. Let's quickly turn our attention to revenue management.
Now, I appreciate this is quite a busy slide and maybe not everyone can read it from where you are sitting, so I will try my best to take you through it. The first thing to say is that UK Wind's merchant to fixed exposure is a deliberate choice. It has been the case since IPO, and it remains unchanged today. We are not going to change it going forward. What is changing is our ability to be able to shape those cash flows, both in the short, medium, and long term. The current portfolio has an inherent profile in terms of its fixed to merchant exposure. You will see at the top there we are over 6% fixed over the next five years, and over the long term, we are about 50/50 by NPV. If we did nothing, it is going to get more and more merchant over time.
But of course, that is not what an active manager is going to do. There are many levers which we have, which we can manage this risk with. New investments into contracts for difference, 15 or 20 year inflation-linked contracts. Corporate PPAs. Maybe even a wholesale CFD might come available at some point. In the shorter term, we have also got physical hedges and financial hedges as well. Together, that helps shape the cash flows that we have to really underpin the dividend. That reinvestment is really, really key for this because those CFDs can really help marry up against some of our older assets and make sure that we have the right ratio going forward. Capital allocation choices are absolutely key. In that shorter term, we have been very active over the last 12 months.
We have hedged around 3 TW h of power during 2026, 2027, and the early part of 2028. We are not trying to predict power prices, but what we are trying to do is give certainty to our dividend. We are also very active in the corporate PPA market as well. We have some corporate PPAs in our book, and we are running a tender process at the moment for exactly that. But it is also important to note that merchant exposure should be balanced. 2022, and indeed this year, has shown some upside for UK Wind. Finding that right balance is absolutely crucial, and we will go onto that in more detail in session three later on. But the key point to take away with all this slide is that we have many levers to manage our merchant risk in the short, medium, and long term.
The next question is, how are we going to allocate our capital? All these opportunities only really work if we choose well, and we want each pound to compete. The three criteria we are looking at, you can see them on the screen here. Return. So risk-adjusted return against the operational base case. We talked through earlier on about some of the differences there that we can see across construction assets, life extension, and repowering. We will always be calibrating that to the operational core of the business. Cash flow. What is the effect on short, medium, and long-term dividend cover? It is a crucial factor for many of our investors. Linked to that is how much of the cash flow from new investments is fixed, or the ability to fix that cash flow. Finally, portfolio impact. What is the impact on NAV?
We talked earlier on that you can have assets that depreciate, and you can even have assets that appreciate in the short term. We have also got to think about asset age as well, as well as the overall effect on the concentration and/or diversification in our portfolio. Therefore, it is really important to triangulate all of these opportunities to make sure we are pursuing the right one.
This is all underpinned by discipline as well. The board are involved, obviously, in every single investment decision, but also much earlier in the process when we are looking at opportunities as well. It is a key facet that we make sure that we are looking at the right opportunities the whole way through the opportunity set. You will note here and later on, we are not setting a specific target for the different allocation buckets or the different toolkit. That is a deliberate choice.
We want to make sure that at any point in time, we can make the right decision to go after the right investment with the right risk-adjusted returns, rather than having predetermined buckets to fill. We think that is the best way of creating and managing value for UK Wind and our shareholders. In summary, in this section, we believe we have got the credibility. We have got a really attractive toolkit in terms of opportunities, and we have got a very defined criteria for allocating capital, along with numerous levers to manage our revenue management. What does this mean? What does this mean specifically for the performance metrics? We have talked around today how the investment proposition is not changing and how the broader toolkit gives us more durable delivery, but what does that really, really mean?
What I am going to run through now is some allocation scenarios, how we are going to allocate our self-generated capital. You are going to see one where there is no reinvestment. It is a bit of a spoiler, it is not a realistic opportunity. Second, where it is all invested into operational assets. Then thirdly, using the toolkit. These are obviously all illustrative. Here on the screen here, you can see the same chart which Matt showed this morning or earlier on. The only difference here is that we have added in the fixed cash flows as well, which is the darker green stack at the bottom. These are finite life assets. As you can see, over time, the cash flows do diminish.
The fixed cash flows down here, towards the end of the 2030s, as the ROCs and CFDs and corporate PPAs start to roll off, the fixed cash flows disappear. Note here that there is no revenue management. In reality, if this was the case, which is not realistic, if this was the case, we would be able to better that situation. But this just is not a realistic opportunity. This is assuming that all the cash that we generate, we do nothing with. We do not even stick it in an account and earn some interest. We just forget about it. We wanted to show this to show the value that we can create by allocating the capital sensibly going forward. What would it look like if all of that self-generated capital was put into operational assets? It is a totally different story.
As you can see here with the blue stacks on top, we are able to grow our cash flows in the medium and long term, and we can add significant fixed cash flows, too. The ROCs and CFDs still expire. That leaves us by the end of this chart assuming no revenue management, so there's no fixing, there's no corporate PPAs, nothing like that, with around 30% of our cash flows fixed. In this scenario, the NAV grows and asset age slowly increases. That's on the qualification that the way that we've assumed that these assets would be bought is when they're 10 years old. You could actually buy earlier, younger assets, and manage that asset age more actively. This works. It's a totally deliverable proposition, but we can do better, and that's using the broader toolkit.
For these purposes here, we just simply put 1/3 , 1.3 , 1/3 in terms of the allocation buckets. So 1/3 into operational assets, 1/3 into construction assets, and 1/3 into repowering back opportunities. Here, the cash flows grow again, but faster. In the short term, it's relatively similar. There's a bit of a cash drag from the assets put into construction. But in the long term, we're able to augment those cash flows. By this, we're also naturally able to maintain the 50% target. See the blue stack in the middle? That's all the fixed cash flows. So without any revenue management, we can achieve the 50%. Asset age is maintained, and because of the value enhancement that we have through some of these higher returning products, we are able to grow NAV faster.
It's important to note that none of these charts here are showing anything on end of life extension, and as I mentioned to you earlier, that can be a significant upside for the business. In summary, this broader toolkit enhances our overall performance whilst maintaining short-term dividend cover, which is a very important factor for us, and delivering enhanced NAV growth for our shareholders. So bringing this all together, the investment proposition is unchanged. We'll say it again. We want a well-covered dividend, inflation linked, with reinvestment into UK Wind opportunities to preserve the capital in real terms. It's the delivery of that proposition which is evolving. Here you can see some performance metrics of which we care about when we're making these investments. So the optionality. We're able, as you can see here, to look for different ways of investing our cash. We talked about these already.
With this broader toolkit, we can naturally maintain the asset life, the age of the asset life in our portfolio. We can also maintain the fixed revenue profile without any revenue management at all. Finally, we're able to enhance the NAV growth for our shareholders. So we're really excited about this proposition. With that, I'll hand back to Matt.
Thanks, Steve. Really, before we move to Q&A, just to summarize what we would like you to take away from this session. We already feel that UK Wind is in an advantaged position because of its design. It has scale, it is self-funding. We have a target market that we can invest in at attractive returns. Those characteristics together are the ones that I think are going to distinguish the businesses that succeed in this market from those that do not. The characteristics we already possess, by design, we have them. We need to do nothing more to get there. We described to you today a range of different investment opportunities that we have, that we have worked very hard on with the board and thought about deeply. That gives us multiple ways to get there.
As Steve said, this will be a dynamic allocation over time to respect which opportunity at any given moment looks the most attractive to us and how that impacts the portfolio. What does it deliver us? An even more durable portfolio, longer term cash flows, more ability to fix cash flows, more tools to do that, and frankly, more ways to add value. Look, we are excited. UK Wind is already a market leading business. What we are doing today is explaining the ways that we are going to use to make it even better. Thank you for your attention through the 42 or so minutes. You have been very patient. It is time now to hear some questions. John, if I invite you up, you can lead us through questions, and Steve and I will stay on stage to take them.
