Write down of investment, 11 September 2018
As part of our overall financial review, we continue to monitor the fair value of all of our investments through both an understanding of the wider environment in addition to the underlying economics of all assets across the business.
As a result of this process, the Board has decided to write down the value of our investment in Swansea Bay Tidal Lagoon plc to Nil, following recent news announcements on government position on offering a contract for difference to the project. The Board have decided that due to the uncertainty regarding ongoing investment in the project and the likelihood of realising a return on the initial investment, it is prudent to reflect this in a lower valuation. Under IFRS 13, this impairment would not be permanent and could be uplifted again should the circumstances change.
The investment had a carrying value as at 31 December 2017 of £0.5m and will be reported under Discontinued Operations.
John Maltby, Non-Executive Chairman, Good Energy: "“We have announced a strong set of financial results for H1 2018, of which the write down of the Swansea Bay project is only a small part of the story, with further details on our strategic priorities which are positioning us well to deliver growth and an improved proposition for our customers. This is largely down to the abilities of a strong leadership team who continue to deliver on those strategic priorities.”
On the government's rejection of the Swansea Bay Tidal Lagoon project, 26 June 2018
John Maltby, Non-Executive Chairman, Good Energy:
We believe tidal lagoons are the perfect solution for harnessing the UK’s most reliable and abundant natural asset. Tidal power is a brilliant way for Britain to diversify its fuel mix; whilst reducing impact on climate change. Put simply a Tidal Lagoon can provide reliable, renewable power. This is why we chose to invest in the Swansea Bay Tidal Lagoon project.
Good Energy’s purpose is to power the choice of a cleaner, greener future together, and part of that is supporting innovation in renewable energy generation.
Investing in innovation is inherently risky but consistent with the profile of a business like Good Energy which has a strong track record of investing in innovation and the development of renewable generation assets.
In 2014, we announced that we were to acquire an option over 10% of the output from the Swansea Bay tidal lagoon project, representing an equity stake of £500,400 in Tidal Lagoon (Swansea Bay) PLC and being less than 2% of the total investment in the project.
As with all of our investments, all proposals go through an investment committee process which assesses the project in the round, forming a balanced view of risks and the potential reward for Good Energy if it decides to invest. These assessments consider not only a financial return, but also security of renewable electricity and long term support of the company’s purpose, amongst other things.
Traditionally, smaller suppliers in the energy market have struggled to buy power from larger power stations in the UK. This was a key driver for Good Energy starting its decentralised approach to buying renewable energy, working directly with smaller generators. However, even that approach faced challenges, particularly where external financiers insisted that smaller generators could only sell their power to large, established offtakers. By growing Good Energy’s balance sheet through investing in its own renewable generation capabilities, Good Energy has been able not only to produce its own renewable power but also to reinforce the credibility of Good Energy, and businesses like it, as an offtaker of choice for smaller renewable generators. We believe the combined effect helped to diversify the power purchase market and accelerate overall investment in renewable generation assets across the UK.
Good Energy’s investment in Swansea Bay was part of this story; an innovative technology that is aligned with our purpose and, once proven, could provide up to 12% of the UK energy needs. Whilst the potential for financial returns from the project would be an added bonus, they were not the main driver of the investment case. Indeed, the investment gave Good Energy access to a significant future source of renewable power that it would not otherwise have been able to secure.
In the process of considering the investment, three precautions were taken;
- A separate team that reported directly to the investment committee was set up to evaluate and negotiate on the investment and the option for purchasing power;
- All related parties had no input to the decision making; and
- The investment was independently assessed by our NOMAD at the time.
Since its inception, Swansea Bay has drawn both supporters and detractors. Some see the project as a threat to their own preferred technology as the output from the future lagoons will essentially produce baseload power and lower and lower costs. Others take a more parochial view that the potential for localised environmental impacts or other factors affecting them individually, outweigh the wider environmental, social and economic benefits that schemes like Tidal Lagoon at Swansea Bay would bring, particularly as much of that benefit would be experienced in Wales.
Any large scale project will always have opposition, largely due to a fear of the unknown and our particularly British pre-disposition to assume the worst of all things. The job of investors and regulators is to balance these risks and to make judgements which properly balance the needs of those today against those of future generations. Our view remains that tidal lagoons offer a net benefit that allow us to leave the planet in a balanced environmental state for future generations. After all, if we fall short in our efforts, the localised environmental impacts of schemes like Tidal Lagoon Swansea Bay will be dwarfed by the relentless march of man-made climate change.
Today Good Energy’s investment in Tidal Lagoon (Swansea Bay) accounts for about 2% of the total investment of around £35 million which the project raised from a broad range of investors, including both private individuals and sophisticated serial investors such as the infrastructure fund arm of Prudential Plc and InfraRed Capital Partners. From Good Energy’s perspective, the investment is a significantly smaller infrastructure investment than we have made over the past five years and accounts for around 0.5% of our balance sheet today.
