NextEnergy Solar Regulatory News (NESF)

LEI: 213800ZPHCBDDSQH5447

17 June 2021

NextEnergy Solar Fund Limited

("NESF" or the "Company")

Full Year Results for the year ended 31 March 2021

NextEnergy Solar Fund, the specialist solar power renewable energy investment company, is pleased to announce its full year results for the year ended 31 March 2021.

Key highlights

· Despite unprecedented times, NESF delivered a solid set of financial results, its target of 150MW of subsidy-free development assets, and updated its investment policy to unlock growth opportunities

· Power price fluctuations were effectively managed through the successful hedging strategy implementation and NESF consistently generated electricity over budget:

o Electricity generation +6.2% above budget for year (2020: +4.7%)

o Additional revenues of £7m delivered through hedging strategy (2020: £9m)

· Continued portfolio growth with 4 new high-quality assets

· 2022 Target dividend increased in line with RPI to 7.16p per ordinary share in respect of the year ended 31 March 2022, payable quarterly

· Electricity generated in the year equivalent to a saving of 317,600 tonnes of CO2e equivalent emissions and sufficient to power 195,000 UK homes for an entire year

Forward looking strategy update

· Focus on unlocking growth, expanding NESF portfolio into international assets (up to 30% GAV), battery storage (up to 10% GAV), and solar PE structures (up to 15% GAV).

· Continue to manage risk, hedging further forward to enhance electricity sales strategy:

UK current hedging position as at 16 June 2021:

o 2021/22: 87% of budgeted generation hedged

o 2022/23: 63% of budgeted generation hedged

o 2023/24: 29% of budgeted generation hedged

· Drive asset performance by continuing to achieve operational outperformance

· To underpin this forward strategy, NESF is currently pursuing:

o 400MW pipeline of international solar assets, across North America, Portugal, Spain and Italy

o 500MW pipeline of domestic battery storage assets to complement NESF portfolio of solar assets and add revenue diversification

Financial highlights

· Net asset value per ordinary share of 98.9p (2020: 99.0p)

· Total Group Revenue of portfolio £101m (2020: £108m)

· EBITDA of portfolio £78m (2020: £86m)

· Ordinary shareholder annualised total return since IPO of 6.1% (2020: 6.3%)

· Gearing (including preference shares) of 43% (2020: 42%)

· Cash income £59.5m (2020: £61.2m)

· Cash dividend cover before scrip 1.1x (2020: 1.2x)

· Increased ordinary shareholders' NAV of £581m (2020: £579m)

· Achieved dividends per ordinary share of 7.05p (2020: 6.87p)

Operational highlights

· Total capacity installed of 814MW (2020: 755MW)

· 94 operating solar assets (2020: 90)

· Successful energisation of High Garrett, a 8.5MW extension to the 5MW ROC asset known as Kentishes acquired in 2016, was achieved in October 2020.

ESG highlights

· 195,000 UK homes powered for one year (2020: 189,000 UK homes)

· 317,600 tonnes of CO2e emissions avoided (2020: 307,700 tonnes)

· 738GWh clean electricity generated (2020: 712GWh)

· 14 sites have completed to full Universal Biodiversity Management Plan (UBMP) level

· Achieved compliance with the European Union Sustainable Finance Disclosure Regulation

· Committed to making disclosures in accordance with Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector

Results presentation

There will be a webcast and conference call this morning at 9.00am hosted by:

· Kevin Lyon (Chairman - NESF)

· Michael Bonte-Friedheim (CEO - NextEnergy Capital, Investment Advisor)

· Ross Grier (Managing Director - NextEnergy Capital, Investment Advisor)

To register for the webcast please use this link: http://bit.ly/NESF_FY_webinar 

The presentation will be followed by a Q&A session for analysts. Questions may be submitted prior to the presentation via email to ir@nextenergysolarfund.com or live during the event using the webcast Q&A function. We will endeavour to answer submitted questions during the Q&A section, if this is not possible due to time constraints, we will follow up shortly after the presentation.

A recording of the presentation will also be made available on the NESF website shortly after the event.

Kevin Lyon, Chairman of NextEnergy Solar Fund commented:

"In a period dominated by the uncertainty and challenges brought about by the Covid-19 pandemic, NESF has continued to perform well and implement its strategy, resulting in portfolio growth and an attractive dividend.

While the period saw power price fluctuations, NESF's ability to effectively manage its exposure through its hedging programme, as well as generating electricity significantly over budget, meant that the period was a successful one. During the year, the Company was again able to increase its dividend in line with RPI, paying a total of £38.1m of cash dividends as well as an additional £2.9m of scrip shares to ordinary shareholders who elected for the scrip dividend alternative.

On the acquisition front, the uncertain environment did not stop NESF being able to grow its portfolio. The Company reached its subsidy-free development target of 150MW and took steps in establishing a foothold in the long-term, high-credit UK corporate PPA market by acquiring the Camden portfolio, comprising two projects totalling 100MW.

Recent changes to the Group's investment policy mean that NESF can increase its geographic, asset class and structure diversity, offering a truly unique investment opportunity for shareholders. I would like to thank everyone at NESF for their commitment as well as our stakeholders for their continued support."

Michael Bonte-Friedheim, Group CEO of NextEnergy Capital commented:

"Notwithstanding the unprecedented circumstances, I am extremely pleased with NESF's ability to navigate a difficult environment of fluctuating power prices with both efficient portfolio optimisation as well as implementing a hedging policy that has produced a significant top line gain for the Group. As well as a solid set of financial results, the period saw NESF deliver on what it set out to do such as reaching its 150MW target of subsidy-free assets in development. As well as this milestone, the Group made several significant acquisitions which add significant long-term confidence in our portfolio continuing to deliver above budget.

Our overwhelming shareholder approval to changes in the Company's Investment Policy means that we can now deploy up to 30% of our GAV outside of the UK, as well as being able to invest 15% into private equity structures and 10% in standalone energy storage projects. These exciting and significant changes mean that NESF has the increased freedom to create a truly diversified portfolio of solar assets and offer a unique investment opportunity for shareholders. I would like to thank all at NESF for their continued hard work and look forward to another exciting period of growth for our stakeholders."

For further information:

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NextEnergy Solar Fund

Generating a more sustainable future

Annual Report for the year ended 31 March 2021

Our Objectives

Investment Objective

To provide ordinary shareholders with attractive risk-adjusted returns, principally in the form of regular dividends, by investing in a diversified portfolio of primarily UK-based solar energy infrastructure assets.

Strategic Objectives

Investment

Expand the portfolio in line with the Company's Investment Policy.

Demonstrate our leadership in the UK solar market and achieve superior technical and operational performance.

Maintain our pricing discipline in relation to acquisitions.

Operational

Optimise the value of our investments through effective portfolio and asset management.

Consistently achieve operational outperformance of the portfolio attributable to effective asset management (Asset Management Alpha).

Environmental

Participate in climate change mitigation, enhance local biodiversity where our assets are located, and contribute towards a zero carbon and sustainable future.

Society

Positively impact both the communities in which our solar assets are located and wider stakeholders.

Governance

To act in a manner consistent with our values of integrity, fairness and transparency.

Maintain strong and constructive relationships with our shareholders and other key stakeholders.