Thank everyone. There should be roaming mics, and there is the ability to ask questions online, but we will definitely start in the room. We have got about 15 minutes before we head to coffee, and Colette is eager there. Colette, you can go first.
Thank you. Just three from me, please. Can you give some color on the pricing differences, the risk factors you talked about in terms of the 250 MW you walked away from, market-wise? Second of all, can you give any color in the cash flow scenarios, illustrations that you have given? Has there been any change to the expected dividend cover range within those? Are you dropping that down a little, given how the market has changed? Again, just in terms of the other key factors on those cash flow assumptions, what is your realistic view of your current curve for the power price in those numbers, please?
Yeah, sure. In terms of some specific, if you can all hear me, specific reasons why on those construction assets we did not meet the pricing expectations. As I said earlier, not all construction assets are the same. There is a whole host of risks. In these particular examples, there are ones around grid.
Maybe the planning for the grid is not completely there, or they do not have a certainty in terms of that grid date. We would see that as a bit of a risk. Not in terms of you will not get there, but there is a timing issue there as well, and if that risk is pushed onto us, we would expect to be able to price that in. There is capital out there that either overlook that risk or see it differently compared to us. There are also other aspects in terms of the way that they look at energy yield as well.
We all know that energy yield is an important facet of wind assets, and sometimes people are willing to be more aggressive in terms of their views on that. We are not willing to sacrifice our positions on where we see the long-term yield targets are going to be. Then there are probably also things around there. There is a bunch of pent-up capital out there that is really trying to chase these assets. AR7 assets especially, our attractive 20-year linked inflation contracts, and there are people going after them as well, and maybe just willing to bid at a cost of capital that we are not willing to go down to. This is one of the benefits of the broader toolkit, is that we have the ability to say, okay, well, we will not go there.
We will go and find this other opportunity as well. We have also got relationships with the vast majority, if not every major developer here in the U.K. We are able then to go and find other pipeline out there, and we do not feel constrained at all by pipeline. It is more around finding the right risk-adjusted returns for the business.
Quick follow on. Can you say where those opportunities went to?
None of them have actually closed. It might well be that they come back to market at some time. This is all an exercise we've largely been doing this year, and we're not aware of any of those deals actually closing, so they could come back.
As Steve said, it's about discipline. I'd rather wait a little bit and invest wisely, because you're going to own that into the future. We've both seen enough construction projects. Jim's certainly seen a fair few as well. You know what you're looking for and you know how to price it, and if the market's telling us that for these particular projects, and there are still 100 MW that we're looking at that does work for us, that the price somebody else is willing to take more risk than we are for the price, then that's completely fine. You also asked a second question, Colette, on the portfolio cash flow returns over time. Those are just assuming our current NAV assumptions. Nothing new, nothing heroic. As Steve said, that even excludes the possibility of extending life of existing assets.
If you did see that, it would happen, of course, later, because few of our assets are 25 years old. We have more of assets in the 20-25-year-old range. If you wanted to think about what that means in terms of dividend cover going forward, we didn't put a line on the chart, we could have, that shows that if you take our current dividend liability of roughly GBP 230 million and times it by your expectation of CPI, you maintain pretty decent level looking dividend cover. So the 1.7-1.8 kind of range that we've been guiding to for the next five years.
It is one of the key criteria for our capital allocation policy as well, is to think about what it does, what new investments do to dividend cover.
You have two questions each, then we will try to get around the room. Or one or two.
I only have one. Hugo Capel here from Rothschild & Co. Our clients are investors. Steve, you had slide 34 showing the runoff. Obviously, the cash flows decrease over time as the assets age, but we are also going to get more dividends in the near term because there is going to be no reinvestment. I am not advocating for this. This is more out of curiosity. What does the PV of that look like if you just paid back every penny compared to the other scenarios where you are reinvesting in the different ways?
So you mean if we paid back everything back to shareholders?
Yeah. Dividend, 100% out.
In terms of, we don't have that exact number here in front of us, but if we were to at the moment, we're forecasting we've got about GBP 200 million of extra cash or self-generated capital each year for the next five years. If we're paying you an 8% dividend this year on our NAV, then it's almost equivalent to that. Something like 14%, 15% in terms of returns it could be each and every year. That has very limited longevity, because if you're not reinvesting back into the portfolio, you can only do that for a certain period of time, and it's effectively winding down the business.
Yeah. It would just be, as Steve has said, you'd get a yield that would just decrease over time, but the present value of that is in effect what our net asset value is. It would just be the shape of it as it comes out to you. So that in effect is a wind down.
Another way of looking at it is your NAV doesn't include any optionality for these other things that you can potentially do.
No, we don't bake into our NAV that we are going to generate cash and then do something good with it. On a yearly basis, you do expect that you're going to have the net cash generation that comes off of the portfolio, but the future allocation decision as to what that earns in terms of return, be it any of the investments we've described today or other methods of capital allocation, that's outside of the NAV.
If we go to Ashley next, and then Iain afterwards.
Yeah. Thanks. Ashley from Winterflood. Just on the 50- 200 bps construction premium. I think Octopus Renewables last year, I think they were suggesting they were finding or could see 50- 100 bps of construction premium. And actually, in their recent AR5 solar acquisition, it's been structured to be conditional to avoid the long stop date risk. Just wondering, I guess AR5, given maturity, has got that greater long stop date risk, and as you said, AR7, there's a lot of demand for it given the longer tenure. Do you think we would actually be landing with construction premium over 100 bps? Do you think there's still that opportunity?
Yes, we do. Just to make sure we are using the right currencies, so that is our levered return. Obviously, the range will be lower and smaller on an unlevered basis. I think there is a bit of a differentiation also with solar, in terms of construction risk typically. There can be some [inaudible] issues with solar, but typically, your program and componentry is a bit more straightforward. Wind, there are more components to bring together and more prospects for delay. So there are more risk-seeking opportunities out there for wind that we see, and you could see 200 basis points of additional return. But for Steve and I to underwrite that, we are going to have to be pretty comfortable that that is well-priced risk, and that is the entire exercise.
What is, at this moment, the best thing to do, is it to have a slightly shallower increase in returns from construction because you can understand the program, you can see that the risk is not really there. If there is far more risk, we are going to have to price that judiciously. That is our job, and as Steve said, we have seen the scars, been there, bought the hats in the movie. We have done a lot of this, and fundamentally, what you are relying on here is our skill and the skill of our platform with us to judge, assess, price these risks well, and then deliver execution.
Yeah. Maybe just to make the comparison to solar is, in the wind in the U.K., it is pretty rare to find an EPC wrap on your construction. In solar, it is relatively common. Because of that, there is just a natural ability to find extra returns in wind because most developers either do not wrap it or they want to sell at the beginning of construction as well. So construction risk does get passed on to the long-term investor.
We will take Iain next. Then if you just raise your hand if you want to ask questions, we will come to this side of the room next, please, Iain.
It's Iain Scouller from Canaccord. I was wondering if you'd talk a bit about your assumptions on the cost of land. I suspect quite many of the landowners will be looking for higher payments in future, particularly given the success of the renewables industry over the last few years. How can you mitigate that?
It's a good and fair question, Iain. The fundamental components of extending the life of your asset, if you don't already have sufficient lease term, or of getting a new 30-year lease if you don't already have that for repowering, is land's one of the key ingredients. Grid, you normally have that. Planning, you have to seek that. Route to market, you can arrange that. Land. That can be anywhere from simple, easy to deal with landowner, you already have a long-term relationship, to the opposite end of the spectrum for complexity, which is somebody represented by an agent. Multiple things that you can do with the land, multiple ways to try and architect value out of these renewable folk that turn up on the other side of the kitchen table. We've dealt with all kinds.