All investors in Swansea Bay invested in the same potential that Good Energy sees in the project; the potential to deliver clean power and develop a new industry here, in the UK. And these investors are not alone in seeing the future of renewables worldwide as bright. Recent announcements by both Orsted and General Electric, show that large utility and engineering firms also believe the future is bright, the future is renewable.
So in summary, Good Energy still believes that harnessing tidal energy is an integral part of the energy transition required for the UK to decarbonise. We’re really disappointed at this government announcement as Swansea Bay would have been the world’s first tidal lagoon to generate renewable power, creating thousands of UK jobs — in manufacturing, construction, operation and maintenance, as well as research and development.
We still believe that a successful pilot project in Swansea could lead to more, bigger tidal projects that could provide the UK with up to 12% of our electricity. Therefore, we as a country should find a way to take leadership on this project and put the UK at the forefront of tidal power worldwide.
As you would expect a Board to do, we have taken advice on the matter and are comfortable that a UK Government decision alone is not cause for us to write down our investment. We will consider whether the investment in Tidal Lagoon needs to be impaired when there is new information to assess the project including any decision the UK Government makes positively or negatively about the Swansea Bay Tidal lagoon. This process is reviewed annually with our auditors as part of our overall financial responsibilities.
We hope that the project can find a way forward, and we will play our role as a supportive shareholder to help SBTL to have a future.
Shire Oak Energy
Good Energy bid for Shire Oak’s services to assist Good Energy in developing solar farms and to build up Good Energy’s own in house development capability. The agreement was overseen by an independent board committee and Good Energy’s Nominated Adviser advised that the terms of the contract were fair and reasonable and in the interests of Good Energy shareholders.
Indeed, we estimate that the net value for Good Energy shareholders of the arrangement with Shire Oak is between £15 and £20 million.
The contract between Good Energy and Shire Oak Energy was dated 10 July 2013. Details of the agreement were fully disclosed in the Proposed Placing and Open Offer and Notice of General Meeting which Good Energy issued the next day, 11 July 2013, and which has been available on the company’s website since.
The window of opportunity for solar development was incredibly tight. While Good Energy could have achieved the transformation in development skills and asset base alone: we had a straight choice between working with Shire Oak or missing the opportunity. We did the work, validated the deal rigorously with outside advisers, and delivered more than £15m of value to our shareholders.
Tidal Lagoon (Swansea Bay)
As part of our efforts to procure the renewable power we need to support our long term growth, we identified the opportunity to invest – alongside other investors - in Tidal Lagoon (Swansea Bay).
The Board established a sub-committee comprising only non-executive directors with full authority to consider the proposals and negotiate with Tidal Lagoon. To ensure no conflicts of interests could arise, our Chief Executive was not a member of that sub-committee. The Board also took extensive legal and regulatory advice in relation to the transaction.
Because the transaction was below the regulatory threshold for transactions with related parties, Good Energy was under no obligation to disclose it. Nonetheless, the Board wanted to be open and transparent with shareholders throughout.
Consequently, when we announced the agreement with Tidal Lagoon (Swansea Bay), we fully disclosed the relationship. The announcement was made on 7th May 2014 and has been on our website ever since. The relationship has also been disclosed in our annual report and accounts since the investment was made - and appears at page 102 in the most recent document.
The Board also notes the outcome of the Hendry Review published on 12 January 2017. The review concluded that there is clear evidence that:
- tidal lagoons can play a cost effective role in the UK’s energy mix
- there is considerable value in a small (less than 500MW) pathfinder project and that the government should move as quickly as possible to secure this
- tidal lagoons at scale could deliver low carbon power in a way that is very competitive with other low carbon sources
What about the environmental impact of a tidal lagoon at Swansea Bay?
Following our most recent AGM, our chairman John Maltby wrote to Keith Clarke, Chairman of Tidal Lagoon (Swansea Bay) Plc, to raise concerns voiced by certain shareholders about Good Energy’s investment in the project, particularly any potential environmental impact from it, and the source of the rock for the lagoon’s construction.
We were pleased to receive a response reassuring us that – once the Government provides a decision on the project and a contractor has been appointed - there will be rigorous processes in place to assess and manage any environmental impacts associated with the project. We were also assured that all applicable planning and environmental standards will be met throughout the project, including in relation to the procurement of rock. Decisions around the sourcing of the rock will sit with the contractor.
We will continue to monitor the project closely and share relevant updates with interested shareholders. We recommend that any shareholders with concerns in the interim should formally raise them with the board of Tidal Lagoon (Swansea Bay) Plc.
Disclosure about agreements between Good Energy and companies run by the husband of Good Energy’s Chief Executive
Good Energy has commercial arrangements in place with two companies - Shire Oak Energy and Tidal Lagoon (Swansea Bay) – of which the husband of Good Energy’s CEO is a director. These are fully commercial, transparently disclosed, and any potential for conflict of interest was appropriately managed. These arrangements date back to 2013 and 2014 respectively.
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