In the first of a series of real asset investment case studies, Bianca McMillan, Associate Director at Gravis Capital Management, looks at rooftop solar panels.
The first renewable energy investment made by GCP Infrastructure Investments Ltd (GCP) over a decade ago, was funding a portfolio of rooftop solar assets. The investment, which was made in 2011, resulted in GCP becoming the first significant backer of domestic and commercial rooftop solar projects in the UK. It provided a relatively small senior-secured loan of £15 million to A Shade Greener (ASG), to fund 1,500 rooftop solar panels.
The investment case
ASG was established in 2009, and invented the ‘free solar model’ whereby the customer receives free electricity in exchange for renting their roof to ASG for a period of 25 years. ASG owns the solar panels for the 25-year term, installing them and maintaining them.
The UK government estimated that this could reduce homeowners’ electricity bills by about a third for an average consumer. It was a very low risk scheme from a consumer perspective – no upfront capital was required and they benefitted from free electricity. For GCP, the rationale behind entering this sector was driven by the introduction of the UK government’s feed-in-tariff in 2010, which provided subsidised revenues to these assets for the first time.
How revenue is derived
The feed-in tariff payments fall into two categories: the generation tariff and the export tariff. The generation tariff is a set rate paid for each unit or each kilowatt hour of electricity generated, and is dependent on the size or type of the installation. For the domestic installations, the rate was set at 41.3 pence per kilowatt hour. The export tariff is a further 3 pence per kilowatt hour for each unit exported to the electricity grid. Interestingly, the export volume is not metered and is deemed to be just 50% of the generation of the project, providing no volume risk.
The majority of the revenues come from the generation tariff, as shown in the chart below, with both tariffs payable for a period of 25 years, with the set rates (which are fixed on the first day of generation) increasing annually in line with RPI. This provides long-term, predictable, public sector-backed and inflation-linked cash flows in line GCP’s investment mandate. Moreover, the projects require minimal operational expenses. This is due to the simple technology, which doesn’t require much in terms of maintenance and monitoring, the majority of which can be done remotely.
How the investment evolved
Between 2011 and 2015, GCP made a series of senior loans to ASG to fund a portfolio of around 50,000 UK-based domestic rooftop solar panels. By entering the rooftop solar sector early, GCP was able to secure an interest rate between 9 and 9.2% on a senior-secured basis.
Between 2016 and 2017, GCP refinanced the portfolio and, with more appetite from senior lenders to enter this market, GCP introduced two other senior lenders, Aviva and BlackRock, enabling access to cheaper funds. This is a key example of Gravis entering sectors early, securing elevated returns, and refinancing to recycle capital into other sectors.
At the time of GCP’s initial investment in 2011, there were only 1,000 megawatts of solar capacity installed in the UK. At the point of refinancing the portfolio, the capacity had increased by more than 10 times, as had GCP’s investment. Over the full period of the investment GCP has funded around 50,000 installations, which is equivalent to powering 53,000 homes or 184 megawatts generating capacity.
By entering this sector early, GCP was able to secure elevated returns ahead of its peers. On a subordinated basis, GCP now receives interest at a rate between 9% and 13%. By comparison, later lenders receive an indexed debt service the rate of which during 2024 was 2.85%. If GCP were to exit the investments at the valuation as at 30 September 2024, this would represent an overall return on an IRR basis of 11.1%.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