We've, in fact, recently dealt with a competitive tender for life extension land at one of our sites and managed to win that. There are, in some respects, some advantages that you can bring as the existing land, as the existing tenant. They know you. They have a relationship with you. They generally can see that you're a reasonable person. You can also factor and capitalize some of the rent that they're presently receiving today in exchange for a sort of easier path in the future. We've done a lot of this. It is an area of complexity, and you need some skills. We feel well-equipped to do that.
Yeah. Maybe just a couple of additional points, Iain. Firstly, a grid sits with the SPV normally, and so that's quite an important bargaining tool because if landowner wants to use someone else, they need to go back to the grid queue, and we all know the problems of grid here in the U.K. Secondly, sometimes you won't be able to reach an agreement on real estate with a landowner if it doesn't work, and that means that not all of these opportunities will come to fruition. We're very transparent about that. We're lucky that we've got 49 assets, and hopefully we'll be able to acquire some more over the coming months and years to give us further opportunity there, so that even when we don't get there on real estate, we'll have other opportunities there in order to get there.
Thank you.
I know we haven't got loads of time, but we'll do a couple more, and apologies, we'll probably have to come back to the questions online separately. If we go to Shonil, who will just stand out of the way.
Shonil Chande, Panmure Liberum. A quick one from me, just in terms of portfolio size into the 2030s. I guess in terms of cash yield on the existing portfolio, because of the ROCs, will be particularly higher. As you get into building out the reinvestment cash flows over time, how much bigger would the portfolio have to be in terms of, let's say, going from 2 GW of net install today to a higher level, presumably? What sort of level might that be?
I guess we haven't really calculated that as a gigawatt figure because we're looking dynamically at the opportunities. As Steve said, in the charts that we've shown, we've used 1/3 , 1/3 , 1/3 . You also have to factor into account that by the mid-2030s, some of your assets are retiring unless you do something with them. We don't have those figures to hand. We'll be happy to follow up with them afterwards. But fundamentally, I think if I'm getting to maybe where you're looking on this, we don't have to buy a significant proportion of the market or be particularly successful in buying things to spend the GBP 250 million we have a year on the range of opportunities that Steve has shown. There's probably, across what we're doing, GBP 5 billion, GBP 6 billion, GBP 7 billion of opportunity per year, and some of that's already ours.
I think the path to execution is good, and what the ultimate outcome is in terms of gigawatt hours will be a function of where we spend the money exactly.
Do we have any more questions in the room? If we go to Alex, sorry, and then we will have to call it a day after this one, and then we are obviously around later in the day and can take questions separately.
Thanks. Just two from me, please. Just firstly, on the GBP 0.9 billion- GBP 1.4 billion, if you could just give us an idea of what assumptions underpin either end of those ranges and how it compares to your base case. And then secondly, you have talked about a lot of levers to get you back into that sort of 50/50 split merchants contracted. I would be interested to understand how flexible you are to going above that on the contracted side if the government offers you the opportunity to do so next year through voluntary CFDs.
I will take the first one?
Sure.
Yeah. In terms of that range from GBP 0.9 billion-GBP 1.4 billion, basically we sensitized wind speeds and power prices to come there. There are major risks, as we all know, and we sensitize those on a realistic basis of what the downside and upside case could be, and that sets the range. It is as simple as that.
It is the same guiding factor that we've used for the expressions of this year's dividend cover. So a sensible range either way up or down in terms of wind and power prices. So when it comes to the balance of fixed and floating cash flows, as you've seen, investing is one way to manage that. Absolutely. I think you also, particularly when you think about things like the wholesale CFD, you need to really know where it's going to land. So we haven't seen that yet. It is, we understand, being worked on. It depends on the kind of pricing that you can expect to get from it, the tenor as to whether that's an attractive route. The good news is there are plenty of different routes. You've seen us do a lot more short-term hedging. What is the right number going forward? 50/50 isn't an inviolable rule.
It could be 55/45 or the other way around. In fact, today, because merchant power prices are higher, and even though we've hedged, we're slightly more merchant than we are fixed. The way to look at it is where we're seeking fixed revenues, are we seeking them at a price that justifies the forgiveness and return that you get from otherwise only merchant revenues? That's how we also look at hedging in the short term. Is this, at this particular moment, a good way to secure near-term dividend cover at a reasonable cost? That is exactly what we discussed, and you'll hear a bit about this afternoon with Nick, Taraneh, Caoimhe, James, and myself, our approach to how we're thinking about power markets and the structure of UK Wind's book.
Yeah. Maybe just to say we're supportive of the government and the wholesale CFD, and if it's well designed, we think it can be very positive for the renewable sector as a whole and UK Wind, and it just gives us another lever within which to manage our fixed and merchant ratio. So we're really positive about it.
Thank you, everyone. Thank you, Matt and Steve. It is meant to be 20 minutes. We might be slightly shorter than 20 minutes. We will take a quick break, get coffees, and then we are back here for two sessions this afternoon on repowering and power markets. Thank you.
Thanks, John.
Welcome back. As a reminder, the second part of the capital markets event is going to function of two sessions. The first around extending asset life and around repowering, and then one around the future power markets. Just as a reminder, after these sessions finish, we have some further refreshments for you. Please do join us for that and some informal Q&A as well. In this session, I am going to outline our approach to repowering, some of the thinking around it. Then I am going to be joined by Jim Smith, who is one of our non-executive directors, and Pablo Hernandez, who heads up UK Wind's technical asset management team, for a fireside chat, followed by some Q&A as well. Firstly, I thought it would be good just to recap why this is interesting for us. Scale. Scale is really, really important.
I mentioned earlier on there will be 4 GW of onshore wind by 2030 that will be 20 years or older. It is a really exciting opportunity at scale for us. There are also possibilities to hybridize those projects as well in due course, even if now we do not believe it is a compelling opportunity. What does this bring for UK Wind? It brings in extra cash flows and NAV growth. Why that NAV growth? One of the things that you can get from repowered project is bigger wind turbines, so you can get further output. That is because you can take old technology that might be limited to 100 m, maybe 140 m of tip height, up to 200, sometimes even 250 m of tip height. That is a significant increase in output, something like 25%-40%.
You might even be able to secure some extra grid capacity, which means that the overall project could increase in size as well. Repowering also comes with CFDs we talked about earlier on, which gives us those fixed cash flows. We think it's a really exciting opportunity for us. What does the decision-making process look like? We'll go onto a bit more of that later on. The three decisions effectively are you decommission your asset, you extend asset life, or you repower. Typically, you're going to want to extend asset life for as long as possible because the cost to extend asset life are typically quite minimal, and it comes with pretty high cash yields. You don't then still give up your opportunity in terms of repowering.
We mentioned earlier on, we've got around 800 MW or more of assets where we think there's an opportunity to extend asset life. We talked about some of the financials for what that looked like as well. This isn't theoretical. This isn't something we're working on in the future, something we're working on now. The Willow portfolio, which we announced this morning, is something where we can talk about in more detail in a few moments. First, we thought it'd just be good to outline what this looks like in practice. Effectively, extending asset life and repowering are two return profiles, and Matt showed that to you earlier on. On the left-hand side of this chart here, we've further broken it down into operate the existing asset, develop the opportunity to repowering, then construct that repowering opportunity, and then you've got your repowered project.
Those first two, the operation of the existing asset and the development of the repowering opportunity, effectively coexist. It takes a time to actually secure that repowering, and you'll be doing that during the existing asset life. After you've then secured your planning consent for your repowering, you'll then build that project, which is pretty much like a normal construction project, but you need to bake in the decommissioning of the existing project at all. Finally, you end up with that fully repowered project. On the right-hand side of the slide here, just wanted to highlight some of the work that this envisages. We had some questions earlier on around real estate. It's a significant part of what you need to do when you're developing repowering. You need to think about planning constraints as well and where you are on grid.