Overview

Performance Highlights

Financial Highlights

NAV per ordinary shareas at 31 March 202198.9p(31 March 2020: 99.0p)

Dividends per ordinary share for the year ended31 March 20217.05p(31 March 2020: 6.87p)

NAV total return per ordinary share for the year ended31 March 20217.0%(31 March 2020: -4.5%)

Ordinary shareholders' NAVas at 31 March 2021£581m(31 March 2020: £579m)

Cash dividend cover (pre-scrip dividends) for the year ended31 March 20211.1x(31 March 2020: 1.2x)

Ordinary shareholder total return for the year ended31 March 20215.1%(31 March 2020: -7.8%)

Financial debt gearingas at 31 March 2021124%(31 March 2020: 22%)

Total gearingas at 31 March 2021243%(31 March 2020: 42%)

Ordinary shareholder annualised total return since IPO6.1%(31 March 2020: 6.3%)

Operational Highlights

Total capacity installed as at 31 March 2021814MW(31 March 2020: 755MW)

Operating solar assetsas at 31 March 202194(31 March 2020: 90)

Total electricity generation for the year ended31 March 2021738GWh(31 March 2020: 712GWh)

Generation above budget for the year ended31 March 20216.2%(31 March 2020: 4.7%)

ESG Highlights

Tonnes of CO2e emissions avoided p.a.3317,600(31 March 2020: 307,700)

UK homes powered for one year3195,000(31 March 2020: 189,000)

1 Financial debt gearing excludes the £200m preference shares

2 Total gearing is the aggregate of financial debt and £200m of preference shares. The preference shares are equivalent to non-amortising debt with repayment in shares

3 www.greeninvestmentgroup.com/green-impact/green-investment-handbook

NextEnergy Solar Fund Overview

SPECIALIST SOLAR POWER RENEWABLE ENERGY INVESTMENT COMPANY WITH A MANDATE FOR GROWTH IN LINE WITH THE COMPANY'S STRATEGIC AIMS

MANAGED BY THE NEXTENERGY CAPITAL GROUP, A LEADING SPECIALIST INVESTMENT AND ASSET MANAGER IN THE SOLAR ENERGY INFRASTRUCTURE SECTOR

DIVERSIFIED PORTFOLIO OF 94 OPERATING SOLAR PLANTS

POWERING THE EQUIVALENT OF 195,000 UK HOMES (EQUIVALENT TO PORTSMOUTH AND BRIGHTON COMBINED) ANNUALLY WITH CLEAN RENEWABLE ENERGY

CONSISTENT OPERATING AND ASSET MANAGEMENT OUTPERFORMANCE SINCE IPO

TARGETING A TOTAL DIVIDEND OF 7.16P PER ORDINARY SHARE IN RESPECT OF THE YEAR ENDING 31 MARCH 2022, PAYABLE QUARTERLY

Why Invest in Solar Assets?

ABUNDANT ENERGY SOURCE

More solar energy hits the Earth in a single hour than the energy being used by the entire human population in a year.

Solar energy generation is now economically viable in markets not typically characterised by high levels of solar irradiation.

PROVEN AND STABLE TECHNOLOGY

Reliable and predictable source of electricity due to high consistency in yearly solar irradiation.

Long useful life (25-40 years with potential to extend) with high proportion of contracted cash flows from operating solar plants.

COST-EFFECTIVE ELECTRICITY GENERATION

Low operating and maintenance costs and ongoing capital expenditures.

Solar PV technology has benefited from a significant reduction in costs and non-subsidised solar assets are now economically competitive with fossil fuel sources and provide attractive financial returns.

CLIMATE CHANGE SOLUTION

Fundamental to achieving a more sustainable future by accelerating the transition to clean and sustainable energy.

Meaningful contribution to reducing CO2e emissions through the generation of clean electricity.

Strategic Report

Chairman's Statement

Kevin Lyon,

Chairman of NESF, commented:

The Board is proud of everyone involved with NESF and their response and performance in the face of the pandemic's consequences on our sector. Despite these challenges, the Company recorded its seventh consecutive year of operating outperformance, positive dividend coverage and we achieved our dividend target of 7.05p, having met the target every year since IPO.

We have reset our strategy for growth, refocusing the investment policy to allow for more international expansion, and increased risk diversification through investments in private equity structures and in different technologies such as battery storage. As we look to the future, we will keep our focus on our revised investment strategy, aiming to achieve investor value creation, progressive dividend growth and positive dividend coverage.

NESF also achieved key milestones in the face of the difficult operating environment, with the acquisition of the two new UK solar farms (Camden portfolio, totalling 100MW) and achieving our 150MW subsidy-free development target. We continue to create a future for solar in a subsidy-free world and are targeting long-term corporate PPAs, direct wire agreements and leveraging our electricity sales capabilities to maximise revenues generated by these plants.

I am pleased to present the Annual Report for the NextEnergy Solar Fund Limited (the "Company" or "NESF") for the year ended 31 March 2021.

The year was significantly impacted by the Covid-19 pandemic and its effects on the demand for electricity, power prices and our operations. The Company, its Investment Manager, NextEnergy Capital and its operating asset manager, WiseEnergy, all faced challenges on an unprecedented level but successfully transitioned to remote working. A phased return to the office is now occurring in jurisdictions where regulations permit.

The uncertainty caused by Covid-19 exacerbated the power price forecasting models in the renewable sector, impacting share prices. Our share price performance was disappointing in comparison to the sector, despite our assets continuing to consistently outperform generation budgets and successfully implemented our power price hedging strategy, which allowed us to reduce volatility and lock in cash flows throughout the pandemic, reducing risk.

Our current dividend yield and share price offers investors both current and new, an attractive opportunity to invest as we position ourselves for future growth, whilst also playing a key part in contributing to tackling global climate change.

Results and Key Events

The Company has continued to perform well operationally during the challenges of the Covid-19 pandemic, driven by the implementation of our portfolio and asset management strategy, our approach to continually improve operating efficiency and ability to manage our exposure to power price fluctuations effectively through our specialist electricity sales function.

The Company's assets generated significantly more electricity and revenues than budgeted, and more than in prior periods, largely due to effective asset management, higher solar irradiation, and the proactive hedging of UK power prices for our electricity generation. This enabled us to both minimise the impact of power price volatility and actively capture pricing opportunities in the market which contributed to our revenues during the year.

At the AGM held in September 2020, shareholders overwhelmingly approved changes to the Company's Investment Policy, allowing the Company to invest up to 30% (previously 15%) of GAV in solar plants outside the UK in OECD countries, invest up to 15% of GAV in private equity structures and up to 10% in standalone energy storage. These changes will help us seek opportunities in markets which yield significantly higher risk-adjusted financial returns than the UK solar secondary or subsidy-free markets. The Investment Adviser is actively considering opportunities to deploy capital in these areas.

The Company is delighted that it has reached its subsidy-free development target of 150MW, by approval of the final two development projects for construction. Hatherden (50MW) and Whitecross (36MW) are currently being prepared for construction and are expected to be energised in late 2022. These assets will follow the successful energisation of High Garrett (8.5MW) in October 2020, and Staughton (50MW) and Hall Farm II (5MW) during the last financial year. NESF's early entry into the UK subsidy-free market has shown its ability to develop value-accretive opportunities such as long-term corporate power price agreements ("PPAs") and secure more attractive risk- adjusted financial returns compared to acquiring operating solar projects with subsidies. This has allowed NESF to establish its expertise and leadership position in this subsidy-free space.

Similarly, NESF took significant steps in establishing a foothold in the long-term, high-credit UK corporate PPA market by acquiring the Camden portfolio, comprising two projects totaling 100MW. The Grange (50MW) is fully operational and South Lowfield (50MW) is expected to be energised this summer. The Camden portfolio has a 15-year PPA in place covering c.75% of the electricity to be generated over the life of the PPA. The PPA counterparty is AB InBev, the world's largest brewer.

The technical performance of our plants during the year has been exceptional. Generation was 6.2% above budget and Asset Management Alpha (which measures the operational outperformance attributable to effective asset management above and beyond changes in underlying solar irradiation) was 0.7%. With the majority of our electricity sold under fixed-price contracts, we achieved earnings per ordinary share of 6.87p (2020: -5.09p).

During the year, the Board concluded its review of its dividend policy. To the extent the Board considers it appropriate, each year we will target increasing the total annual dividend paid to ordinary shareholders. For the financial year ending 31 March 2022, we are therefore targeting an increased total dividend of 7.16p per ordinary share.

In approving this dividend target, the Board took into account the projected future power prices and associated price hedges, inflation in our markets, historic and budgeted technical and operational performance of our portfolio, the appropriate ratio of ordinary earnings and future targeted dividend payments.

NAV and Operating Results

At the year end, the ordinary shareholders' NAV was £581m, equivalent to 98.9p per ordinary share (2020: £579m, 99.0p per ordinary share).

The main detractors during the year were a decrease in long-term power price forecasts (-3.0p per ordinary share), a downward revision in short-term inflation forecasts (-1.1p per ordinary share) and increased corporation tax rate from 2023 onwards (-1.8p per ordinary share). The main contributors during the year were a decrease in the unlevered discount rate (+3.4p per ordinary share) and the Company's operating outperformance (+1.4p per ordinary share).

Profit before tax was £40.2m (2020: -£29.7m) with earnings per ordinary share of 6.87p (2020: -5.09p). Cash dividend cover (pre-scrip dividends) was 1.1x (2020: 1.2x).

