None of the information provided is investment or tax advice. You should always read the associated risks before deciding whether to invest. These can be found on the product pages as well as in our risks overview. Please confirm you have read the information above.
The Future of Commercial PPAs in the Unsubsidised World of Renewables
No items found.
Coos Battjes
Energy Markets Specialist
Downing launches new actively managed liquid alternatives fund aiming to deliver 7% to 10%+ per annum and positive returns in most markets. The new MGTS Downing Active Defined Return Assets Fund (‘Active Defined Returns’, the ‘Fund’), is the first fund from its new Liquid Alternatives team.
The Fund is aimed at institutional investors, Discretionary Fund Managers, IFAs and advised sophisticated individual investors, and will primarily consist of UK Government bonds and large-cap equity index options, which provide significant scalability and strong liquidity. It aims to deliver 7% to 10%+ per annum and positive returns in all markets except for a sustained equity market fall (generally more than 35%), over a period of at least six years.
The Fund is the first to be launched by the new Liquid Alternatives Team established by Downing. Collectively, the team has over 125 years of experience and sector knowledge, and includes Tony Stenning, who held senior roles at BlackRock and most recently was CEO of Atlantic House Group; Russell Catley, founder and also a former CEO of Atlantic House Group; Huw Price, a former Executive Director at Santander Asset Management, and Paul Adams, former Head of Cash Equities and Derivatives Sales, Royal Bank of Canada.
The Fund offers investors a compelling building block for multi-asset portfolios, aiming to add consistent and predictable returns, typically secured with a portfolio of UK Government bonds. The unique proposition includes a hybrid approach of using systematic derivative strategies and active management, combining liquid investments with predictable returns, and an equity like risk profile.
Investment strategy: Maximising the probability of delivering predictable defined returns across the economic cycle.
Systematic Liquid Derivatives: Systematic, derivative strategies optimise the equity risk-return profile. The Fund uses rules-based derivative strategies linked to the most liquid, large-cap global equity indices (i.e. FTSE100, S&P500) with the aim of harvesting well-proven consistent returns across a wide corridor of market conditions.
Strong security: The Fund will hold a high-quality portfolio of assets as secure collateral – typically UK Government bonds.
Active benefits: At times, rules-based, passive derivative strategies can underperform when markets move strongly – this is when specialist active management can add incremental gains by monitoring and monetising positions and applying active risk management.
Key benefits
Increased consistency and predictability of returns: Positive returns in all markets except for a sustained equity market fall of more than 35% over at least six years.
Diversification of risk: The Fund’s risk components are diversified across large, liquid equity indices, observation levels and counterparties. Secured with high-quality assets – typically UK Government bonds.
Active management: Our experienced team will actively manage the Fund and its investments to optimise risk and reward for investors.
Russell Catley, Head of Retail, Liquid Alternatives at Downing, said: “Put simply, we focus your investment risk on the probability of receiving the returns you need, not those you don’t. We target the highest probability of delivering 7% to 10%+ per annum with active management adding material incremental gains. We believe that we are building the next evolution of the proven success of Defined Returns funds
The Downing team isseeing strong demand from clients looking for alternatives to large-cap equity funds which are becoming concentrated in technology stocks, or alternatives to UK equity income funds and illiquid alternatives.”
Tony Stenning, Head of Liquid Alternatives at Downing, said: “The launch of our Active Defined Return Assets Fund is a significant milestone in the ambitious build-out of our new Liquid Alternatives strategies. It is a solution-focused fund that should deliver stable high single or low double-digit returns across a wide spectrum of equity market conditions, except for a persistent multi-year bear market. The Fund is designed to enhance balanced portfolios by providing consistent, predictable returns and is suitable for accumulation or drawdown.
“We aim to deliver a unique combination of proven systematic derivative strategies and specialist active management, and we are doing so at a very compelling fee level, below our closest competitors and in line with active ETFs.”
How the Fund is expected to perform in different markets
In bullish markets: UK Government bonds secure the capital, and the equity index options deliver a predictable 7-10%+ return per annum – giving up some less likely upside.
In neutral markets and normal market corrections: UK Government bonds secure the capital, and the index options deliver a predictable 7-10%+ return per annum.
In a sustained sell-off: if markets fall more than the cover to capital loss and do not recover for six years. Then capital is eroded 1:1 in line with the worst performing index.
The average Cover to Capital Loss is targeted at 35%: the average cover to capital loss represents the average level the Global indices within the Fund could fall before capital is at risk.
Fund key risks
Performance: Capital is at risk. Investors may not get back the full amount invested.
Liquidity: Access to capital is always subject to liquidity.
Counterparty risk: Other parties could default on the contractual obligations.
Fund Structure
UK regulated OEIC fund structure, fully UCITS compliant
Daily dealing, at published NAV
Minimum investment: £100,000
SRRI: 6 out of 7
Depositary: Bank of New York
Authorised corporate Director (‘ACD’): Margetts Fund Management Ltd.