You need to use that in order to understand what the new layout for your new project can be. It's a bit of an iterative process, and you need to be able to understand what the factors are to give you the best chance of being able to secure repowering. You need to think about your wind and what the layout actually looks like. Knowing the actual asset like we do actually helps because you know what the wind speeds look like. You know where to put your turbines, what it might mean in terms of turbine choice as well. After you've done that, you've then got your repowering consent. What do you do then? It's pre-construction works. There's a lot of things around pre-construction, but the biggest element of that is going to be procurement.
It is not just buying your wind turbines, it is also procuring all the necessary civils and electrical infrastructure, and then making sure it all works together. There is no point buying your turbines and turning up and not having a road or somewhere to erect them. You have got to have the civils there, and you have also then got to have the electrical infrastructure, too. That leads us on to construction. If you have planned your pre-construction really well, your construction has a much better chance of succeeding. That pre-construction phase is really, really, really important. At the end of this, you have your repowered asset with hopefully a CFD and an extra 30 or 35 years of asset life. We thought we would just bring it to life a little bit with the Willow transaction that we acquired this morning.
Firstly, you need to actually own the asset to be able to extend its life or repower it, obviously. It is probably worth noting here that for this Willow transaction, we did not pay anything for life extension or NAV. It is just on the cash flows of the current project. Life extension and repowering is pure upside to us. Next we will look to operate. Now we know the assets very, very well, but actually having full control of that really lets you commercially optimize everything you are doing in terms of the turbine contracts, O&M contracts, in terms of what you are doing with your land, in terms of potentially even corporate PPAs. These assets tend to have a higher cash yield as well. So they are really attractive from a dividend point of view. Now the really interesting part, life extension.
As I mentioned earlier, you are probably going to want to extend life for as long as possible because the cost to do so are relatively minimal and the upside is fairly significant. There are three facets you really need to think about: real estate, planning, and whether your turbines can actually operate for that period of time. Now we have got the skills internally to be able to achieve all of those things and understand what needs to be done. We are working on this actively for Willow, but also other sites at the moment. So you can expect in due course for us to be able to give you further updates. What does this mean, though, in terms of numbers? If we were to extend this almost 100 MW portfolio by five years, it would give us more than 400 bps on the IRR.
That is a huge increase because it is five years of extra cash flows for a project that has about 11 years left. It is really, really significant. Actually, that adds about 15% to the current NAV as well. These are significant numbers here, and if we can repeat this time and again across our portfolio, there is a really great opportunity there to add significant value for UK Wind and its shareholders. Finally, onto repowering. After you have run your asset for as long as possible, you are going to want to repower it where you possibly can. In this particular opportunity, we are going to partner with EDF. We really like that as an opportunity. We have got a great relationship with them. They run the assets very well.
They also were one of the original developers of these assets. They know the landscape very well, and they have a huge amount of expertise in development. We really like that partnership there. This was already part of the deal, actually, when we acquired the original 80% back in 2017. We think that these assets are attractive for repowering because we know the sites. We know them well. From a planning point of view, we have identified no red flags. We believe from a real estate point of view, we will be able to secure everything that we need. While on these sites in particular, the wind regime is relatively modest, with newer turbines we will be able to have bigger turbines, which will be able to get more out of the same area of land and more out of our grid connection, too.
Again, we talked about some of the returns you could potentially see compared to an operational asset here of around 200-400 bps extra. It is a really attractive opportunity there for us. With that, I would like to invite Pablo and Jim to the stage, where we will have a fireside chat.
Good afternoon, everyone. Steve, Pablo, I guess the choreography of life extension and repowering is quite important here in getting it right. Could we put a little bit more color on the process that you will go through to determine the optimum time to repower and just how life extension might play into that?
Yeah, sure. The overarching consideration there is when do the economics of repowering become more compelling than extending the asset life? As we have already talked about, in most cases, it is going to be to extend asset life. At something like the Willow portfolio, we have great turbines. We know how they operate. We have the scale there, which means it is really attractive to be able to find spare parts and have the labor needed in terms of the technicians, et cetera. Extending the asset life is going to be where we are focusing. They also come with a high yield, and there is relatively little cost to extend, but that is only up to a certain point.
At some point, the availability is going to dip, and you won't be able to, at a reasonable cost, maintain that availability. That's a point where you'll start to think about repowering. Repowering obviously has a significant CapEx requirement, something like GBP 1.2 million to say GBP 1.6 million a megawatt, depending upon what your grid costs are and exactly what turbine types you have. For a period of time, as we explained earlier on, there'll be no yield. You need to weigh that up in terms of the impact of the overall portfolio. Ideally, you're going to want to overlap the building of the new project, the repower project, onto the existing project.
Whilst that won't always be possible, in many cases, there'll be some things you can do, some of the access works, maybe some of the roads, and maybe even some of the hard standings for the new turbines, especially if they're in different locations. There's also other factors that might come into play here. Is there an availability of the CFD? What's your real estate deal? We've talked about that a bit today. Is there a grid opportunity as well? The other crucial factor to really understand is that you have to run repowering in conjunction with the consent anyway for the repowering in conjunction with your existing asset life. It can typically take, say, three to seven years, sometimes longer, to secure repowering consent. You can't wait until you get to the end of asset life and then suddenly think about repowering.
You need to think about it very early on, probably in the early 20s of an asset life. Even then, there's some uncertainty. If you get something really early, you've then got five years to implement your consent. Sometimes it's less than that. You would want to take advantage of that, and that might end up incentivizing you to repower earlier than you otherwise would. You just need to find that balance.
Yeah, I think as well, like you were saying, basically all of these questions will have a different answer for each asset. Repowering will not be a one-size-fits-all opportunity. What we're doing is assess each asset based on its own merits, spending little development cost at a time until we're certain. Like Steve presented before, the Willow portfolio is a great example, where we have ROCs expiring in one to two years. We still will have 10 years of operational lifetime before the 30-year target that we have. We can see already from the assessment the potential of extending for extra life and also the repowering.
And just in assessing that residual life, what are the key areas of the wind farm that you or the focus in that in establishing what you think the residual life is?
In a way, I think obviously the assets as they age, you will see an increase on the failure rates. The components, both small and large, will probably higher risk of failure, and that will drive the availability down and also the cost of repairing those up. This obviously will be gradual, and we expect it to be from 30 year on because we have all the previous assessments. But we will also have 30 years of operational data. We will also know exactly the technology. We will know how well to remedy some of these issues, and also how to prepare and modify our strategy, O&M and otherwise, in order to mitigate all of this risk going forward.
Yeah. You mentioned technology. Clearly, these wind farms, the oldest ones now are over 20 years or approaching 20 years. Wind turbine technology has moved on considerably since then. Obviously, the obvious thing being scale. You have touched a little bit, Steve, on the potential additional output from a given site. What are the other sort of benefits of this new technology that you see that will feed into the valuation?
If I could answer that, I think in order to assess the potential benefit of a repowering asset, we probably need to understand well the restrictions that comes with the repowering. We mainly assess three factors. This is grid, planning, and we will also look at the land. Starting from the planning perspective, the most important thing to assess is the visual impact. This is driven by the size of the turbines. Firstly, we want to bring bigger turbines, but there might be a limit as to how big we can build them because of this. By simply bringing the new technology into an existing wind farm, we can expect, like Steve mentioned before, 25%-40% increase in output. This is because we bring in longer blades, so we can capture more energy at the same wind speeds.
But also they can operate at lower and higher wind speeds. So overall, the capacity factor for the site will go up. In addition to the visual impact, we will also assess noise and shadow flicker. But overall, planning will limit the potential scope of a repowering asset. Then if you look at the grid could be simple. If we assume we're repowering based on the same install capacity. If that's the case, then like we said, we'll bring the new turbines and you can expect already an increase in output. If you are able to increase the grid capacity, then obviously you'll assume a higher value of the repowering.
And this could be done in a phased way where you can repower the current installed capacity and then a subsequent wind farm extension or, more ideally, you have the planning doing the grid connection extended before you lay out the design of the wind farm and you build all of this together.
Okay.