For the year, the ordinary shareholder total return was 5.1% (2020: -7.8%) and the ordinary share NAV total return was 7.0% (2020: -4.5%). As at 31 March 2021, NESF had an annualised ordinary shareholder total return of 6.1% (2020: 6.3%) and an annual ordinary share NAV total return of 6.0% since IPO (2020: -5.9%). At year end, the NESF share price was 99.6p, which was a 0.7% premium to the NAV per ordinary share of 98.9p (2020: share price was 101.5p, 2.5% premium to the NAV per ordinary share which was 99.0p).

Power Prices

At the beginning of the financial year, the "oil price war" between the USA, Saudi Arabia and Russia, and the first effects of the Covid-19 pandemic led to sharp power price declines. In May 2020, the short-term demand-side effects stemming from the pandemic drove power prices down to unprecedented levels. A H2 2020 economic recovery, and subsequent increased demand for electricity, has driven a recovery in short and medium-term power prices; something that is currently reflected in day-ahead prices as well as 2021 and 2022 pricing.

Of the Company's revenues for the year, 66% were derived from government subsidies and, at the end of the year, the average remaining weighted life under the relevant subsidies was 14 years. These revenues are fixed for the long-term in accordance with the terms of the relevant subsidies.

The remaining 34% of the Company's revenues were derived from selling the electricity generated to carefully selected counterparties in the open market and, therefore, are exposed to market power price movements. Our Asset Manager's electricity sales desk is focused on securing the best terms for our sales and minimising our exposure to short-term price fluctuations by securing fixed prices for specified time periods. The flexible PPA framework allowed us to lock in higher power prices during the year and produced a £7.0m revenue uplift compared to selling the electricity at the spot rate.

Looking forward to the next two financial years, as at 16 June 2021, the Company has agreed fixed UK pricing (hedged) covering:

· 87% of budgeted generation for the 2021/22 financial year; and

· 63% of budgeted generation for the 2022/23 financial year.

Portfolio Performance

Energy generated during the year was 738GWh (2020: 712GWh), 6.2% above budget (2020: 4.7%), resulting in a seventh consecutive year of outperformance.

During the year, solar irradiation across the portfolio was 5.5% above budget (2020: 4.0%). Asset Management Alpha for the year was 0.7% (2020: 0.7%) and would have been 1.3% (2020: 1.5%) if we excluded distributor network outages, over which we have no control.

Our UK portfolio performed above expectations with generation outperformance of 6.3% (2020: 4.6%) and an Asset Management Alpha of 0.7% (2020: 0.7%).

Our Italian portfolio performed above expectations with generation outperformance of 5.1% (2020: 6.4%) and an Asset Management Alpha of 0.2% (2020: 1.3%).

Overall, we estimate this extra generation to have delivered additional revenues of c.£4.8m (2020: £3.5m) to the Company.

Portfolio Update

Over the year, our Investment Adviser and Asset Manager have continued to optimise the returns from the portfolio by:

· acquiring projects with attractive long-term PPAs

· executing our electricity sales strategy to maximise revenue and reduce shorter-term power price risk;

· implementing technical improvements;

· reducing operating costs through re-negotiating contractual terms and entering into new agreements; and

· securing options or rights to extend the useful life of four of our assets;

Our subsidy-free asset High Garrett (8.5MW) was successfully energised in October 2020. The final investment decision covering two further subsidy-free assets, Hatherden (50MW) and Whitecross (36MW), ensured our 150MW subsidy-free portfolio target was achieved, of which 64MW has been energised as at the date of this report. The full subsidy-free portfolio will amount to a total investment of c.£79m (7.7% of GAV as at 31 March 2021).

We are progressing strategies for the sale of electricity from these subsidy-free plants to secure attractive risk-adjusted returns using electricity sales agreements, corporate power purchase agreements or direct-wire agreements with a range of off-takers. The successful consolidation of our subsidy-free portfolio demonstrates our ability to adjust effectively to a changing UK solar market through our expertise in identifying opportunities and maximising risk-adjusted returns.

Separate to the Company's subsidy-free strategy, the Company has agreed to finance, design, build, operate and own over 30MW of solar assets on sites operated by Anglian Water Group. The power generated from these assets will be sold directly to Anglian Water under 25-year agreements at a fixed price. Sutterton (0.4MW) and Marham (1MW) were energised in early 2021, and a further 18MW are expected to be energised during the current financial year.

In addition, we acquired the 100MW long-term PPA backed Camden portfolio for a total consideration of £64.3m. The Grange (50MW) is fully operational and South Lowfield (50MW) will be energised during the summer, increasing our combined installed power to 864MW. More information on this transaction can be found in the Investment Adviser's Report.

On 14 May 2020, two subsidy-free pre-construction development projects, Strensham and Llanwern, were disposed of for a combined consideration of £11.5m. Construction had not started on either of these projects and they were disposed of as it became apparent during the development process they would not meet NESF's financial target return, mainly due to the decline in power price forecasts.

Similarly, following the successful completion of our 150 MW subsidy-free development portfolio, on 25 March 2021, 16 further development projects in the pipeline were sold for a combined consideration of £5.6m. For both disposal transactions, NESF recovered all development costs incurred and produced a return on capital invested significantly in excess of our annualised target return for UK assets.

Changes to Investment Policy

At the Company's AGM on 11 September 2020, the following changes were approved by shareholders:

· up to 30% of GAV may be invested in solar assets that are located outside the UK (the limit was previously up to 15%);

· the Company may now acquire an interest in solar assets located in non-OECD countries where those assets form part of a portfolio of solar assets in which the Company acquires an interest and subject to the Company's aggregate investment in any such assets being not greater than 3% of GAV;

· up to 15% of GAV may now be invested in solar assets through private equity structures; and

· the Company may now also invest in standalone energy storage systems (not ancillary to or co-located with solar assets owned by the Company) up to an aggregate limit of 10% of GAV.

At the time of making an investment, the cost of the investment is calculated as a percentage of GAV to ensure it does not breach the relevant limit.

In line with its refocused investment policy, the Company is advancing a significant pipeline of both domestic and international solar assets and domestic energy storage asset opportunities, including investments in private equity structures, which complement its existing portfolio, with a view to achieving higher financial returns, additional geographical, technology, and revenue diversification.

Debt Strategy

As at 31 March 2021, the Company's had £200m of preference shares (2020: £200m). The Company's subsidiaries also had financial debt outstanding of £246m (2020: £214m). Of the financial debt, £192m comprises two long-term fully amortising debt facilities, and £54m was drawn under a short-term credit facility.

The short-term credit facility of £70m was extended from July 2020 to July 2022 during the year. At the year end, the Company's subsidiaries had £36m (2020: £71.1m) undrawn from two short-term credit facilities and the Company had a cash balance of £11m (2020: £25m).

The total financial debt represented 24% of GAV as at 31 March 2021 (2020: 22%). As at 31 March 2021, the total gearing comprising the total financial debt and the preference shares represented 43% of GAV (2020: 42%).

Dividends

The Directors have approved a fourth interim dividend of 1.7625p per ordinary share, which will be payable on 30 June 2021 to ordinary shareholders on the register as at the close of business on 21 May 2021. Following the payment of the fourth interim dividend, the Company will have paid total dividends of 7.05p per ordinary share in respect of the year ended 31 March 2021 (2020: 6.87p), achieving its target for the year.

The Company continues to offer a scrip dividend alternative as approved by ordinary shareholders at the 2020 AGM, details of which can be found on the Company's website (nextenergysolar.com).

During the year, the Company paid a total of £38.1m of cash dividends (2020: £36.7m) and, in addition, issued £2.9m of scrip shares to ordinary shareholders who elected for the scrip dividend alternative (2020: £3.0m), making a total of £41.0m of distributions (2020: £39.7m).

The Company has paid dividends since IPO that have increased annually in line with RPI. With effect from the financial year beginning 1 April 2021, to the extent the Board considers it appropriate, we will each year target increasing the total annual ordinary dividend paid to shareholders. In deciding the total annual dividend, the Board will take into account projected future power prices and associated price hedges, inflation in our markets, historic and budgeted technical and operational performance of our portfolio, and the appropriate ratio of ordinary earnings and cash cover to proposed dividend payments.

For the financial year ending 31 March 2022, we are targeting an increased total dividend of 7.16p per ordinary share.

Environmental, Social and Governance Matters

Our commitment to ESG is at the forefront of our business strategy and purpose. Our Investment Adviser is a signatory of the United Nations' Principles for Responsible Investments and has integrated ESG principles into all aspects of the NEC Group's investment and asset management processes. NESF integrates ESG factors in investment decisions by implementing the Investment adviser's Sustainable Investment Policy1 throughout the investment cycle, from preliminary screening and exclusion to risk management during pre-investment and ownership phases. We have strengthened our transparency and reporting in compliance with the EU Sustainable Finance Disclosure Regulation.

