In light of the Covid-19 pandemic and the resulting impact on the global energy markets, we have reviewed the Director’s Valuation.
The price we sell electricity at is a key factor in the valuation, along with levels of generation and operational costs. Our projects benefit from a range of power sales contracts which include price floors, fixed pricing and inflation linked elements, as well as government backed renewable electricity support mechanisms. To estimate the long-term dividend flow from our projects, we combine the prices we have agreed in power sales contracts, wholesale electricity market prices in the immediate and medium term and longer-term projections which are provided by market leading experts.
Whilst the DV reflects the long-term value of Thrive shares, events in the short term have an impact. The company continues to generate and sell renewable electricity and has a strong pipeline of new projects - you can find out more about our business response to Covid-19 here. However, the pandemic is having a significant impact on prices on the UK’s wholesale electricity market.
Since the beginning of 2020, there has been a reduction of more than 15% in wholesale power prices. Whilst Thrive has mitigated exposure to these price movements in the near term, over the next 24 months we are now projecting lower electricity prices than previously. This has resulted in a 5p per share decrease in the Directors’ Valuation, reducing it by 2% from £2.28 to £2.23 per share.
The pricing of the UKs wholesale electricity market is complex. There are a number of key price drivers which are having a negative impact on electricity prices currently:
- Global Oil prices have fallen by over 70% since January 20201 This has principally been driven by slowing global growth, the reduction in global oil demand as much of the world is in lock down, exacerbated by the oil supply dispute between Russia and Saudi Arabia.
- Natural Gas prices have fallen by over 20% this year2. They are linked to oil prices and currently have a direct impact on the cost of electricity in the UK.
- A reduction in demand for electricity in the UK since the lock down was implemented in response to the Covid pandemic. Demand has fallen by between 10% and 20% as both industrial and commercial consumption has dropped. This reduction means that more of the lower cost generators (such as renewables) are satisfying demand and driving down wholesale electricity prices.
The combination of locking in future prices and the c.50% of revenues from government backed renewable electricity support mechanisms is limiting Thrive’s exposure to the material changes in the wholesale electricity markets which have been caused largely by the Covid pandemic. The Directors will continue to monitor the factors driving the valuation and communicate any material changes.
1 - https://www.bbc.co.uk/news/topics/cmjpj223708t/oil
2 - https://www.bbc.co.uk/news/topics/cxwdwz5d8gxt/natural-gas
