There are plenty of paradoxes around renewable energy, but the major paradox as far as the Australian stock market is concerned is that renewable energy has not been a good investment proposition.

A long period of poor performance ended for the market’s largest wind and solar company Infigen Energy earlier this year, when a bidding war between Spanish renewables giant Iberdrola and Philippines conglomerate Ayala (through UAC) was won by the Spanish in October: bid and counter-bid had more than doubled Infigen’s share price to 93 cents, but that only took it back to where it was in 2017.

Similarly, wind farm operator Windlab left the stock market in June, when it was bought through a scheme of arrangement, by a consortium comprising renewable energy investor Federation Asset Management, (which owned 18.7% of Windlab) and Squadron Energy, the renewable energy arm of Fortescue founder Andrew Forrest’s family office, Tattarang Group.

Windlab had gone through a tough time on the market: it listed on the ASX in August 2017 at $2.00, but the shares never traded above issue price, and halved in price in November 2018 (from $1.55 to 80 cents) after losing its only investor in the Lakeland wind farm project in Queensland due to grid connection risks. In August 2019, the company launched a strategic review to “close the value gap between the price of Windlab’s listed securities and the board’s view on [its] underlying value.” Federation and Squadron picked it up by offering shareholders $1.00 a WND share, representing a 30% premium to the six-month volume weighted average price, of 77 cents.

So, let’s take a look at the major exposures from which investors have to choose on the ASX.

1. Meridian Energy (MEZ, $5.62)
Market capitalisation: $14.4 billion
Three-year total return: +35.3% a year
Analysts’ consensus valuation:

Another paradox – the biggest pure-play renewables generator on the ASX is the dual-listed Kiwi, Meridian Energy, which is one of New Zealand’s largest electricity generators, and the country’s largest renewable energy power company. Meridian operates a mix of hydro and wind power, generating about one-third of New Zealand’s energy from its hydro dams and wind farms.

The New Zealand Government holds a 51% share in Meridian.

Meridian’s Australian assets, the Hume/Burrinjuck/Keepit hydro facilities and the Mt Miller/Mt Mercer wind farms, generate about 1% of the National Energy Market.

In FY20 (ended June 30), Meridian generated a record amount of electricity in New Zealand. The volume of electricity sold to customers increased by 18% in New Zealand and 24% in Australia, and customer numbers were well up in both countries.

That led to operating earnings – or EBITDAF – rising by 2% to NZ$854 million ($799 million), driven by record generation and retail sales growth in New Zealand and Australia. Net profit dropped by 48%, to NZ$176 million ($164.6 million), reflecting higher depreciation on previously revalued assets and changes to its financial instruments used to manage risk. Meridian’s underlying net profit, removing those changes, fell by 5% to NZ$317 million ($296.5 million). MEZ’s final dividend was 11.2 cents a share, up 4% on last year’s final dividend, bringing the total ordinary dividend payout to 16.9 cents, up 3%. To Australian investors, the 15.2 cent dividend for FY20 represents a dividend yield of 2.7%, unfranked.

Meridian faces the challenge posed by the planned closure of its biggest customer, Rio Tinto’s Tiwai Point aluminium smelter, next August. Tiwai consumes about 13% of New Zealand’s power output, and Meridian Energy is the smelter’s largest power supplier. Its contract will now end on August 2021.

Meridian is everyone’s idea of a successful renewables business – but it trades on 66.1 times historical earnings. MEZ is just too expensive.

2. Tilt Renewables (TLT, $3.73)
Market capitalisation: $1.4 billion
Three-year total return: n/a
Analysts’ consensus valuation: NZ$3.99 ($3.76 at current exchange rates)

The Australian stock market’s second biggest pure-play renewable electricity generation company, Tilt Renewables, is also headquartered in New Zealand and dual-listed. Tilt has a wind and solar portfolio in New Zealand and Australia that in 2019-20 (the company’s financial year ends in March) generated 1,835 gigawatt hours (GWh) of emissions-free energy.

In Australia, Tilt also earns revenue from large-scale generation certificates (LGCs), which renewable energy producers receive purely for producing a megawatt hour of power – selling that power is a bonus. The LGCs represent 43.9% of Tilt’s Australian revenue.

Tilt has long-term offtake agreements with Powershop (owned by Meridian Energy), the state of Victoria, Snowy Hydro, Aldi, Origin Energy, Trustpower and Genesis Energy.

Tilt has 469 megawatts (MW) of wind power under construction and says its development pipeline is 3,000 MW. In particular, its two major development projects, the 133.3 MW Waipipi Wind Farm in New Zealand and the $650 million 336 MW Dundonnell Wind Farm in Victoria, will boost output considerably. Dundonnell is one of the largest renewable energy projects in Australia, and the largest ever undertaken by Tilt Renewables: the project is expected to produce over 1,200GWh annually, doubling the annual production of the company’s current operational fleet. In addition to that, Waipipi will contribute 455 GWh a year.

