John Laing takes £66m hit on Australian renewables due to MLFs

UK-listed firm says changes to Marginal Loss Factors produced ‘unfavourable results’ for three Australian renewables assets.

John Laing has put new renewable investments in Australia on hold after booking a £66 million ($81.1 million; €73.1 million) write-down on projects due to Marginal Loss Factors.

The UK-listed investor revealed that it was taking the write-down on Australian renewable projects due to “industry transmission problems” in its half-year results published last week.

The firm said that the final MLFs for 2019-20, published by the Australian Energy Market Operator in June this year, had produced “unfavourable results” for three of its assets in the country, whose value together represented 11 percent of its total investment portfolio at 31 December 2018.

The £66 million write-down was based on forecasts obtained from an external advisor.

It did not disclose the identity of the assets, but John Laing only holds stakes in six renewable energy assets in Australia: Cherry Tree Wind Farm and Kiata Wind Farm in Victoria; Granville Harbour Wind Farm in Tasmania; Finley Solar Farm and Sunraysia Solar Farm in New South Wales; and Hornsdale Wind Farm in South Australia.

All three of John Laing’s operating assets had their MLFs downgraded this year, according to figures published by AEMO, with two seeing sizeable drops. Kiata Wind Farm saw its MLF fall from 0.9911 in 2018-19 to 0.9066 for 2019-20, while Finley Solar Farm saw its MLF drop from 1.441 to 0.9895. All three stages of Hornsdale Wind Farm were also downgraded slightly from 0.9744 to 0.9698.

Draft MLFs for the under-construction assets are not published by AEMO, but John Laing said these had been taken into account when calculating the write-down.

John Laing added that active asset management had led to the firm recognising £29 million of value enhancements in the Asia-Pacific region, primarily on its Australian renewables assets, which helped to offset some of these losses. It expects further value enhancements in the second half of this year.

“Our team in Australia heads a group of approximately 20 renewable energy developers and investors that has made a proposal supporting a rule change under a consultation process with the Australian Energy Market Commission [the body that sets the rules for Australian gas and electricity markets], which, if accepted, is expected to mitigate the impact from MLFs. Additionally, the team are working with advisors to explore project specific opportunities around technical performance which could provide further mitigation,” the firm said in a statement.

The write-downs are among the first asset valuation revisions to be seen following the setting of new MLFs this year.

New Energy Solar chief executive John Martin told Infrastructure Investor in June that the annual change in MLFs added “substantial uncertainty into a market that is already bereft of long-term policy and guidance”. Several solar farms and wind farms operated by private investors saw their MLFs fall, while others saw slight rises.

MLFs effectively represent the percentage of electricity that AEMO predicts will be lost between the generator and the end user, so assets located in remote areas, or in areas with many other generators, often have a lower MLF.

John Laing also booked a write-down of £55 million on its European wind assets and put investments in that region on hold as well. This was due to operational performance issues “mainly driven by low levels of wind which have translated into lower longer-term energy yield forecasts”, the firm said.

It also said that investment in new US renewables projects was limited to recycling of capital.

John Laing reported a portfolio value of £1.535 billion as at 30 June 2019, up 3.5 percent from the end of December 2018. Its net asset value also rose by 0.6 percent to £1.599 billion, or 325p per share.