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Good Energy: turning a consistent profit from UK clean power

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In 2021, the UK government’s Department for Business, Energy & Industrial Strategy published a Net Zero Strategy, which sets out policies and proposals for decarbonising all sectors of the UK economy to meet the net zero target by 2050. This means there will be a set of policies published by the government to incentivise businesses to become more environmentally friendly and lower their carbon emissions.

Specifically, in the Net Zero Strategy, there is a key commitment saying, ‘by 2035, all our electricity will come from low carbon sources, subject to security of supply, bringing forward the government’s commitment to a fully decarbonised power system by 15 years.’

An introduction to Good Energy

The company we will introduce today is a company that could benefit from this environmental commitment, to deliver greener, more sustainable energy to British households.

Good Energy [LON:GOOD] [AQSE:GOOD] is a British renewable electricity company. The company was set up 20 years ago to fight climate change. Good energy buys all their power from renewable generators across the UK, coming from wind, solar, small hydro, and lots of biomass generators. They also supply green gas that comes from small biogas generators.

Good Energy has a lot of low carbon emissions investment to offset any impact they might make on the power transmission. Nearly 60 per cent of investors come from their customer base, meaning that the customers really love their product and the idea of 100% renewable energy. The company also sells energy-generating equipment, helping people be greener with their energy use.

The long-term goal of Net Zero 2050 with more emphasis on green energy, makes Good Energy Group well positioned for the high domestic demand for renewable energy.

Industry analysis

Renewable energy generation has been experiencing robust growth in recent years, because of rising concerns about the environmental impact made by traditional energy generation, like burning fossil fuels, which causes greenhouse gases emission to blanket the Earth and trap the heat from the sun. With the high and increasing level of industry assistance from the UK government, this sector lies securely in the growth part of the industry life cycle.

The green energy industry has a great outlook: it has a high barrier of entry, relatively low imports, high profits compared to the sector average, a diversified customer base and low product concentration. This combination means the competition is not too high given a not-yet saturated market, and a low switching cost because the sector is still very fragmented; this means there are a lot of competitors and hence a more competitive playground for companies like Good Energy Group.

This situation results in a great growth forecast for the sector in the next five years, a 7.8% annual growth rate in 2023-2028, even higher than the growth rate of 6.9% from 2018-2023. The sector’s profit grew at an extremely high rate at 64.4% in 2023 and is expected a 56.4% growth in 2023.

Although the high growth in recent years has been projected, there are some essential developments to the infrastructure that will be needed to maintain this high level of growth, such as developing power grids that integrate renewable energy.

More efficient  energy usage

Luckily, Good Energy has some solutions to help the not so developed power grid to be more efficient. Smart metres can updates the energy used by businesses and households in a more precise way, which can help the trading team to know in detail how much energy to buy and sell, making sure the energy generation and transmission are more efficient, as well as helping the electricity grid to incorporate a higher percentage of renewable electricity.

The smart meter can use the information they have to detect the peaks and outages across the grid, hence the company can use incentives like ‘time of use’ tariffs, giving customers lower price at times when energy usage is low, to match the time when energy is generated, particularly from renewables like solar. This gradual flattening of peaks and troughs can hugely cut the carbon intensity of the grid by reducing the need for fossil fuel power plants that lie idle outside of peak times.

Financial and operational highlights

Good Energy is doing well in growing their revenue, from the interim results we can observe 57% growth driven by rising energy prices, although the pressure from the commodity market resulted in the gross profit decreasing 31%, though H1 2021’s high gross profit benefited from the commodity procurement during COVID. Good Energy retains a debt-free balance sheet and a strong cash position of £22.2m at the end of August 2022. This can provide a buffer against volatile wholesale energy prices.

Good Energy Group also invested heavily in next generation product development, innovative business supply products and ZAP-Map – an application that helps electric vehicle users to find charging points across the UK. It is reported that 75% of EV drivers use ZAP-Map. Zap-Map registered users increased 105% to 455,000, reflecting continued strong growth in electric vehicle uptake. Mapping data includes 95% of the UK’s public charging points on its network. Good Energy now holds a 49% investment in Zap-Map, after a recent series A round. Zap-Map is valued at £ 26.3m on a post-money equity value.

The smart meter rollout is progressing well, with over 36,800 and 43% of customer smart meters installed to date, and over 10,000 installed in 2022; the company is aiming to reach 40,000 meters and 47% of the customer base by the end of 2022.

Good Energy is very well-hedged against the volatility of energy prices, based on seasonal normal weather patterns, the company is 90 per cent hedged for the winter of 2022, with help from their robust hedging policy. Good Energy has declared that they will be following a similar approach and plan to incrementally increase hedging for summer 2023.

Nigel Pocklington, CEO of Good Energy, said: “Demand for clean energy products like solar, storage and electric vehicles is soaring as customers look to cut costs and gain control of their energy. Our mission to help one million homes and businesses cut carbon from their energy and transport use by 2025, and supporting the growth of renewable generation, has never been more needed.”

Capital structure

As we mentioned, 60% of the investor base from Good Energy’s pool of customers, and individual insiders hold 13% of the shares. Some pension funds and ESG-focused funds are also shareholders. This makes for a great shareholding structure, as most of them can be classified as ‘long-term’ investors.

Trading details

Good Energy is trading now at a 0.1x price-to-sales ratio, compared to the peer average of 3.2x, making this stock look cheap. The current dividend yield is 1.7% and with a substantial amount of cash on the books, we do not expect a sudden cut; the dividend is forecast to be raised to 2.2% in the coming years. Good Energy Group is trading at 172p, in the lower range of the 52-week range (143.50 – 330.00). If investors are looking at improving the ESG rating of their portfolio and helping Britain to have a greener future, the Good Energy Group is worth the consideration.

Good Energy is listed on AIM and AQSE exchanges. You can get access to AQSE listed shares via a number of UK stockbrokers including Hargreaves Lansdown and IG

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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