Perhaps other benefits would be having all the wind data for so many years. It will help with the accuracy of energy yield assessment that have been a significant factor over the years. You can optimize the layout of the wind farm. It will also help selecting which turbine to install. So that's obviously quite important. And finally, I think on the availability side of things, by bringing a new contract and a new turbine, you expect a higher availability because obviously we've just said the availability will be dipping. So if you bring new assets, higher availability, this will also be warranted by the O&M contractor, and we can also shift some of this operational risk to the O&M contractor. And in that way, we can manage as well the portfolio risk, which is a great advantage.
Yeah. Is there any sort of benefit, if you like, of bringing repowering forward maybe earlier than you might otherwise expect? Because on the face of it would seem that life extension is the obvious first place to visit. But are there any situations where it would actually make sense to bring repowering forward, even though there might be some residual life left in the wind farm?
Sometimes that might happen. It might just be for factors out of your control. Like I said earlier, if you get that consent earlier than you expected, you do not want to lose that significant value. Of course, you could apply to extend the time to implement that consent, but you would not want to reduce that. So in an ideal world, it is going to be idiosyncratic per site. You just need to weigh up all the different factors at any point in time to make sure that you are just making the right decision in terms of the opportunity set you have in front of you.
We heard earlier about how we are going to continue as a business to focus on wind. When you come to repower a site, have you thought about potentially doing dual technology on site? Co-location?
We have, and we will continue to do so. Probably the most obvious co-locational technology might be batteries. It is something that, as you know, Jim, the board and the manager have reviewed in detail in terms of our view on batteries and whether there is a hybridization opportunity with our current portfolio and new projects as well. At the moment, we believe that it is not something we want to pursue, and that is principally for three reasons. Firstly, the yield profile of wind is quite different to solar, which is where you see much of the hybridization opportunities. Wind tends to be operational for windy for 24, 48, 72 hours at a time. Solar, obviously, we all know when the sun rises and the sun sets and when solar is going to be generating.
Around that midday peak is a great opportunity each and every day for a battery to charge. Those batteries require to charge and discharge every single day in order to make the economics work. Without that, the economics just do not stack up from a battery point of view. There are not sort of that natural They are not natural bedfellows, wind and batteries. Secondly, we have looked at the revenues as well and correlated those, and tried to see whether from a hedging point of view, batteries could help in terms of the certainty of dividend cover for UK Wind. What we have seen is that the top revenue days for batteries do not have any correlation at all with the revenues that we get out of our wind farms as well. So whilst there is diversification there is no real hedge.
The last point, and it's probably the most important one, is that we just don't see the risk-adjusted returns being attractive for batteries. Maybe you can get 100 basis points extra, but the risk of those revenues, especially as more and more batteries come onto the market and things like EVs are there as well, we just don't see that it's a risk-adjusted return that we want to take at the moment. Now, things can and maybe do change. Schroders Greencoat, as a manager, we've got significant experience in batteries. For other products, we are investing in batteries and indeed building them as well. So it's not no because of technology, it's no because it doesn't fit the product that UK Wind offers.
We've heard about life extension as an upside to our NAV, post-30 year design life. What would you need to see in place before you would actually start to think we can now add this to our NAV?
Yeah. It's a good question. I think there's sort of three facets, which Pablo talked about somewhat earlier on. Firstly, you need to have your land. Effectively these are real estate deals. If you don't have the land, you haven't got the project. Secondly is the planning. You need to be able to go and make sure you've got the planning to be able to recognize the value. The last point is around turbines and your ability to actually operate the turbines during that either life extension, to actually put that into your valuation. It's sometimes difficult to do that. Sometimes it's quite obvious. The Willow portfolio has the Senvion turbines, which operate very well. We've got very high availability. We'd have a very high confidence that once we secure those other facets, we will be able to operate for that longer period of time.
Other turbines might be different, and we'd lean on our engineering team and technical team to really understand what is possible there.
Yeah. So a bit of balance between risk and certainty. Yeah. Okay, listen, I am conscious of time, so maybe just open up the floor to questions. If you could say your name and where you are from. Got a gentleman here in front. Someone will bring you a mic.
Edmond Jackson. Oh, do I need to press anything? No?
No.
Okay. Edmond Jackson, Interactive Investor. Got a question to Steve. Did I hear you correctly say in relation to repowering on Willow, a 15% accretion to NAV? If so, over what sort of timescale and how representative of the portfolio? Or is this the jewel in the crown?
It wasn't about repowering, it was about life extension.
The portfolio has about 11 odd years left to run. If we today were to extend the portfolio by an extra five years, rather than having 11 years, have 16 years, then that is what it would indicatively do to the NAV. We would expect that to be broadly similar across different assets. There will be some ups and downs around that, and we gave a range for life extension earlier on in terms of what we can expect in terms of IRR upside from life extension.
Thank you.
Yes.
All right. First, a general question on regulation and compliance, pricing permits and all the rest of it at top level. Secondly, presumably your, if you like, diversification and working more with your existing assets, does that make life a bit easier? Or are you still dealing with a lot of local issues in planning grid and so on? That is one question. Secondly, the cost of the kit, the turbines, the origins. Is it still a European oligopoly? Are the Chinese coming in? So sort of two questions. Compliance, regulation, control and the equipment.
Well, I will take the first one in terms of compliance, regulation, control. So obviously we know our own assets very well. We know how they operate. We have got relationships with local stakeholders, local councils, local authorities, planning consultants, environmental consultants, and of course, the landowners and local grid company as well.
So within our own portfolio, we need to make sure we are compliant with all of our planning constraints for the existing asset, but also for the future assets as well. It is easier on the whole to repower an existing project than to go for a brand new site and develop that, because people have been living with a wind turbine for a period of time, and some of the myths that surround wind turbines are dispelled when people live near them. Also, many of our wind farms, they actually create jobs locally, and it is the knock-on jobs as well.
There are community funds as well, so we are funding local communities. So from a community point of view, they are very, very positive. So we think the barriers to be able to either extend life or repower are less. Want to take the cost point?
Yeah. So with regards to cost, obviously we have a fairly standard offering across the particular European OEMs. You have mentioned about bringing from outside of what we currently have. We obviously evaluate that, but we also want to benefit from the footprint we already have. So there are quite a lot of synergies that we can work with the OEM manufacturers, our current existing manufacturers that are the leading in Europe, and also with [inaudible]. So I would not say no, but I would not foresee using others i n the short sort of timeframe.
What we've also seen is that the Chinese OEMs aren't actually pricing at a level which makes it terribly attractive to go and use them. There's not actually a huge difference. This isn't like building a BYD car, and you can have a big factory and you're producing thousands or millions of these cars. These are all sort of built toward a turbine, so they're a lot more bespoke. So the economies of scale that the Chinese can get out of that are lessened. Solar panels are very different, yeah. So most solar panels are manufactured, obviously, in China.
Yeah. Maybe just to add, I mean, a lot with really around offshore, I mean, the government have effectively blocked the Chinese turbines, where Ming Yang wanted to invest in a factory for the U.K. market, and government have said no.
Any more? I think time-wise, that's just about us anyway, so thank you.
So we'll move straight on. And whilst people get their chairs aligned, I'll briefly introduce everybody. So firstly, moving the chairs, Matt Ridley, who you all know, Partner at Schroders Greencoat, Co-Investment Manager of UK Wind. Next we have James Samworth, also a Partner at Schroders Greencoat, co-heads the investment team, and was largely responsible for building up the energy transition platform at Schroders Greencoat. Then we have Taraneh Azad, a Non-Executive Director of UK Wind. She has extensive experience across energy trading, investment, and finance. Caoimhe Giblin is next, also a non-executive director of UK Wind and Co-CEO of renewable energy trading firm ElectroRoute. And last but not least, Nick Winser, who is the Senior Independent Director on the board, former Electricity Networks Commissioner, and a former CEO of National Grid in the U.K.