The electricity generated by our portfolio during the year ended 31 March 2021 was equivalent to a saving of 317,600 tonnes of CO2 equivalent emissions (2020: 307,700 tonnes CO2e) and sufficient to power 195,000 UK homes for an entire year (2020: 189,000 homes). This is roughly equivalent to powering a city with 490,000 inhabitants (e.g. Portsmouth and Brighton combined) or taking 102,000 petrol/diesel cars off the road for an entire year (2020: 99,000 cars off the road for an entire year).

Our Asset Manager also actively engages in activities that enhance the environment and communities surrounding our solar plants, including, where feasible, on-site biodiversity activities such as encouraging wildflower meadows, installing bug hotels, partnering with local beekeepers and other initiatives to improve the local biodiversity, as well as local community programmes. Please refer to the ESG report for more information.

The Company continues to hold the London Stock Exchange Green Economy Mark, which recognises funds which derive 50% or more of their revenues from environmental solutions, and the Guernsey Green Fund Mark, due to our meaningful contribution to reducing CO2e emissions through the generation of clean solar power.

In addition to the ESG activities on behalf of NESF and other clients, the NEC Group continues to donate at least 5% of its net profits to the NextEnergy Foundation, which it established in 2017. The NextEnergy Foundation participates proactively in the global effort to reduce carbon emissions, providing clean power sources in regions where they are not available and contributing to poverty alleviation.

Board changes during the year

Sue Inglis stood down from the board on the 31 March 2021. The Board would like to take this opportunity to thank Sue for her contributions during her time as a Director. We wish Sue well for the future.

Appreciation

On behalf of my fellow Directors, I would like to express my sincere thanks and appreciation to the numerous people who have worked in the field and from home under difficult and testing conditions to enable our Company to continue to operate successfully in these challenging times.

Outlook

The Board, our Investment Manager and our Investment Adviser believe that the market environment continues to be favourable for the Company and its Investment Policy.

Undoubtedly, the economic shock of Covid-19 has had a profound impact on energy demand and commodity prices. However, the near-term power price recovery during the second half of the financial year and beyond has underlined the resilience of our sector in the current uncertain environment. The price for electricity is driven by several factors that are proving particularly difficult to predict in the current environment but is ultimately dependent on the supply and demand for electricity. A sustained upturn in demand for electricity will be driven by the pace of economic recovery once the effects of the pandemic fully subside.

We continue to closely monitor macro and micro economic indicators and governmental information to assess the potential future impact on the Company's activities. The Company will continue to focus on generating attractive financial returns for our shareholders, while having positive social and environmental impacts.

With the energisation of our third subsidy-free asset (High Garrett, 8.5MW) and the investment approval of Hatherden and Whitecross, both exciting subsidy-free assets of scale, NESF has reached its target of c.150MW of subsidy-free assets in the portfolio.

NESF will now look to consolidate its leadership position in the growing UK long-term corporate PPA market, building upon the successes of the Anglian Water projects and the landmark 100MW Camden acquisition, with the aim of providing long-term, reliable cashflows for the Company.

NextEnergy Capital's specialist energy trading desk continues to ensure that our electricity sales strategy, including our subsidy-free assets, lock in revenue prices mitigating power price risk.

We are aiming to extend the useful life of a further ten assets during the current financial year, adding to the 35 assets which have already secured extensions. These extensions will be value accretive and optimise our long-term revenues.

We are currently advancing a pipeline of non-UK acquisitions, a direct investment in an existing private equity fund, and investments in energy storage systems and ancillary solar technologies. These will complement our existing portfolio and diversify some of our asset-specific or market risks, whilst also adapting our portfolio to the changing dynamics of the solar markets in which our assets are located.

1 https://cdn.next1.nextenergycapital.com/next/2021/04/NextEnergy-NEC_Sustainable_Investment_policy.pdf

ESG continues to be a core part of our purpose, as activities mitigating climate change accelerate globally. The execution of our ESG policy is not just integrated into NESF investment decisions, it ensures we continue to lead by example and our Company and stakeholders are fully aligned to create a better environment for both current and future generations.

The Company has demonstrated that it can be resilient to the volatility that the Covid-19 pandemic has posed, and we are well placed to meet the challenge of achieving our investment objectives and the opportunity to grow the business in the future in line with our strategic aims.

Kevin Lyon,

Chairman

16 June 2021

Our Business Model

Structure

The Company is regulated by the Guernsey Financial Services Commission as a registered closed-ended investment company. It has an indefinite life.

The Company's capital structure comprises ordinary shares and preference shares. The ordinary shares are listed on the premium segment of the Official List and traded on the London Stock Exchange's Main Market. The preference shares are not listed or traded on any public market. The rights attaching to each class of shares are summarised in note 13 to the Financial Statements.

The Company makes its investments through intermediate holding companies ("HoldCos") and underlying special purpose vehicles ("SPVs") that hold the solar assets. The Group comprises the Company, the HoldCos and the SPVs. As explained in note 2d) to the Financial Statements, as the Company is an investment entity as described by IFRS 10, the Company does not prepare consolidated accounts and, instead, holds its investments in its HoldCos and SPVs at fair value.

The Company has the ability to use short- and long-term debt at the Company, HoldCo and SPV levels. Debt at the HoldCo and SPV levels is non-recourse.

Operating Model

The Company's business model follows that of an externally managed investment company. Therefore, the Company does not have any employees and outsources its activities to third party service providers, including the Investment Manager, Asset Manager and Administrator who are the principal service providers. The Investment Manager outsources specific services to the Investment Adviser.

Management of the Company

The independent Board is responsible to shareholders for the overall management of the Company, including strategy and strategic aims, corporate governance, risk management and financial reporting.

The Company has outsourced the management of its day-to-day activities to the Investment Manager and the Administrator, which operate within clearly defined terms of agreements that set out their roles, responsibilities and authorities. The Investment Manager, operating under guidelines determined by the Board, has direct responsibility for the decisions relating to the day-to-day running of the Company and is accountable to the Board for the investment and operating performance of the Company. The Administrator provides the Company with company secretarial, fund accounting and administration services.

Further information on the division of responsibilities for the management of the Company can be found in the Corporate Governance Statement.

Management of the Company's Investment Activities and Assets

The Investment Manager, Investment Adviser and Asset Manager are all members of NextEnergy Capital Group (the "NEC Group").

The NEC Group, which is privately owned, was founded in 2007 and has evolved into a leading specialist investment and asset manager in the solar energy infrastructure sector. Since its inception, it has been active in the development, construction and ownership of solar assets, which is its sole focus. As at 31 March 2021, the NEC Group had assets under management of $2.6 billion with a cumulative generating capacity of more than 1.2GW. In addition to the Company, it manages two private equity funds, NextPower II LP (invests in solar assets in Italy) and NextPower III LP (invests in solar assets globally).

The NEC Group's team of some 190 individuals has significant experience in energy and infrastructure transactions across international jurisdictions. The Investment Adviser's Investment Committee comprises of Michael Bonte-Friedheim, Aldo Beolchini Giulia Guidi and Ross Grier who have over 65 years' industry experience.

Since it was founded, the NEC Group has provided operating asset management, monitoring, technical due diligence and other services to over 1,300 utility-scale solar power plants with an installed capacity in excess of 2.1GW. Its asset management clients include, banks, private equity funds and other specialist investors. It has created a proprietary asset management platform which integrates all technical, financial and commercial data to analyse clients' data in real-time and generates insight that help drive performance. This software and systems having been refined over the past 12 years, together with specialist staff with extensive solar experience allows WiseEnergy to be at the forefront of the 'digitalisation of energy'.

The collective experience of the NEC Group of investing and managing solar assets best positions the Company to implement efficiencies at both the investment and operating asset levels. The technical and operating outperformance of the Company's portfolio to date underlines the benefits of this comprehensive strategic relationship.

Administration of the Company

The Board has delegated administration, fund accounting and company secretarial services to the Administrator.

Apex Fund and Corporate Services (Guernsey) Limited, is part of the Apex Group which was established in Bermuda in 2003 and is a global financial services provider. It has over 45 offices worldwide and 4,000+ employees.

Further details of the Administrator's responsibilities can be found in the Corporate Governance Report.

