Regular readers will be aware of my fondness for utility companies, stemming from my prior success with Telecom Plus (TEP; 1490p). I highlighted it at its inception at 50p when it had a market cap. of just £1m but it has come a very long way as it’s evolved into a multi-utility provider, extending its services beyond telecommunications to include internet, gas, and electricity as these markets underwent deregulation. In the process, the shares have soared 28-fold in value, catapulting it into the FTSE-250. Furthermore, it has consistently delivered substantial dividends, many-fold on my initial buy price. More recently in January, I featured Yu (YU; 1140p), including it as a New Year NAP. Yu has been on a remarkable growth trajectory, experiencing three upgrades since May, the latest being 90%.
This month I am alighting on Good Energy, a supplier of 100% renewable power and green energy services. It’s a small company with a market cap. of just £29.2m at 172.5p but if forecasts are correct, the shares have multi-bagger potential: Investec forecasts pretax profit to virtually double every year from £2.3m this year to £4.2m, £7.4m and £15.2m in the following three. The corresponding sequence of eps is 9.5p, 18.3p, 33.2p and 69.2p.
Cash of £38m is greater than market cap
Anyone can make punchy projections like that and with the business having been around for 23 years, there is a need for a bit of caution but the downside looks protected as Good Energy owns a 49% stake in the leading EV charging app, Zap-Map, which at the last fundraising in August 22 valued its shareholding at £14.5m and it also has net cash of £29.7m (125p a share excluding £8.5m restricted deposits). Surely it couldn’t get any better? Oh yes, it pays a dividend.
History
Good Energy was established in 2000, starting out on the now defunct Plus market before transferring to AIM, where it laid out its plan of owning and operating 110MW of renewable generation assets. It got just half way towards that target; its first wind power site in Delabole in Cornwall was followed by a solar power plant in Aberdeen, before it eventually ended up with a 47.5MW generation portfolio comprising six solar sites and two wind farms.
Self-generated electricity sold directly to homes and businesses makes for high margins but the problem it had to contend with was that wind farms produce a lot less power than their rated amounts when winds are light. For instance, chief executive Nigel Pocklington shoots from the hip in noting that as a result of varying wind speeds, a site like Delabole might only produce, say, 3 MW of power production a year versus its nameplate 9.2 MW. At the time, Good Energy was also handicapped by having to charge customers a 10% premium for their renewable electricity vs standard energy and so it only attracted green-minded affluent customers, limiting its growth.
Since taking the helm in 2021, Pocklington has sold all of Good Energy’s generation assets. As he notes, the business was carrying too much debt and was low margin. Not only did the sale eliminate £40m debt but it left him £22m net cash. His plan has been to use this to build an energy services firm, of which energy supply is just one part of what it will offer customers. The services added thus far include electric vehicle charge point mapping, solar installation, heat pumps and renewable supply, where Pocklington is “targeting 10-20% margin with low working capital requirements versus the 1-3% margins he used to get as a wholesale energy market retailer.”
Energy supplied is green
These days, Good Energy still supplies energy to homes and businesses but the energy it buys is coming from long-term power purchase agreements (PPAs) with 2,000 power producers including independent wind, solar or anaerobic digestion facilities ensuring its electricity supply is truly green.
“Good Energy’s PPA backed model is what sets our supply apart and allows us to provide truly 100% renewable electricity,” says Pocklington, adding that there are now plenty more anaerobic digesters in the mix vs wind farms and so outputs are more consistent. But in any case any shortfall in its power requirements is bought from renewable energy giant Ørsted, where it has pre-contracted rates rather than having to be traded in the volatile wholesale market. Using the power from the Hornsea 1 offshore windfarm in the North Sea, a three year deal could provide 110GWh per annum - enough to supply almost 38,000 homes.
The gas Good Energy supplies is also green as 10% comes from biogas, whilst the remaining 90% is carbon offset through Gold Standard schemes that fund biogas projects. And all told, he says the old premium price has disappeared.
Supplies 80,000 gas and electricity customers
Good Energy presently has 80,000 gas and electricity customers and 8,000 business customers so my early vexed question was how it contends with customer churn, hedging of energy, bad debts and the rising cost of customer acquisition.
‘Churn,’ says Pocklington ‘has been negligible during the last year because of the energy price caps that had been put in place by the government, which made every firm’s tariffs the same.’ Turning to bad debt, he also notes that his customers are generally more affluent with larger homes and are a better credit risk. A smart meter rollout has progressed (50% of the customer base has a smart meter) and this makes it easier to manage bad debts as these can be turned into prepayment meters, although fewer than 500 are delinquent accounts. The big question mark really is about “hedging,” and whereas business energy supplier Yu might hedge a year’s supply, this one doesn’t.