So, let me start, and we'll focus on power markets first, and we can move a little bit into policy and regulation later. So, in terms of the wider power market, and this is firstly to you, Caoimhe, what are the main things that you think are changing in the market in the U.K. and globally? And how should investors respond?
Thanks, John. Thanks very much. Great to be here today. I guess maybe showing my age, but I've been in the energy sector, the renewable energy sector, for about 25 years. And when I started back in the early 2000s, renewable energy didn't really contribute meaningfully to the energy mix in Ireland or the U.K. or across Europe. And the prices, the power markets were pretty benign. We'd base load thermal plants producing power, and the markets were fairly predictable, fairly static. And when we look at the markets today, they've obviously changed really dramatically. And there's probably two key themes, I would say, or two key words I would talk about to illustrate those changes. As John mentioned, I work in a renewable energy trading business, and probably the word that's used on our trading floor most every day is volatility. So that's the first big change, volatility.
And then the second big change is flexibility. And they're quite interlinked, and they're both important concepts to explain the energy transition and the journey we're on. I guess in terms of volatility, I don't think anyone in the room's unaware of the dramatic volatility we're seeing in the energy markets, particularly over the last five or six years. And that's primarily driven by geopolitical events. It started with the Ukraine crisis. More recently, we've seen the Iranian conflict, and that's just caused a lot of uncertainty and a lot of pressures on demand and supply of energy. And we've seen really extraordinary power prices. And the other big fundamental is the economics of demand and supply. And we can particularly see that in the market today. As we look into the winter and into 2027, our gas supplies are at an all-time, are kind of a decades-long low level.
That is primarily driven by the fact that the Iranian conflict removed about 1/5 of LNG out of the system. Europe can no longer rely on gas from Russia. We have to compete with the Asian markets for our gas. That gas has a direct impact on the price of power here in the U.K. So that volatility is really key. What that means for a fund like UKW, especially, as Matt and Stephen spoke about earlier on, where there is an exposure to merchant prices, that provides upside where those prices are higher. The team spoke really well about what actions they have taken over the last while to capture those high prices. I guess the other place we see volatility play out is in the short-term energy markets. We have moved from, again, a baseload system to a system that is weather dependent.
How much power is in the system is solely dependent on how much wind is generating power and how sunny it is, and that has a big impact on power prices within the day. We have seen huge spreads. At really extremes, prices can go into the thousands of euros a megawatt hour, during the day where it is very low renewables, where there is high demand, and then prices can go to zero or even negative, where the opposite is true, where there is a lot of renewables on the system. So that intraday volatility creates risks for renewables. The market is so different to where it was when we started, and those risks materialize in things like negative prices or wind capture prices.
Again, that is where the revenue management that Stephen and Matt talked about is really important, making sure that we have the right structures, the right contracting structures, and hedging tools to manage that exposure. Just very briefly, that leads me on to flexibility, the other key theme. It is really the introduction of flexibility into the energy system is what will capture that or manage that volatility in the short-term markets. At the moment, flexibility is coming in two areas. We have seen huge deployment of batteries onto the system. Those batteries are absorbing that difference. They are absorbing the spread between those really high peak prices and then those negative or zero prices. That is effectively their business model. What that is doing is narrowing the spread and reducing some of that volatility.
The other way we see flexibility manifesting itself today is around demand, smarter use of power, charging EVs when renewables are high, goes into heat pumps, looking at other forms of demand. In particular, smart consumers like data centers or big industrial loads who can flex their demand to suit the renewable patterns. I guess all of that means that the renewable energy space is much more dynamic, it is more complex, and really important is making sure that the asset manager, whoever is looking after these assets, is reflecting the real-world conditions, that dynamic nature of the business and of the sector into the day-to-day decisions around revenue management and capital allocation.
So, that probably leads neatly on to you, Matt, and how you are thinking around volatility, flexibility in your day-to-day life with UKW.
Thanks, Caoimhe. I would just like to lean into a few points that Caoimhe made around responsive demand, because a lot of people think that that is a sort of future technology that might arrive one day on our shores, but it is already here. Probably the best way to do that is just to lean into one of the examples that Caoimhe made. If you think about electric vehicles, just to isolate one area of growth of electrical demand in the U.K. At present, there is about 2 million EVs on the road, more or less. By 2030, you may have 6 million, it could be a few more. Just think about the scale of that for a second.
So, 2 million EVs, assuming that they do something like 10,000 mi a year and are relatively efficient when they do it, they are going to consume about the same amount of power that UK Wind generates already. So that is about 6 TWh per year. If you have 6 million EVs by 2030, you need two UK Winds just to keep up. So that is more of an absolute scale of demand point, where we are heading in terms of electrification, and that is supportive for UK Wind. The more interesting point, as Caoimhe said, is around ordering. I think we will have enough electrons to give everybody the electrons they want to charge their car. But it is really constructive for generators if those electrons arrive at times that might otherwise be poorly priced or have no demand on the system.
There is also a sort of grid-level reason to try and solve that problem. Again, this is deliberately simple. If you had 6 million EVs, I am sure some of you have them. At home, you have a 7 KW charger? Most people do. If they all plugged in at the same time, which they obviously do not, that would be 42 GW of instantaneous demand. The average demand in the U.K., like today, is probably about 30 GW.
Right? So the magnitude is there so that this problem is going to be solved. Otherwise, you will need to invest a lot in local grid reinforcement so that the 100 people that live on this substation do not all plug in their cars at the same time and blow something up. So this is a problem that is going to be solved, and it can be solved with existing technology today.
If you have an electric vehicle at home, you know that you can avail yourself of a half-hourly tariff. You do not really care when your car is charged. It is charged by 7:00 A.M. to a certain point. You do not really mind what order that takes over the night. That can be highly responsive to periods of time where there is say, a lot of wind on the system, prices would otherwise be low. You can capture that as a generator. You can capture it certainly in flex, but you can also capture it as a generator. These are things that are happening already. There is technology that exists today that underpin the distance between variable prices that renewables receive and the base load prices that Caoimhe mentioned.
I guess the last point, again, to underline something that Caoimhe said, the days of the passive ownership of assets is just over. I also started doing this about 18, 19 years ago. You had to think about the power markets, of course, but they were pretty stable, right? You now have to underwrite the system that you are investing in and not just the asset that you are buying. That is a crucial distinction for us, and that is why we look at many of the revenue management tools, and the conversations that we have around the board table are exactly about this.
Thank you, Matt. Actually that, if I go to Taraneh next, maybe you can talk to us around UKW's exposure to power prices and how you as the board or the wider board get comfortable with the approach and the power price risk that is in the portfolio.
Thank you, John, and good afternoon, everyone. Good to be here. Really interesting question. We have already heard from Matt about this a little bit earlier, so maybe just three points to make around this. Firstly, you have heard this already. Our revenues are roughly 50/50, so we have got fixed 50% fixed and 50% merchant, roughly at all times. We heard about that earlier on. That is really important because that 50% fixed is obviously certainty of the cash flows. Then turning to the other 50%, the merchant element, what is really important there is that it is not just exposed without any management around it. We heard earlier about different instruments. In managing that 50% merchant, there is systematic thought around what the right instruments are, and also within the context of what the market actually enables and how deep and liquid that market is.
That would usually then help ascertain what period, for how long, that merchant element would be fixed, as we heard earlier on. The second point is, there are instruments being utilized to manage that merchant exposure, and those instruments are differentiated and depend in part also in what is possible in the market. Then a third point, which we've heard from U.K. investors, which is quite an interesting point, is that some U.K. investors have told us that they actually like the diversification of the power price increases and the higher power price, and the effect on UKW, because those U.K. investors who spoke to us about that said that mostly their investments are the other way. So they're exposed to when the energy price goes up, that really hits the bottom line of their investments.