Michael Bonte-Friedheim is Founding Partner and CEO of the NEC Group. He has over 20 years' specialist experience in the power and energy sector and was previously Managing Director in Goldman Sachs' energy and power investment banking team in London and non-executive Chairman and CEO of a number of listed energy companies.

Aldo Beolchini is Managing Partner and CIO of the NEC Group. He has over 20 years' experience in investment banking and renewable energy. Prior to joining the NEC Group in 2008, he was Vice President at Morgan Stanley Investment Banking.

Dividend Policy, Scrip Dividends and Dividend Target for Financial Year Ending 31 March 2022

The Company's principal purpose is to provide ordinary shareholders with attractive risk-adjusted returns, principally in the form of dividends that increase in line with RPI for financial year 2021 and a progressive dividend thereafter. In respect of each financial year, the Company pays quarterly interim dividends of equal amount, with dividends declared in August, November, February and May and paid in or around September, December, March and June respectively.

The Company offers a scrip dividend alternative to ordinary shareholders and currently anticipates that it will continue to do so.

Scrip dividends provide ordinary shareholders with the flexibility to receive their quarterly dividend in cash or newly issued ordinary shares. Details of the scrip dividend alternative for the year ending 31 March 2022 will be set out in a separate circular that is expected to be sent to ordinary shareholders in or around August 2021. Once published, a copy of the circular will also be available on the Company's website (nextenergysolarfund.com).

The target dividend for the financial year ending 31 March 2022 is 7.16 pence per ordinary share, an increase of 1.5% compared to the financial year ended 31 March 2021. We expect to pay four quarterly of dividends of 1.79 pence each.

Five Year Record

Our Investment Strategy and Track Record

Investment Strategy

Our strategy is straightforward:

· Investment: We seek to own a broad range of large scale solar energy infrastructure assets, primarily located in the UK but with up to 30% of GAV in other OECD countries, that generate reliable cash flows over their useful lives (typically, at least 25-40 years from energisation).

· Asset management: We seek to enhance the returns from our assets through effective asset management, including controlling costs, delivering operational efficiencies, extending their useful lives and executing short and medium-term electricity sales hedges to mitigate power price risk.

· Financing: We seek to optimise the risk-adjusted returns to our ordinary shareholders by funding our activities through an appropriate mix of shareholder equity and debt, subject to debt being capped at 50% of GAV.

· Risk management: We seek to actively manage potential risks, including maintaining a diversified exposure by location, third-party suppliers, service providers and other commercial counterparties to improve the resilience of the Company's portfolio and contributing to its long-term sustainable success.

Investment Policy

The Company seeks to achieve its investment objective by investing predominantly in solar PV assets.

The Company invests in solar PV assets primarily in the UK. Not more than 30% of the Company's GAV (calculated at the time of investment) may be invested in solar PV assets that are located outside the UK. Investments in solar PV assets outside the UK will be made in OECD countries that the Investment Manager and Investment Adviser believe have a stable solar energy regulatory environment and provide investment opportunities with similar, or better, investment characteristics and returns relative to investments in the UK, although the Company may acquire an interest in solar PV assets located in non-OECD countries where those assets form part of a portfolio of solar PV assets in which the Company acquires an interest and where the Company's aggregate investment in any such assets is, at the time any such investment is made, not greater than 3% of the GAV.

The Company intends to continue to acquire solar PV assets that are primarily ground-based and utility-scale and which are on sites that may be agricultural, industrial or commercial. The Company may also acquire portfolios of residential or commercial building-integrated installations. The Company targets solar PV assets that are anticipated to generate stable cash flows over their asset lifespan.

The Company typically seeks to acquire sole ownership of individual solar PV assets through SPVs, but may invest in solar PV assets through entering into joint ventures, acquiring minority interests or via private equity structures, provided that not more than 15% of the GAV may be invested in private equity structures (calculated at the time of investment). Where a controlling interest of less than 100% in a particular solar PV asset is acquired, the Company intends to secure controlling shareholder rights through shareholders' agreements or other legal arrangements. Where a non-controlling interest is being acquired (either directly in a solar PV asset or through a private equity structure) the Company intends to secure minority protection rights or protections through limited partnership agreements in line with typical private equity structures. Investments by the Company in solar PV assets may be either by way of equity or a mix of equity and shareholder loans.

The Company has built up a diversified portfolio of solar PV assets and its Investment Policy contains restrictions to ensure risk diversification. No single investment (or, if an additional stake in an existing investment is acquired, the combined value of both the existing and the additional stake) by the Company in any one solar PV asset will constitute (at the time of investment) more than 30% of the GAV. In addition, the four largest solar PV assets will not constitute (at the time of investment) more than 75% of the GAV.

The Company will continue, primarily, to acquire operating solar PV assets, but may also invest in solar PV assets that are under development (that is, at the stage of origination, project planning or construction) when acquired. Such assets will constitute (at the time of investment) not more than 10% of the Gross Asset Value in aggregate.

The Company may also agree to forward-fund by way of secured loans the construction costs of solar PV assets where it retains the right (but not the obligation) to acquire the relevant asset once operational. Such forward-funding will not fall within the 10% development restriction above but will be restricted to no more than 25% of the GAV (at the time such arrangement is entered into) in aggregate and will only be undertaken where supported by appropriate security (which may include financial instruments as well as asset-backed guarantees).

The right to forward fund, subject to the above limitations, enables the Company to retain flexibility in the event of changes in the development pipeline over time. In addition, the Company will not employ forward funding and engage in development activity in relation to the same project or asset.

A significant proportion of the Group's income is expected to result from the sale of the entirety of the electricity generated by the solar PV assets within the terms of power purchase agreements ("PPAs") to be executed from time to time. These are expected to include the monetisation of ROCs and other regulated benefits and the sale of electricity generated by the assets to energy consumers and energy suppliers (Brown Power). Within this context, the Company expects to execute PPAs with creditworthy counterparties at the appropriate time.

The Company will continue to diversify its third-party suppliers, service providers and other commercial counterparties, such as developers, engineering and procurement contractors, technical component manufacturers, PPA providers and landlords.

In pursuit of the Company's investment objective, the Company may employ leverage, which borrowing together with the aggregate subscription monies paid in respect of all Preference Shares in issue and including any unpaid or undeclared dividends thereon will not exceed (at the time the relevant arrangement is entered into) 50% of the GAV in aggregate. Such leverage will be deployed for the acquisition of further solar PV assets in accordance with the Company's Investment Policy. The Company may seek to raise leverage at any of the SPV, UK Holdco or Company level.

The Company invests with a view to holding its solar PV assets until the end of their useful lives. However, assets may be disposed of or otherwise realised where the Investment Manager determines, in its discretion, that such realisation is in the best interests of the Company. Such circumstances may include (without limitation) disposals for the purposes of realising or preserving value, or of realising cash resources for reinvestment or otherwise. The Company will seek to optimise and extend the lifespan of its assets and may invest in their repowering and/or integration of ancillary technologies (e.g. energy storage) on its solar PV assets to fully utilise grid connections and balance the electricity grid with a view to generating greater revenues. The Company may also invest in standalone energy storage systems (not ancillary to or co-located with solar PV assets owned by the Company) up to an aggregate limit of 10% of the GAV (calculated at the time of investment). The Company expects to re-invest any cash surplus (in excess of that required to meet the Company's dividend target and ongoing operating expenses) in further investments, thereby supporting its long-term net asset value.

The Company may invest cash held for working capital purposes and pending investment or distribution in cash or near-cash equivalents, including money market funds.

The Company may (but is not obliged to) enter into hedging arrangements in relation to interest rates and/or power prices.

Where investments are made in currencies other than sterling, currency hedging may be carried out to seek to provide protection to the level of sterling dividends and other distributions that the Company aims to pay on its shares and in order to reduce the risk of currency fluctuations and the volatility of returns that may result from such currency exposure. This may involve the use of forward foreign exchange contracts to hedge the income from assets that are exposed to exchange rate risk against sterling and foreign currency borrowings to finance foreign currency assets.

Hedging transactions (if carried out) will only be undertaken for the purpose of efficient portfolio management to protect or enhance returns from the Company's portfolio and will not be carried out for speculative purposes.

As required by the Listing Rules, any material change to the Investment Policy of the Company will be made only with the approval of the FCA and of the Company's Ordinary Shareholders by ordinary resolution.