However, the Dundonnell project has struck some problems, with grid issues severely curtailing output at its new $650 million wind farm in Victoria. The Australian Energy Market Operator (AEMO) is grappling with multiple technical issues that come from the rapid increase on the grid of variable renewable energy generation, and it has issued curtailment orders on a range of new wind and solar projects – Dundonnell got one in July, and has been operating at less than half of its rated capacity. That caused Tilt to cut its earnings guidance, and in August the company told shareholders not to expect any go-ahead decisions on new projects in Australia for the foreseeable future – however, it is continuing to move forward with its development pipeline.

As of this month, Dundonnell has since been cleared to increase output to 226MW (85% of rated capacity) with all 80 turbines able to operate, and there is a commissioning sequence in place with AEMO to get the output to 300 MW by the end of December 2020, where the wind farm will be able to deliver approximately 97% of its expected annual energy yield. Tilt expects to reach full production at Dundonnell, at 336 MW, by March 2021.

Within its Australian constraints, TLT is performing well as a generator, with production (excluding the sale of the Snowtown 2 wind farm in South Australia) up 3% in FY20 (year to March), with revenue (again excluding the effect of only 8.5 months of Snowtown 2 contributing) up 5%. Tilt generated EBITDAF (earnings before interest, tax, depreciation, amortisation and fair-value movements of financial Instruments) of $117.5 million (down 12.8%), but a net gain of $486 million on the sale of swelled this to a reported net profit of $478 million.

Over the past three years, Tilt has delivered significant returns to shareholders: from its first trade on the ASX, in February 2018, at $1.84, the share price has more than doubled, to $3.73. In addition, the company raised $260 million in February 2019 and fully returned that amount to shareholders in July 2020.

The price of that success, however, is that analysts see TLT as fully valued for the present. But with a strong pipeline, the company is well-placed in the longer-term for a renewables boom.

3. New Energy Solar (NEW, 91 cents)
Market capitalisation: $323 million
Three-year total return: n/a
Analysts’ consensus valuation: $1.08 (Thomson Reuters), $1.08 (FN Arena)

New Energy Solar was established in 2015 to put together a portfolio of large-scale solar power plants around the world with long-term contracted power purchase agreements.

New Energy Solar is managed by Walsh & Co, a subsidiary of embattled wealth manager Evans Dixon, whose clients are invested in the solar fund as well as other funds managed by Walsh. The funds have been paying large fee burdens to Walsh and other entities with the Evans Dixon Group, with was created in 2017 through the merger of Evans & Partners and Dixon Advisory.

New Energy Solar exemplifies the dilemma for Australian investors. It announced in October that it would sell its two Australian projects – the 111MW Beryl solar farm and the 56MW Manildra project – as it struggles to achieve a share price that it thinks should reflect the value of its portfolio. The company said that a strategic review had decided that “recognition of the underlying fair value NEW’s assets in the security price is impeded by NEW’s current corporate structure and the limited support for the listed renewables sector in Australia.” It will keep its significant US solar assets.

Shares in New Energy Solar trade at 91 cents, after being sold to investors in an initial public offer in December 2017 at $1.50. In its interim result in August, New Energy took a $63.2 million write-down on assets due to forecast lower electricity prices, which will reduce returns from its solar farms once power sales contracts expire.

Investors might eventually warm to the cleaner structure, but New Solar has lost its Australian angle. If this were dragging the share price down, as the company thought, maybe ditching it is a plus – and analysts seem to think so.

4. Genex Power (GNX, 18.5 cents)
Market capitalisation: $95 million
Three-year total return: –17.5% a year
Analysts’ consensus valuation: 33 cents (Thomson Reuters), 36 cents (FN Arena)

Genex Power is also a speculative stock, but here at least you have analysts’ price projections to back you up. Genex’s key projects are the Kidston Solar Project, which has a long-term (30 years) power agreement with the Queensland government, giving GNX secure and stable returns over the period of this contract; and the Kidston pumped storage hydro project – a mini-version of Snowy River 2.0, housed in two old gold mine open-pits (closed in 2001) that have been filled for the purpose. The company calls it a world-first solar/pumped hydro combination, which effectively forms a big battery that can provide renewable energy 24/7.

How it works is that when the demand or prices for electricity are low, GNX can pump water uphill and store it like a battery; when demand or prices are high, GNX can release the water downhill and create electricity.

The solar side of the project is already up and running: in FY20, Genex earned revenue of $12.3 million from the project, down 23% on FY19, because of a one-off software outage that occurred in the project’s inverters. But more importantly, a recent cornerstone investment in August from Japan’s J-Power of up to $25 million secured the funding for Genex’s equity component of the Kidston pumped hydro project, and the company says it is nearing final sign-off – construction could start before the end of the year.

J-Power will gain between 15% and 19.99% of Genex’s enlarged share capital under the deal: it will also be able to nominate a director to Genex’s board and will provide certain technical services in the operational stages of the project. Genex is speculative, but it now has greater certainty than ever before on commencing the hydro project, which it has always considered the jewel in the crown at Kidston.