They quite like that sort of upside exposure through UKW, measured and managed, but they quite like it. So in summary, John, I'd say there are three things to say. One is, it is a 50/50. It is about 50% fixed. A number of tools are employed to manage that. Then last but not least, some people really like the diversification.
Thank you, Taraneh. Matt, anything you want to add in terms of the tools we're actively using or more actively using these days than in the past?
I mean, just a few small points to add to what Taraneh already covered. We do see investors, we see this in our private markets business at Schroders Greencoat, but also in the context of UK Wind, they understand that they have negative exposure to power prices elsewhere. While there isn't a perfect correlative hedge that you can make with buying into UK Wind, there's a directional hedge. That is a feature that some people like in their portfolio balance. It's also the same if you're a consumer. I mean, unless you fix your electricity prices a long time ahead, your bills are going to go up. There's a convexity to having an interest in assets that generate electricity at merchant prices. But having exposure or targeting exposure is a deliberate thing to do, but it's not there to be maximized, right?
We are operating in the context of providing a predictable dividend over time. As Taraneh said, we are taking shorter term measures to lock in prices where we think it is in effect a good portfolio expression to do so. In taking those shorter term price hedges, one also has to think about the electricity generator levy, because you start paying that above a price of GBP 83 roughly this year. You do not necessarily own all of the appreciation beyond that. That is a key feature in how we are thinking about the short term hedges that we have done. Over the longer term, they are the instruments that we have already discussed today. What you buy is the most important part of how you manage the revenues over time.
There are corporate PPAs, of which we have quite a few, and there is also the potential emergence of a wholesale CFD, which probably, John, brings us quite neatly onto the policy side of this discussion.
Yes. Yes, it is very difficult, I guess, to separate markets from policy. If we move on, I will come to you, Nick, how do you think investors should think about the balance between affordability and delivering on the energy transition? What do you think we need to do to ensure we maintain public support?
Yes. Thank you, John. Good afternoon, everybody. I think it is interesting to think about broadly what has happened to the big themes in the energy market over roughly the time that UK Wind has existed. What we have seen is a movement from things that I mean, you are all going to think there is a lot of uncertainty out there, which indeed there is. Actually, when you look at the big themes, quite a few things have become more certain in terms of the structure of the energy market going into the future. If you look back 10 or 15 years, we were looking at all these different technologies. We were looking at the ones that actually turned out to be really, really strong, wind, solar, battery, because costs have come down so much.
And we weren't talking that much about flex, but as Caoimhe pointed out, flex is really important. But this was a very, from a policy point of view, a contestable space, with advocates of major investment in hydrogen, CCS, biomass, and we've seen those, I'm not going to say they're not going to feature, but what we know is wind is absolutely central. Absolutely central, and we're seeing it. That's the world we live in now. That wasn't the world back then. And similarly, if you look on the demand side, that was contestable as well in terms of policy. And some of you know I was involved in quite a few of those debates. What we see is that electrification is clearly now the way forward for domestic heat, for commercial heat, and for industrial load.
There will be some niche use of hydrogen, undoubtedly, but those things are broadly settled. So wind is central. We will see heavy electrification. The pace, of course, is difficult to predict at the moment, and it's only fair to acknowledge that. But then to bring those two things together, affordability, as you were questioning, John, affordability is difficult at the moment. And we see the cost of electricity being more than 3x the cost of gas, which makes particularly investment in heat pumps difficult, because of the COP. But our view is that actually there's a lot of fixed costs into the base of the electricity system now. So actually, the secret to driving towards affordability, one of the most powerful things is to drive up the denominator.
Actually, good public policy will be to drive the pace of electrification, drive up the denominator, reduce the unit price, and then you get to a tipping point. Clearly, once you get electricity prices, with the growth of that denominator, less than 3x gas price. And of course, we've seen movement on VAT, which has sort of helped. VAT's come off electricity, but not of gas. Then you get into a tipping point and a virtuous circle where you electrify and drive down the cost of electricity. And all of this supports very much UK Wind's asset base.
Thank you, Nick. And to bring James in here. So, James, from your perspective with your wider Schroders Greencoat hat on, how do you think about some of those challenges for the wider business? And maybe also speak around how you and us as a firm engage with government and policymakers on these topics.
Sure. Likewise, thank you for having me. I guess we take a view that energy is a fundamental part of the modern economy. It's always going to be important to politicians and policymakers. It has led to challenges with a number of governments around Europe. It really is for this current government, Nick was touching on affordability there, it's very, very high up the political priorities. We've thought for a long time that it's very important to engage with government and have a constructive conversation. It's no good standing on the outside and lobbing bricks. We are in regularly seeing officials, regulators, policymakers, across a variety of institutions. Across DESNZ, Treasury, Ofgem, NESO, I mean, roughly monthly, sometimes more frequently and at multiple levels.
We have an outstanding head of regulatory affairs who spent a long time in Treasury doing energy policy and in DESNZ working on financings. We, in all those discussions, try to represent the views of our clients, of you all, I suppose principally re-emphasizing the importance of investor confidence and certainty given the volume of private capital that's needed for the energy system as a whole and for the energy transition, whether that's for generation or for networks and the sort of things that Matt was talking about. But try to build a trusted relationship with government and actually, where we can, where it's not commercially sensitive, to share some data and give them some facts because they often operate in a vacuum, and they have all sorts of lobbying firms acting on various clients' behalf.
We try and say, here are some numbers, and try and make some decisions based on that. I think we've had some successes through that. You don't win them all, but I think we do have an active dialogue, and that's well-respected and I hope in our clients' interests.
We've got maybe 10 minutes, so very happy to open it up for questions. Feel free to direct at whoever you please. If not, I may lob it at the right person. Do we have any questions in the audience? You want to raise your hand. Colette.
Thank you. Colette from Deutsche Numis. There is clearly an emphasis on growth today, the importance of wind, the purity of the model, a lot of operational expertise on the board. You have talked about this being a growth business slowly over time to protect that dividend. Has the board or the team really not thought about accelerating the growth, balancing the return more to capitalize on the opportunity set that you have got in front of you?
Maybe Matt, you want to start and Nick or someone from the board can jump in as well.
Thanks, Colette. Yes, when Lucinda said at the very beginning that we spend a lot of time thinking about this, we thought about different technologies, different geographies, alternative means of growth. We even referenced in our full-year results that we released at the end of February that today's market could present inorganic opportunities for growth. We said that explicitly. That is out there. That is part of the broader set of considerations that we have looked at. Our fundamental conclusion is the one that we have arrived at here today. The best risk-adjusted opportunities in terms of the long-term interests of our shareholders are the ones that we see ahead of us now. That is a continuing review and dialogue. I think the beneficial and advantageous piece for UK Wind is that we can grow organically, and we can keep pace with paying the dividend.
We can keep pace with growing dividend cover into the future, and that is what makes it such an attractive model. I do not know if any of our board colleagues would like to supplement any of that.
Well, just to say that this is a very active board. We engage very strongly with Matt and Stephen and the team and examine the full gamut of everything from the most macro policy through to the detailed tactics of managing the portfolio. We try to balance that growth thing by being very active, looking at a very fast-changing position, and keeping that under review. I hope us being here has persuaded you that the board has got a good array of skills, and we work very closely with Matt and Stephen on this.
Maybe just to add, I thought, like Matt's chart earlier that showed the stages of this business since it originated in 2013. We have been through a period where we've been aiming to stabilize the business. Obviously, we undertook a lot of share buybacks. That was a deliberate decision. But over the last six or nine months, a lot of our time at a board level has been looking at what the right priorities are for the business into the next phase of opportunity. Looking at the competing priorities for capital, making the right capital allocation decisions.
We've done a lot of analysis, a lot of thinking on this topic, and I guess when we come back in a couple of years' time, that chart hopefully will show a different trajectory when we look at the life extensions, the opportunities we see on the construction side, and the repowering side. So we see a lot of opportunities for growth, maybe not the same dramatic growth we had before the current period, but we see still great opportunities for this fund into the future.