In the event of any breach of the Company's Investment Policy, Shareholders will be informed of the actions to be taken by an announcement issued through a Regulatory Information Service or a notice sent to Shareholders at their registered addresses in accordance with the Articles.

Future Investments

As per its Investment Policy, the Company has an investment limit of 30% of the Company's GAV in solar assets outside the UK. The Company already has investments in Italy and is advancing attractive risk-adjusted investment opportunities in other OECD jurisdictions which would enhance geographic diversification and provide attractive risk-adjusted financial returns.

The Company is also permitted to invest up to 15% of its GAV into private equity structures. The Investment Adviser is considering opportunities to deploy capital in such structures.

The Company may also acquire an interest in solar assets located in non-OECD countries where those assets are part of a portfolio of solar assets in which the Company acquires an interest and subject to the Company's aggregate investment in any such assets being not greater than 3% of the Company's GAV.

The Company is also permitted to invest up to 10% of its GAV in standalone energy storage, and we have commenced a detailed review of numerous opportunities in this technology that will complement its solar farm portfolio in the UK.

Disposals

During the year, the Company disposed of several non-operational development projects (Strensham, Llanwern, and 16 development projects) to an affiliate of NEC. This resulted in NESF recovering all development costs incurred and producing a return on capital invested significantly in excess of NESF's annualised target return for our UK assets. The Board of Directors reviewed each proposal alongside external advice and concluded that each transaction was in the best interests of NESF shareholders, whilst also being in line with the Company's Investment policy. Our RNS disclosures demonstrate that we have followed the appropriate process for these disposals. The disposals were undertaken as the investment manager continued to actively manage the NESF portfolio and looked to divest residual development risk that did not fit the required return profile. Full details can be found in the relevant RNS announcements.

Investment Adviser's Report

Introduction

As at 31 March 2021, the NAV per ordinary share was 98.9p (2020: 99.0p). The change in NAV over 12 months reflects a decrease in long-term power price forecasts (-3.0p per ordinary share), a downward revision in short-term inflation forecasts (-1.1p per ordinary share) and increased UK corporate tax rates rising to 25% from 2023, expected to remain in place for the remainder of the life of the portfolio (-1.8p per ordinary share). These movements were mainly offset by the Company's operating outperformance (+1.4p per ordinary share) and a reduction in the unlevered discount rate (+3.4p per ordinary share).

At the year end, the UK blended average power curve corresponded to an average solar capture price of approximately £45.4/MWh (2020: £43.3/MWh) for the period 2021-2025 and £46.5/MWh (2020: £48.6/MWh) for the period 2026-2041 (at 2021 prices).

In March 2020, as the pandemic took hold, the NEC Group implemented its business continuity plans for its global staff to work from home. This had minimal disruption on the operations of the NEC Group. As our employees gradually return to the office, we continue to follow multiple government guidelines and monitor closely the impact of Covid-19 on our workforce, and the countries in which we operate and are pursuing new investment opportunities.

Portfolio Highlights

NEC Group continued to explore new attractive opportunities for NESF whilst actively managing NESF's existing portfolio of operating and development assets. On 14 May 2020, two subsidy-free projects under development, Strensham (40MW) and Llanwern (75MW), were disposed of for a combined consideration of £11.5m. This resulted in NESF recovering all development costs incurred and producing a return on capital invested significantly in excess of NESF's annualised target return for our UK assets. Construction had not started on either of these projects, and they were sold when they did not meet NESF's annualised target return, partly due to the decline in power price forecasts. The transaction constituted a smaller related party transaction as set out in the FCA's Listing Rules.

On 29 June 2020, a short-term revolving credit facility ("RCF") of £70m was extended from July 2020 to July 2022. This extension provides the Company with a short-term source of capital, at an attractive cost. The Company expects to use the RCF to finance the completion of its subsidy-free pipeline, and other investment opportunities that fall within the Company's Investment Policy.

Pre-construction works for our third subsidy-free asset, High Garrett, began in early 2020 and full construction commenced during the summer. High Garrett, a 8.5MW extension to the 5MW ROC asset known as Kentishes acquired in 2016, was energised in October 2020.

The Company has agreed to finance, design, develop, build, operate and own approximately 30MW of solar assets on Anglian Water sites. During the year, construction work progressed, and the first two projects Sutterton (0.4MW) and Marham (1MW) were energised in early 2021. The power generated from these assets will be sold direct to Anglian Water at a fixed price for a 25-year period through a private wire agreement.

On 1 March 2021, two projects totaling 100MW were acquired for a consideration of £64.3m. The Grange (50MW) is fully operational whilst South Lowfield (50MW) will be energised in the summer of 2021. Once commissioned, these two assets will represent an increase of c.13% in NESF's installed capacity and produce enough clean energy combined to power the equivalent of c.29,000 UK households per year. Both assets benefit from long-term 15-year PPA in place with AB InBev for c.75% of the electricity generation.

Following the investment approval of two subsidy-free projects (Hatherden (50MW) and Whitecross (36MW)) the Company successfully reached its target subsidy-free development portfolio capacity of c.150MW. Both assets are being prepared for construction and are expected to be energised in late 2022. The early entry into the UK subsidy-free market reflects the Company's leadership in the space and expertise in developing attractive value-accretive opportunities. As a result of our specialist energy sales desk, NESF's subsidy-free portfolio will benefit from active hedging and greater trading flexibility, thereby maximising risk-adjusted returns for shareholders by locking in future cash flows.

Having achieved its target subsidy-free capacity of c.150MW, the Company has begun to eliminate any residual development risk. In March 2021, the Company divested 16 development projects (not in construction or in operation) from its subsidy-free pipeline. The projects were sold to an affiliate of the NextEnergy Group through a related-party transaction as set out in the FCA's Listing Rules. The divestment amounted to a combined consideration of £5.6m and resulted in an attractive return on the capital invested into this development activity.

Portfolio Performance

During the pandemic, workers in the electricity sector are considered "key workers" and this enabled the Asset Manager to ensure that the technical and operational integrity of NESF's solar assets were maintained and, to date, NESF has not experienced any significant technical or operational impacts on its portfolio resulting from the effects of Covid-19.

During the year, irradiation across the entire portfolio was 5.5% above expectation (2020: 4.0%), and generation was 6.2% above budget (2020: 4.7%). Asset Management Alpha for the year was 0.7% (2020: 0.7%), which would have been 1.3% (2020: 1.5%) if distributor network outages, over which we have no control, were excluded.

Asset Management Alpha

The Asset Management Alpha is an important metric that allows the Company to identify the "real" outperformance of the portfolio due to effective asset management and excludes the effect of variation in irradiation. The "nominal" outperformance is calculated as the GWh generated by the portfolio versus the GWh expected in the assumptions used at the time of acquisition. This metric can be used for comparison with other peers in the solar industry to directly show the contribution of the Asset Manager to generation outperformance.

The Asset Manager monitors actual performance versus expectations for assets operational for at least two months post completion. The three rooftop portfolios have been excluded as irradiation is not monitored. Similarly, the generation performance of assets that are yet to pass Preliminary Acceptance Certificate ("PAC") in accordance with the EPC contract is not reported by the Asset Manager.

Portfolio Optimisation

Asset life extensions

During the year, we secured options or rights to extend the leases and/or planning on four UK plants. The positive impact on NAV of these lease extensions amounted to 0.6p per ordinary share.

As at 31 March 2021, 35 UK assets (337MW), comprising c.41% of the Company's portfolio, had secured 5, 10 or 15 year lease extensions. We continue to work on extending the life of the remaining assets and are targeting a further ten assets for the remainder of the current financial year to 31 March 2022.

For illustrative purposes, should the ten targeted assets be valued on a 40-year lease basis from the date of connection to the grid (assuming current lease terms), the Company's NAV per ordinary share at 31 March 2021 would increase by approximately 1.6p.

Asset optimisation

During the year, three sites entered into new Operating and Maintenance 'O&M' contracts, of which NEC actively negotiated a reduction in price of £5.5k/MW with various counterparties. This resulted in an aggregate annualised cost savings of c.£20k, equivalent to a 20% reduction in contract price.

Short/medium-term power purchase agreements

NEC's specialist energy trading desk, along with external energy brokers, ensures that the Company's electricity sales strategy maximises revenues whilst mitigating the negative impact of short-term fluctuations in the power markets.

Secured pricing comprises of fixed price contracts, hedging under the trading contracts and nine FiT sites opted into the export tariff. During the year, power price contract fixes provided £7.0m in additional revenue compared to baseload prices.