Solar installation business
Whilst it is only a small energy supplier, however, Pocklington’s plan is to become bigger in other areas, particularly helping homes and businesses generate their own clean power. As a first step in this, he bought Wessex EcoEnergy, an established UK-based solar installation business, for £2.5m. The acquisition is about delivering on Good Energy's strategy to expand its capability in “decentralised energy” services by targeting 600 panel installations per month within 18 months versus the 200 individual jobs it expects to carry out in 2023.
Feed-in Tariff administration services
The government has also been keen to incentivise people to go green. A few years ago it launched Feed-in Tariffs (FIT) to promote the uptake of solar panels. The FIT scheme allows customers who have solar panels to receive a payment for what they generate, and a deemed payment for what they export into the National Grid, which was fixed at 50% of the energy generated.
The FIT programme’s successor is the Smart Export Guarantee (SEG) scheme and the government has mandated big energy companies (>150,000 customers buying power from them) to offer smart export to their customers but unlike FIT, this scheme pays only for excess electricity put into the grid, as metered by a customer’s smart meter, rather than energy produced. It is up to energy suppliers to decide what tariffs they offer for exported electricity.
With 80,000 customers, Good Energy isn’t mandated under SEG, however, it has set up “Solar Savings,” an export tariff of its own working in a similar fashion, offering 15p/kWh or 20p for those who install solar panels through it. Under its Solar Savings export tariff, Good Energy can match what it buys against its own customers’ usage or it can be sold back to the market.
It ought to be a win-win as the suppliers can resell the energy they buy from consumers to others at a higher price. Microgeneration like this (buying energy back from small generators running a solar panel at home) has been of limited interest to the big energy firms whereas for Good Energy it has been a central part of its business and it’s a key USP. Contracts runs for an indefinite term and prices can be reviewed annually.
At the moment there are 40,000 customers live on smart export tariffs and 180,000 overall including FIT customers, making Good Energy the UK’s second largest administrator of such schemes.
Electrification of transport
These days, Good Energy is finding that 80% of its solar installs also include a battery storage system for charging EVs, reflecting continued strong growth in electric vehicle uptake. EV drivers are seven times more likely to have Solar PV installed compared to the national average. In another interesting move, Good Energy therefore has come to own 49% of the leading EV charging app, Zap-Map. Since 2014, Zap-Map has established the most comprehensive map and dataset of EV charging points in the UK, including location and live availability of chargers.
Over 70% of the UK’s EV drivers have downloaded Zap-Map with registered users up 52% year-on-year to 683k, of which 285k are active, paying £3 a month. As well as that, it also sells driving and charging data to the DVLA and chargepoint operators. This year, Zap-Map’s sales will be £2m, although it is modestly lossmaking.
Zap-Map’s last fundraise in August 22 attracted a £5.3m investment from fuel card and payment provider Fleetcor, valuing the business at £26.3m. Next year will see it raise further funds but this round values Good Energy’s 49% stake at £14.5m.
Greener gas
Interestingly, Pocklington notes that 60% of new heat pump installations are in homes that already have solar, so he has also bought a UK based heat pump installation business. A heat pump captures heat from outside and moves it into your home. It uses electricity to do this, however the quantity of heat delivered into the home is much greater than the quantity of electricity used to power the system and it’s intended to get the UK off gas in the longer term. Now rebranded Good Energy Works, this business is expected to have 100 installations in 2023. Good Energy paid £1.7m upfront for the business (plus £4.5m earnout) but performance is behind schedule due to the high cost of systems, which are still £10k a pop but Pocklington is nevertheless hopeful that it should move into profits in H2 24.
Windfall profits in H1
In the latest H1, Good Energy saw unusually high profits. Overall, H1 23 operating profit of £14.1m was a material jump vs a £0.5m loss in H1 22, leading to H1 23 eps of 72p.
Energy Services posted an operating loss of £1.7m but all this and much, much more was made from the supply business, including FIT administration, which grew its operating profit eight-fold to £16.7m, up from £2.1m in H1 22. This was mainly because Good Energy was buying energy cheaply under some of the historically priced PPA contracts, whilst the price customers were being charged was elevated during last year’s spike. But the pendulum has swung the other way in H2 and with some PPAs now re-priced, Good Energy is paying more for energy than it is charging customers, so it will lose money in H2. Some of this will carry through into H1 next year before reverting to an even keel. But eps of 9.5p, balloon quickly thereafter to 18.3p, 33.2p and 69.2p. As one broker note on Yu says, “the problem with unbelievable growth is that it is not believed” and again it is the scenario here and a little known story. Put the shares on your watch list.