We can go to Alex at the back. Excuse me.
Just on the, I guess, the evolution of the U.K. market, certainly from my perspective, it feels like the new government has very much reiterated the policies of the predecessor. I guess from your perspective, I would be interested to understand whether there is any ultimate changes you expect in sort of government strategic direction and/or anything that you would like to see from the new government in terms of energy policy that could add to what you have described as quite a supportive environment.
Everyone is itching to answer, but James, why don't you go ahead?
I think you are right. It is evolution, subtle changes rather than anything else. There is probably a sharper focus on affordability, but I don't think anything too radical. There were obviously noises about public involvement in Burnham's campaign and so on, but I think the measures that have been taken so far, the GBP 4 billion for GB Grid is a lot of money, but it is not a lot of money compared to the amount that needs to get invested in the grid. I think it is an incremental type approach. I think it will be interesting to see what happens.
The CP30 target, I hope Nick doesn't mind me saying, but it was incredibly ambitious, and I think there was even at the start a sort of admission that it is an incredibly demanding target, but at least by having a demanding target, we will achieve more than would have been the case had we not had the demanding target. It is going to be clearer in the next two years that they are not going to hit the goal, but maybe they will be proud of what has been achieved, and I think that is probably going to be a bit of the battleground for the next election about where it goes from there. Honestly, what that has meant in terms of bills. I would not fully digest it, but Miatta Fahnbulleh was talking this morning about that really being the yardstick about how people are feeling about affordability.
Anything to add, Nick?
I would add that current energy policy is helpful for this company. As I tried to point out, we are very much in the sweet spot. Certainly, as James referred, there will be things that we want to engage closely with government on, particularly if they develop something like the wholesale CFD. We will do, but we are in a great spot here in terms of the development of the energy system. The other thing I would say about it is that the development of the whole sector, this is a capital-intensive, long lead time sector. What we need is a big dose of stability and a vision of where we are going, and that is sort of evident at the moment and should be encouraged long term.
Okay. Do we have time for one more question? Yes. Okay. We can take two. We will go to Ashley, and then we will come to Richard afterwards. Short answers, please, panel.
Yeah. I wanted to ask about power price forecasts, sort of consultants curves. Obviously, the returns that you have outlined are based on Aurora power price forecasts. For all of them, be it Aurora , Baringa, or AFRY, or even Modo, I guess their sort of key inputs are commodity price assumptions, gas price, sort of generation, new addition in capacity, but also sort of electricity demand. When you are sort of looking at the Aurora forecast and the delta between the other consultants, what is the main driver of that? Is that sort of longer term higher electricity demand, or is it sort of slower capacity additions? Just to help us sort of get an understanding.
That's a Matt or James question.
So obviously, forming a net asset value power price assumptions are a key one, and just to remind our investors what we do there. In the very short term, we're taking the futures prices, so those come off of the screen. They're objective, and they're the prices that we've been using to hedge in some of the short-term capacity that we've referenced earlier. Beyond that, you start to move into the world of forecasts, and that's where it's vitally important to understand the dynamics of that forecaster's proposition, both in terms of the demand for electrons. So actually, that would be things like how fast are heat pumps going to roll out, how fast are EVs going to roll out? What do you see for industrial demand? What do you see for economic growth?
What do you see for data centers? And those are exactly the kind of points that James and I sit down on as a valuation committee matter and interrogate as we look at each report going forward. And there are differences between how different forecasters look at these ingredients, and there will always be differences. They have to have their own views and opinions. Fundamentally, for the forecaster that we look at, we're confident with the system that they operate in. There's a logic to it. There's ability to test it for short-term sensitivities. And ultimately, this is really about how you manifest that in your valuation. And how we manifest that in our valuation is with a pretty high discount rate that we feel is commensurate with the risk of its delivery.
Again, these are conversations that we feel we're pretty well-placed to navigate given the expertise that we have, not only within the manager, but also on the board.
I didn't know, is the main delta higher electricity demand over the longer term?
Mostly, yes.
We'll take one final question.
Matt talked about the challenges faced to U.K. with electrification and increased demand and how to manage that technically. Is that a particular acute problem for the U.K.? How do we compare against our nearest neighbors in that regard? Obviously, UK Wind is domestic, but Schroders Greencoat has contact with other jurisdictions. Is that going to affect everyone, or are we particularly exposed? How well are institutions like NESO equipped to deal with those challenges?
I am happy—
Do you want to start?
—maybe to start with in terms of I am based in Ireland, and exactly the same challenges we are seeing in the Republic of Ireland in terms of grid constraints, the need to reinforce the grid to enable the smart network, smart metering, EV metering, network across the island, as well as being able to transport all this renewables from where it is being generated to the big demand centers. It is probably the biggest issue in the Irish system at the moment is grid and whether that grid infrastructure is ready for the next generation of renewable growth. That is the same all across Europe. It is the same in Japan. We do a lot of work in Japan. It is the same in Japan. It is not unique to the domestic market. It is not unique to the U.K.
It's a common problem that the system operators at a global level are grappling with. You can see it in the U.S., particularly in some states in the U.S. as well. It's not unique to the U.K. And I think there's a lot of technological developments underway across Europe, across the world, to try and make grid more effective. But ultimately, it's going to be about huge capital investment programs to reinforce the grid, to upgrade the grid, to put in the big grid structures that are needed in order to make sure we have the right power in the right place when it's needed. I guess, James, you talked about GB Energy, and that's a start. But the sums of money involved in terms of upgrading the U.K. grid system are staggering. And then that's a big requirement all across the globe.
From a policy perspective, maybe Nick, you might be closer to it or anything to comment.
Yeah, I would maybe just add on, I think you would make your point about controllability of the grid. I think that's clearly one of the things that's playing at the moment. I suppose I would reflect that there have always been, the whole of my career, there have been significant changes. The changes seem quite big at the moment. The shape of the system has always been changing. It's always had uncertainties in it. I don't know, it's difficult. In every moment, we always think we're in an unprecedented time of change, don't we? We say that a lot. It's very difficult to know whether this is a more difficult time than other moments.
In terms of how is it all going to come together and be controlled, I think that we need to remember that the amount of data and the amount of analysis that is available to operate these systems has gone up dramatically. So it may well turn out that it is a more complex thing to work with the intermittences of wind and the flexibility of demand. But we've got an awful lot of data and awful lot of ability to manipulate it and understand it to enable us to manage that, and I'm pretty optimistic about that.
Well, listen, let's draw it to a close there. Thank you to all the panelists for sharing their perspectives. We can carry on some of the debate afterwards, but for now, I'll hand it back to Matt for some concluding remarks.
Thanks. I stand between us and a few drinks. I better not speak for very long. I thought I'd just reflect on the two panels. I hope you can see some of the texture and richness that exists in both us as a manager and our board, and the skills and expertise that we have, and some of the challenges and how we're well-placed to work through those in terms of life extension and repowering. You've heard a lot, and it was there in the opening words that Caoimhe said around the complexity of today's power markets. You really need to be able to navigate that with expertise, and that's certainly something that we possess as a board and a manager. I think, look, fundamentally, I really like simple slides because it just makes it very simple.
What we've tried to convey today is that UK Wind, we feel, is a market leading business. It's already advantage in terms of its scale, its ability to self-fund, and its target market that we can operate in, that we can execute in well. These are the kind of characteristics that investors are increasingly distinguishing between, and they're ones that we possess by design. What we've set out today is we've multiple ways to add value, multiple ways to invest, multiple things to allocate across that are within our competency and our skill set, and that's a great position to be in. What does that give us? That gives us an even more durable portfolio than we already had. You can see that from the charts that Steve showed. More ways to add value. Fundamentally, I'm quite excited.
Look, I believe that UK Wind is the best business in this sector, and what we've set out today is the ways that we can make it even better. That is the end of the remarks, and it's time to have a drink in the saloon room. Thank you