1 Covers 95% of total portfolio (775MW) as at 16 June 2021

For the financial year ended 31 March 2021, the Italian portfolio derived c. 85% of revenues from subsidised revenues (principally FiTs) and c. 15% of revenues resulted from the sale of electricity generated under short-term contracts. The Company has secured fixed price agreements covering 100% of its Italian electricity generation for calendar year 2021 at a weighted average fixed price of c.€45/MWh (2020: 100% at €57/MWh).

OFGEM audits

Since IPO, the majority of OFGEM audits have been successfully signed-off without impacting ROC accreditations. NESF continues to have regular audits and the NEC Group have experienced team who deal with the ongoing audit. Professional advisers are engaged as and when appropriate. During the year, no adjustments to the NAV were made as a result of any completed or ongoing OFGEM audits.

Subsidy-free Portfolio

Starting in 2018, the Company sourced a pipeline of projects to be developed into operating subsidy-free assets and set a target of c. 150MW to add into its portfolio. As at 31 March 2021, the Company had 64MW of operating subsidy-free assets. Following the recent investment approval of Hatherden (50MW) and Whitecross (36MW), the Company will have reached its target when the assets are energised in the financial year 2022/23.

The Company's subsidy-free pipeline was intentionally greater than its subsidy-free target of c. 150MW. This was to ensure a broad set of investment opportunities for NESF from which it has selected the most attractive projects for inclusion in its portfolio.

The Anglian Water projects (Sutterton and Marham) and the Camden projects (The Grange and South Lowfield) are subsidy-free. However, the energy generated will be sold directly to offtakers at a fixed price linked to inflation for 25 and 15 years respectively. These assets therefore have similar characteristics to subsidised assets and for that reason are not included in the 150MW subsidy-free target.

The NEC Group's Head of Energy Sales is responsible for managing the strategy for the sale of electricity from the subsidy-free operating assets. Details on the power price risk management strategy can be found below and in note 22b to the Financial Statements.

The Italian Solis Portfolio

In December 2017 the Company acquired the portfolio of eight operating solar plants with an installed capacity of 34.5MW located in Italy for a total value of €131.9m (equivalent to £116.2m). The portfolio represented 11% of the Company's GAV as at 31 March 2021.

The key benefits of the Solis portfolio continue to be:

· High risk-adjusted return: As at the 31 March 2021 valuation, the net IRR of the Solis portfolio was c. 8.0%.

· Low risk-profile: The Company benefits from the portfolio's operating history and the high quality of its components. In addition, it reduces NESF's exposure to merchant energy markets, as c. 85% of its revenues are fixed for 15 years following the acquisition.

· Positive contribution to dividend cover: The higher return on investment is coupled with an attractive cashflow generation profile, which is higher than ROC assets, and evenly spread over the life of the investment, as the Italian FiT is fully fixed. For the purposes of comparison, the Solis portfolio has a cash dividend cover equivalent metric of 1.4x.

· NAV accretion: As at 31 March 2021, the Solis portfolio was valued on a DCF basis with a discount rate of 7.25% (2020: 7.75%) as a result of the increasing competition to acquire solar PV assets in Italy.

· Diversifying market risk: Italy is supported by a FiT incentive mechanism. The FiT is granted by a state-owned company which promotes and supports renewable energy in Italy, where the sole shareholder is the Ministry of Economy and Finance. Tariffs differ depending on the capacity, type of plant and the time of commissioning which range between €195/ MWh to €318/MWh. Once a PV plant is accredited, the FiT is granted over a period of 20 years and is not inflated.

· Low revenue risk: Of the Solis portfolio revenues, c.85% result from FiTs. The FiTs specific to this portfolio expire in 2032. The remaining 15% is from the sale of the brown electricity fed into the grid at market price or via PPAs to other market participants. With this revenue mix there is low revenue risk. In addition, low operating costs result in stable EBITDA margins in excess of 80%.

Changes to Investment Policy

As explained in the Chairman's Statement, the following changes to the Company's Investment Policy were approved by shareholders at the Company's AGM on 11 September 2020:

· up to 30% of GAV may be invested in solar assets that are located outside the UK (the limit was previously 15%);

· the Company may now acquire an interest in solar assets located in non-OECD countries where those assets form part of a portfolio of solar assets in which the Company acquires an interest and subject to the Company's aggregate investment in any such assets being not greater than 3% of GAV;

· up to 15% of GAV may now be invested in solar assets through private equity structures; and

· the Company may now also invest in standalone energy storage systems (not ancillary to or co-located with solar assets owned by the Company) up to an aggregate limit of 10% of GAV.

We have identified and are advancing value creating opportunities in line with the refocused Investment Policy to maximise shareholder returns and increase geographical diversification.

Managing NESF's merchant market exposure

Portfolio Valuation

Introduction

The Investment Adviser carries out the fair market valuation of the Company's underlying investment portfolio in line with its accounting policies. This valuation is then presented to the Board of the Investment Manager, before being presented to the Company's Board for review and final approval. The valuation is carried out quarterly (ad hoc valuations may also be undertaken from time to time, for example in conjunction with an equity fund raising).

The valuation principles used are based on a discounted cash flow methodology. Assets not yet operational or where the completion of the acquisition is not imminent at the time of valuation use the acquisition cost as a proxy for fair value.

The Board reviews the operating and financial assumptions used in the valuation of the Company's underlying portfolio.

Portfolio valuation bridge for the year ended 31 March 2021

1 Operating result includes excess cash generated for the period of £9.5m.

Forecasted power price methodology

For the UK portfolio, we use multiple sources for UK power price forecasts. At the short end, where PPAs exist we use the PPA prices that have been achieved, for periods where there are no PPAs in place, we use the short-term market forward prices. After this we use a simple average of three leading independent energy market consultants' long-term projections. This approach allows mitigation of any delay in response from the Consultants in publishing periodic (quarterly) or ad hoc updates following any significant market development.

For the Italian portfolio, a leading independent energy market consultant's long-term projections are used to derive the power curve adopted in the valuation.

The power price forecasts used also include a "solar capture" discount which reflects the difference between the prices available in the market in the daylight hours of operation of a solar plant versus the baseload prices included in the power price estimates. This solar capture discount is provided by the Consultants on the basis of a typical load profile of a solar plant and is reviewed as frequently as the baseload power price forecasts. The application of such a discount results in a lower long-term price being assumed for the energy generated by NESF's portfolio.

Historic - UK power prices

UK electricity day ahead prices increased from c. £24.2/MWh in April 2020 to c. £57.0/MWh in March 2021.

Source: N2EX - UK baseload - day ahead.

Forecast UK power prices (real 2021)

The Company's current UK long-term (2026-2041) average power price forecast represents a decrease of 4.5% compared to those used at the end of the previous financial year (real 2021). Overall, the 20-year UK average power price forecast is 49% below the assumptions employed at IPO.

Historic - Italian power prices

The Italian price of electricity increased from approximately €24.8/MWh in April 2020 to c. €60.4/MWh in March 2021.

Source: Gestore Marcati Energetici - purchasing price.

Forecast Italian power price (real 2021)

The Company's current Italian 20-year average power price forecast represents a decrease of 0.2% compared to those used at the end of the previous financial year (real 2021).

Discount rate

During the year, the Company has reduced the discount rate for unlevered operating UK solar assets to 5.75% (2020: 6.25%).

In the context of high liquidity provided by international investors, a maturing renewable energy market, a scarcity of subsidised assets and the lack of any incentive framework for new installations, the demand for operating solar assets remained strong resulting in sustained pressure on prices in the last twelve months. These changing dynamics were evidenced by the experience of the Investment Adviser when bidding for solar assets in the UK.

1 Unlevered discount rate for Italian operating assets implying 1.50% country risk premium.

2 Unlevered discount rate for subsidy-free uncontracted operating assets implying 1.0% risk premium.

3 1.0% risk premium for cash flows after 30 years where leases have been extended.

The resulting weighted average discount rate for the Company's portfolio was 6.3% (2020: 6.8%). The Company does not use the weighted average cost of capital ("WACC") as the discount rate for its investments as it believes that the reduction in WACC deriving from the introduction of long-term debt financing does not reflect the greater level of risk to equity investors associated with leverage assets or levered portfolios. However, for the purposes of transparency, the Company's pre-tax WACC as at 31 March 2021 was 5.4% (2020: 5.5%).