I share-class: SEDOL: BM8J604 / ISIN: GB00BM8J6044
F share-class: SEDOL: BM8J615 / ISIN: GB00BM8J6150
Risk warning: Opinions expressed represent the views of the fund manager at the time of publication, are subject to change, and should not be interpreted as investment advice. Please refer to the latest full Prospectus and KIID before investing; your attention is drawn to the risk, fees and taxation factors contained therein. Please note that past performance is not a reliable indicator of future results. Capital is at risk. Investments and the income derived from them can fall as well as rise and investors may not get back the full amount invested. Investments in this fund should be held for the long term.
Important notice: This document is intended for professional investors and has been approved as a financial promotion in line with Section 21 of the FSMA by Downing LLP (“Downing”). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Downing does not offer investment or tax advice or make recommendations regarding investments. Downing is a trading name of Downing LLP. Downing LLP is authorised and regulated by the Financial Conduct Authority (Firm Reference No. 545025). Registered in England and Wales (No. OC341575). Registered Office: 10 Lower Thames Street, London EC3R 6AF.
In the UK energy markets, where there is a trend towards the end of subsidies for renewables and a demand for green energy increasing year-on-year, a key challenge is how subsidy-free renewable energy projects will be funded if revenue is increasingly at risk.
Corporate and Institutional Power Purchase Agreements, more commonly known as corporate PPAs (“CPPAs”), offer one way to reduce this risk: locking in fixed prices with a corporate consumer allows for a stable, long-term, and often inflation-linked revenue stream, providing comfort to institutional investors seeking more secure returns.
Given the significant reduction in renewable energy technology and installation costs, CPPAs can now be set at competitive prices. The prices of solar PV modules have fallen by around 90% since the end of 2009, while wind turbine prices have fallen by 55-60% since 2010. This means that owners of renewable energy generation projects can offer clean electricity for sale at prices that are comparable to the current market cost of electricity for these corporate entities.
The substantial roll out of subsidised renewable generation projects has also allowed for the development of standards (technical and legal amongst others) which reduce the overall risk of a project, allowing for a variety of CPPA structures to exist.
CPPAs are not as commonplace in the EMEA and APAC markets when compared to AMER, where the market is more mature, with a variety of CPPA instruments and structures available (see graph below) which opens up a huge opportunity for EMEA and APAC.
Figure 1 Global growth of CPPA per region
Sustainability
Corporate consumers are increasingly looking to reduce their environmental footprint and energy costs. The 21st United Nations Conference of the Parties (COP21) and RE100 are examples of this momentum:
COP21 implemented UN Sustainability Development Goals in 2015, several of which support the need for corporates to reduce their carbon footprint. This provides a significant opportunity for CPPAs to help businesses achieve their corporate responsibility and environmental goals in addition to decarbonisation targets. In today’s market climate and with the introduction of ongoing governmental legislation, it is important for companies to be progressively engaging with real sustainable solutions, which is exactly the opportunity that a CPPA presents; the direct procurement of renewable energy for corporate energy use.
The RE100 collaborative is another example – a global initiative of more than 100 influential businesses committed to develop their operations supported by a 100% renewable electricity supply for their energy requirements, and working to increase demand for, and delivery of, renewable energy.
Each signatory of RE100 has to set an ambitious target for the year they intend to reach a 100% renewable energy supply – another opportunity for CPPAs. In the UK alone, CPPAs could potentially supply much of the 22TWh demand for the UK members, enabling them to be achieving 100% renewable energy by 2030.
This is not to say that there are not companies that have reached 100% renewable energy already – Google reached this milestone in 2017 for their global operations, making them the largest corporate renewable energy purchaser on the planet. Microsoft have been running on 100% renewable energy since 2014 and now are on a mission to “make the data centres disappear” by eliminating the environmental impact of its server farms.
Challenges Ahead
Threats to developers and finance organisations signing CPPAs include geopolitical events such as Brexit, energy price fluctuations and the ongoing global pandemic. With many companies’ employees expecting to be working from home all the way into 2021, and changes in commuting and working patterns expected longer-term, corporates are unable to predict what their future energy supply requirements might be. This could mean corporates do not want to commit to large renewable energy supply volumes until the economic and working environment has stabilised. All factors considered however, there remains significant volumes of CPPAs currently being tendered in the UK market, as the longer-term fundamental drivers to decarbonise and achieve price certainty are unlikely to disappear.
Economic Return
There are attractive economic propositions for both buyer and seller. For a buyer, they reduce their exposure to power price volatility when tied into a long term (fixed) CPPA as well being able to forecast their future electricity costs.
For a seller, corporate buyers present an opportunity to finance renewable energy projects without the availability of a subsidy.
Conclusion
Renewable energy subsidies have provided financial security for nearly two decades, allowing the renewables sector to flourish and thrive. In a world that is calling out for clean sources of energy as the direct route for combatting climate change and air pollution, corporates are being held more and more accountable for delivering this by customers and their shareholders alike. The role of the CPPA is more significant than ever, especially in meeting the challenges of a subsidy-free market, within the context of the UK market. References
.jpeg)
