Tremendous news for Corcel  released which will serve to improve the returns from the peaker plants.  Yesterday, the company was able to update investors on the recent T-4 Capacity Market auction, which established a UK record high price of £30.59 per kw per annum (£30,590/MW/annum) which is 70% higher than that achieved last year.

Tuesday 22^nd February 2022, saw the T-4 Capacity Market Auction for delivery in 2025/26. Well, Corcel’s Avonmouth gas peaking project was successfully entered into the T-4 Auction and has been provisionally awarded a 15-year Capacity Market contract by National Grid.   The final results of the T-4 Auction are to be published on 4 March 2022, but no further changes are expected at that time.

For the Avonmouth 50MW gas peaking project, Corcel was provisionally awarded a 15-year Capacity Market contract with National Grid, which would provide guaranteed gross revenue of approximately £1.5 million per year starting in 2025. What’s more this is index -linked over this period.  Basically, the Capacity Market is a mechanism used to procure capacity to make sure that the National Grid has enough generation capacity to meet security of supply standards that it is required to maintain.  

It is worth noting that the company has rights over a 100% interest in this gas peaking project subject to the successful completion of the existing project funding process and ultimate project construction. Apparently, commercial terms with FPC Electric Land Limited concerning the manner in which the benefits of the Capacity Market contract are shared, are still to be negotiated.

The record high price of £30.59 per kw per annum achieved at the auction is a really cracking result which serves to dramatically change the revenue projections for all flexible energy projects, and so we feel like the number crunchers will be hard at work upgrading the expected economic potential of these projects.

It is good news to learn that the peaker portfolio fundraising progress continues with the team in negotiations with multiple parties, several of which have now advanced to the due diligence stage. Investors might be concerned about the speed of progress here, but these large infrastructure funds march to their own beat and have processes, multi-level approval procedures and significant requirements for DD before they commit a sizeable £55 million to two 25-year projects.  So keeping that in mind, investors should show patience as this all plays out, as the stakes are very large. But there is light at the end of the tunnel and management has suggested that potential bids can be expected during March 2022, which presumably would lead to financial close of these projects with one group or a combination of groups very shortly thereafter. 

At the time, CEO Scott Kaintz was quick to point out that “We are delighted with the results of this year’s T-4 Auction and that of our project, thanks to our partner FPC Electric Land Limited, which was able to pre-qualify and enter into the auction.  The large increase in the clearing price as compared to previous years is reflective of the UK’s fragile energy network, and the uncertainty of supply that has arisen, as the country transitions from primarily base load suppliers to renewable energy sources.  We believe these results only serve to emphasise the importance of transitional energy assets such as our gas peaking and battery energy storage projects. This is a highly encouraging step towards closing funding on our gas peaking projects and means that a large part of anticipated revenues at Avonmouth are effectively guaranteed. We look forward to updating shareholders on additional progress shortly.”

The announcement reads very well. This is all about the National Grid making sure that there is enough power coverage availability and for it they seemingly will pay through the nose – which is all due to the volatility of alternative power sources such as solar and wind.  So, the National Grid is paying for future back up even if they don’t end up using it.  At this stage it is worth mentioning that the Capacity Market function was only triggered once, with participants given the required 4-hour notice.  That was back in 2016 and in the end no power was drawn down as the notice was cancelled before coming into effect.  So Avonmouth is in line to get £1.5 million a year for effectively doing nothing, on top of the revenue it would generate from trading electricity when they do turn the peaker plant on when conditions make sense to do so. Food for thought set against the current market cap.

However it actually gets better than that.   The T-4 contract starts in 4 years’ time and runs for 15 years, but there are also T-1 contracts which are for a lot shorter periods (12 months) and which of late tend to pay a lot more.  This year’s T-1 auction prices have been bonkers at around £75 per kw per annum (£75,000 per MW per annum). What seems to be on the cards is that Corcel’s Avonmouth would apply for a number T-1 contracts ahead of the T-4 contract that starts in 2025.  Once the team is comfortable with progress on the construction of the gas peaker plant they would go to auction for these T1’s as a bridge to the much longer term T4; all of which make the project more attractive to investors and better able to support debt funding.

This back up capacity is required to ensure that the lights can be kept on in the UK. As the country continues to turn its back on coal and nuclear, and although renewable power is fine when the sun is shining, and the wind is blowing – there are clearly ongoing power requirements 24/7 – 365. Batteries might be quite good for an hour or two, to fill gaps or shave off high prices, but in reality, to cover something like a two-day gap, gas peaker plants are definitely required.

All of this does mean that the financial model will need to be revised. The current model uses an annualised revenue in the range of £71,000 – 91,000 per MW. This was based on historical data from the last five years, which given recent trends, clearly it isn’t at all indicative of the next five years. I say this because one in a decade crises are happening now on a quarterly basis, with muti-day shortages becoming quite common.  The end result is that these projects are going to be much more profitable than perhaps initially expected by Corcel or the broader industry.

The midcase of total revenue for Avonmouth was £82,000 per MW but in the case of the T-1 result, nearly all of that could be government backed, and in the case of the T4 a decent chunk, but for a much longer timeframe.  So, on this basis it does look as though the revenue estimates could be increased to say £80,000 – £100,000 per MW at the very least.  At the high end then that means gross revenues of £5m per annum, with no real associated increase in costs.  To summarize, this gas peaker plant, and the one at Tring Road, are likely to be more profitable than expected. That means that they will be more likely to get funded and be more profitable for the ultimate owners, which includes Corcel.  Taking a sideways view of this, it this does look like the UK government is trying to incentivise lenders and investors to be more comfortable with funding these types of projects, ensuring more of them get built by providing a nice handout for the first 15 years of a 25-year life project.

By any yardstick, Corcel is well undervalued. We initiated coverage on Corcel in July 2021 with a Conviction Buy stance when the shares were trading at 1.625p and have since upped our target price a touch to 20.03p. At the current price of 1.35p, our recommendation of a conviction Buy remains unchanged.

Read our full research report on Corcel HERE

RISK WARNING & DISCLAIMER

Corcel is a research client of Align Research. Align Research holds an interest in the shares of CRCL. Full details of our Company & Personal Account Dealing Policy can be found on our website http://www.alignresearch.co.uk/legal/ 

This is a marketing communication and cannot be considered independent research nor is it subject to any prohibition on dealing ahead of its dissemination. Nothing in this report should be construed as advice, an offer, or the solicitation of an offer to buy or sell securities by us. As we have no knowledge of your individual situation and circumstances the investment(s) covered may not be suitable for you. You should not make any investment decision without consulting a fully qualified financial advisor.

Your capital is at risk by investing in securities and the income from them may fluctuate. Past performance is not necessarily a guide to future performance and forecasts are not a reliable indicator of future results. The marketability of some of the companies we cover is limited and you may have difficulty buying or selling in volume. Additionally, given the smaller capitalisation bias of our coverage, the companies we cover should be considered as high risk

This financial promotion has been approved by Align Research Limited

• Corcel