Asset life

The discounted cash flow methodology implemented in the portfolio valuation assumes a valuation time-horizon capped to the current terms of the lease and planning permission on the properties where each individual solar asset is located. These leases have been typically entered into for a 25-year period from commissioning of the relevant solar plants (specific terms may vary). However, the useful operating life of the Company's portfolio of solar assets is expected to be longer than 25 years. This is due to many factors, including:

· solar assets with technology components similar to the ones deployed in the Company's portfolio have been demonstrated to be capable of operating for over 45 years, with levels of the technical degradation lower than those assumed or guaranteed by the manufacturers;

· local planning authorities have already granted initial planning consents that do not expire and/or have granted permissions to extend initial consented periods;

· the Company owns rights to supply electricity into the grid through connection agreements that do not expire, and

· discounted cash flow valuation assumes a zero-terminal value at the end of the lease term for each asset or the end of the planning permission, whichever is the earlier.

Operating performance

The Company values each solar asset on the basis of the minimum performance ratio ("PR") guaranteed by the vendor, or that estimated by the appointed technical adviser during the acquisition due diligence. These estimates have been generally lower than the actual PR that the Company has been experiencing during subsequent operations. We therefore deem it appropriate to adopt the actual PR after two years of operating history when, typically, the plants have satisfied tests and received Final Acceptance Certification ("FAC").

During the year, FACs were closed across 41.1MW, with £617k retentions secured. These funds have been held back at the SPV to remedy any issues which remain outstanding.

As at 31 March 2021, 69 UK solar assets and all eight Italian solar assets (totalling 557MW) achieved FAC and their actual PR was used in the discounted cash flow valuation.

NAV

The Company's NAV is calculated quarterly and based on the valuation of the investment portfolio provided by the Investment Adviser and the other assets and liabilities of the Company calculated by the Administrator. The NAV is reviewed and approved by the Investment Manager and the Board. All variables relating to the performance of the underlying assets are reviewed and incorporated in the process of identifying relevant drivers of the discounted cash flow valuation.

In accordance with IFRS 10, the Company reports its financial results as an Investment entity and on a non-consolidated basis (see note 2c to the Financial Statements). The change in fair value of its assets during the year is taken through the Statement of Comprehensive Income.

NAV bridge for the year ended 31 March 2021

The movement in the NAV was driven by the following factors:

· a decrease in long-term (2026-2041) UK power prices forecasts provided by three Consultants (2020: two Consultants), being 4.5% lower than prior year. The Company used the forecasts released by the Consultants up to the date of preparation of this Annual Report;

· the uplift resulting from a decrease in the unlevered discount rate from 6.25% to 5.75% during the year;

· the increase in UK corporate tax rates from 2023 onwards;

· the downward revision in short-term inflation forecasts;

· the minor uplift arising from lease extensions;

· the operating results achieved by the Company's solar assets; and

· the dividends and operating costs paid during the year.

NAV sensitivity analysis as at 31 March 2021

Sensitivity analyses can be found in note 19b to the Financial Statements.

The UK Government is consulting on an alignment of the RPI to the lower consumer price index ("CPI"). Any change agreed after the consultation would not take effect until between 2025-30. The NAV does not take into account this potential change as it is not certain. However, for illustrative purposes, a CPI transition sensitivity for the year would equate to -6.2% reduction in ordinary NAV per share which is the equivalent of -6.4p per ordinary share.

Cash flow generation

The Company generates revenues through the sale of electricity to the markets and the subsidies provided under different subsidy regimes (ROC, NIROC and FiT). Both revenue streams are underpinned by two main factors:

· the actual energy output (measured as amount of KWh of energy generated), which is mainly driven by the solar irradiation, technical performance and availability of the plant; and

· the actual price at which the energy generated is sold to the markets, as well as the subsidies received for the same generation.

The performance of a plant in terms of revenues is therefore a product of both the operational performance and the commercial terms of the PPAs in place. Before taking into account tax payments and financing considerations, the cash flow generation of solar assets is also influenced by operating expenses, which are usually governed by long-term contracts and characterised by low volatility over the long-term.

1 Based on the average installed capacity (721MW) over the financial year. Given the different composition of the growing portfolio, this information is not directly comparable with what was provided in the previous Annual Report.

2 Ratio captures the solar plant performance ratio as well as the availability (which reflects all system shut downs for maintenance or one-off events such as DNO outages).

3 EBITDA is a reference to EBITDA at the SPV levels.

4 Budgeted operating expenses are based on the acquisition case of the assets.

Operating results

Profit before tax was £40.2m (2020: -£29.7m) with earnings per ordinary share of 6.87p (2020: -5.09p).

Operating expenses and ongoing charges

The operating expenses, excluding preference share dividends paid by the Company, for the year amounted to £6.8m (2020: £7.2m). The Company's ongoing charges ratio ("OCR") was 1.1% (2020: 1.1%). The budgeted OCR for the financial year ending 31 March 2022 is 1.1%. The OCR, which has been calculated in accordance with the Association of Investment Companies recommended methodology, is an Alternative Performance Measure.

For the year ended 31 March 2021, the fourth quarterly dividend of 1.7625p per ordinary share is expected to be paid on 30 June 2021 to ordinary shareholders on the register at the close of business on 21 May 2021. The Company offers scrip dividends, details of which can be found on the Company's website (nextenergysolarfund.com).

Cash flow analysis

As at 31 March 2021, the Company held cash of £10.8m at high credit rated financial institutions.

Cash received from assets in the year covered the operating expenses, the preference shares dividend, the dividends declared to ordinary shareholders in respect of the year ended 31 March 2021 and part of the Investment into HoldCos.

NESF Group operating SPV's

The below table represents the unaudited consolidated financial results of the Company's SPVs.

1 Cash distributed to the fund during the year.

Cash dividend cover

1 Cash income differs from the Income in the Statement of Comprehensive Income as the latter is prepared on an accruals basis.

2 Alternative Performance Measure.

Financing

Financial debt

At 31 March 2021, the Company's subsidiaries had financial debt outstanding of £246m (2020: £214m), on a look-through basis, as shown in the table below.

Due to a combination of low debt levels, and RPI linked subsidies, debt covenants at the HoldCos level would only be breached at very low power prices (less than c.£20/MWh).

Preference shares

At 31 March 2021, the Company had £200m of preference shares outstanding (2020: £200m).

The preference shares are non-redeemable (except in limited exceptional circumstances), non-voting and convertible into ordinary shares from 1 April 2036 at their issue price (£200m in aggregate) plus any unpaid preference share dividends at the date of conversion. For financial accounting purposes, and in line with IFRS the preference shares are classified as long-term liabilities. The preference shares are equivalent to non- amortising debt with repayment in shares, and the Company is not required to use cashflow, or raise funds, to repay them at the end of their life. The absence of amortisation enhances the ability to pay the ordinary share dividend, and repayment in shares removes refinancing risk.

The investment management fee is calculated based on the ordinary share NAV and, accordingly, no management fee is payable in respect of the preference shares. The terms of the preference shares can be found in note 23 to the Financial Statements.

Total gearing

The financial debt, together with the preference shares, represented a total gearing level of 43% (2020: 42%), which is below the maximum limit of 50% in the Company's Investment Policy.

1 NESF has 325MW under long-term debt financing, 128MW under short-term debt financing and 359MW without debt financing.

2 Loan to Value defined as 'Debt outstanding / GAV'.

3 Long-term debt is fully amortised over the period secured assets receive subsidies (ROCs and others).

4 Applicable rate represents the swap rate.

5 Represents the "real" outstanding debt balance. The "nominal" outstanding debt balances are included in the debt balances provided in Note 23 b) to the financial statements.

Alignment of interest

As at 16 June 2021, NextEnergy Capital Group employees held 394,561 shares in NESF.

Events After the Balance Sheet Date

On 13 May 2021, the Directors approved an interim dividend of 1.7625p per ordinary share for the quarter ended 31 March 2021 to be paid on 30 June 2021 to ordinary shareholders on the register as at the close of business on 21 May 2021.

NextEnergy Capital Limited

16 June 2021

Operating Portfolio

1 ROCs, unless otherwise stated. An explanation of the ROC subsidy is available at www.ofgem.gov.uk/environmental-programmes/renewables-obligation-ro.

2 With project level debt.

3 Part of the Apollo portfolio.

4 Part of the Thirteen Kings portfolio.

5 Part of the Radius portfolio.

6 Part of the Solis portfolio.

7 Weighted average remaining life of the portfolio.

Portfolio Generation Performance