Interview with Simon Kidston, Executive Director of Genex Power (ASX:GNX)

July 5, 2021

Genex, Genex Power, GNX, video

Summary

Genex Power

We spoke with Simon Kidston of Genex Power (ASX:GNX) about the strong public policy support for renewable energy in Australia, the company’s success to date in solar and pumped hydro projects, and its point of differentiation in battery storage, where the company is working with Tesla as its preferred equipment supplier.

Transcription below.

 

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Transcription

 

Stuart: Hello, and welcome to “Stocks Down Under.” My name is Stuart Roberts, and with me is Mr. Simon Kidston, who’s one of the executive directors of Genex Power, ASX:GNX. It’s Thursday, the 1st of July, 2021. Simon, good morning. You’ve got a great story going with Genex.

Simon: Good morning. Good morning, Stuart. Look, we’re very, very pleased with the way the business has developed. We’re now generally diversified renewable energy generator with a strong focus on energy storage. So it’s a very exciting time to be in our business at the moment.

Stuart: Yeah. I was very impressed. From a standing start several years ago, you built 50 megawatts of solar power at Kidston. And we’ll talk about the family connection with your name in a second to that little town up in North Queensland, over the old barrack goldmine. You’re now building 250 megawatts of pump hydro, first pump hydro project in Australia in 40 years. And there’s a heck of a lot of other projects in the renewable space going ahead. You’re gonna be five times bigger in terms of your capacity by the middle of the decade if everything works out.

Simon: Look, in fact, we’ve now got two operating solar farms, so 100 megawatts of solar capacity has been constructed. Both of those solar farms were built on time and on budget, and the real focus now is to execute the construction of our pump hydro project, which as you say, the first pump hydro developed in Australia for 40 years. This plant is 250 megawatts. It’s fully funded and it will be generating revenue for the business in late 2024. So that really stepped change in scale for the business in terms of revenue and revenue certainty for the business.

Stuart: Right. Now, the step-up in terms of Kidston from the initial 50 megawatts through this 250 megawatts you’re building now, it took some time because you had some contracts to negotiate. Tell us about your success in that regard.

Simon: Look, I guess the way we finance our projects is with long-term revenue contracts. So we seek to underpin each project with a 10, 20, 30-year contract, which guarantees revenue from each of these projects, and in doing so, we can attract very low-cost project finance. And that’s one of the key drivers to our business strategy. And intention is to lock in our revenues, lock in our operating costs, and overtime, pay a significant portion of those cash flows to shareholders as dividends. And that’s all by virtue of these very secure cash flows and revenue contracts with tier-one counterparties.

Stuart: Now, your company was the subject of an article in the 24th of June edition of “Stocks Down Under.” And in that article, we talked about how we didn’t see you being too much differentiated from other renewable energy companies. There is a point of difference though, isn’t there? No other company like yours is involved in battery storage.

Simon: So that’s right. So the economy is decarbonizing, which means there’s a lot of intermittent generation going into the market, both solar farms and wind farms. Of course, we know energy is what…our consumers want reliable firm power, so therefore, to deliver that from renewable sources, you need to store energy. So there’s really only two ways you can store energy. It’s from a battery or from pump hydro. Pump hydro is a very low-cost mature technology, and our business, Genex Power is very much focused on energy storage. In fact, we’re the only company purely focused on energy storage on the ASX, and one of the few globally that has [inaudible 00:03:32] light focus.

And because of those power winds, I mentioned about the strong government support, the decarbonization of the energy markets, we believe a real place to grow the business substantially over the next 10 years.

Stuart: That’s right. And before we started recording, we were talking about some of the public policy supports that you have to grow your business. I think, for example, Northern Australia Infrastructure Fund was a big provider of project financing for you. You’ve had the Australian Renewable Agency behind you as well, for example, and Westpac, who’s committed to this sector, is quite strong, have also been participants in helping you out.

Simon: Look, there’s been a huge focus from these funding bodies to support sustainable projects, and in particular, the federal government’s got this body of the Northern Australia Infrastructure Facility, which is supporting infrastructure in the Northern part of Australia. So they do so by providing very low-cost confessional funding. So we’ve now secured almost 800 million of project finance. We’ve locked that interest rate in for 15 years, and it’s sub 3%. So 3% money locked into 15 years is a big driver to our economics. It means funding costs are very, very low, which means the majority of our cash flows can be paid to our sharholders as dividends over time.

Stuart: And I mean, another big theme in the whole renewable energy space has been the progressive decline in the capital cost of new solar projects. I remember first reading about the idea of the levelized cost of energy for solar way back in about 2014. And here we are, seven years later, it’s getting pretty inexpensive to source good quality panels from producers in China that will last for the best part of 30 years of your project, right?

Simon: That’s right. So even if you look back five, six years ago, as you suggest, there were subsidies required for solar funds and wind farms to enable them to compete against coal and gas-fired power. That has fundamentally changed to the point now where the cost of new-build solar and wind is lower than other forms of generation. So that’s a big change happening in the market.

I’m also seeing the same thing happening with battery technology. And in fact, we are looking to develop a battery project near Rockhampton. It’s called the [inaudible 00:05:51] Battery Project, and we’ve now seen the decline in costs, meaning that that project is very much economic. So we can finance that in the commercial markets. The numbers stack up, and we’re looking forward to developing that project. But in terms of how that impacts our returns, because we lock in our construction costs, because we lock in our revenue contracts, we lock in our operations and maintenance contracts at the point of finance when we commence construction, we know precisely what our equity returns will be, and we finance our projects on post-tax equity IRS in the low teens, and we believe that fact alone locks in those returns for our shareholders.

Stuart: Now, some of the more cautious investors out there might be concerned given that battery storage is such a new field, that potentially there’s technology risk that could leave shareholders exposed. What would you say to those cautious investors?

Simon: Well, look, I think they’re right to be cautious, and I guess in some ways we are too, so we’ve gone with a tier-one battery supplier. It’s Tesla, which is one of the market leaders. They’ve got a…

Stuart: Yeah, I think I’ve heard of that company before.

Simon: I think you’ve heard of them. And obviously, they’re a big global company, but they’ve also got a track record in the Australian market. So they built two or three projects in South Australia, a few more in Victoria, those projects passed in less than 18 months from one of the revenue streams that batteries can capture. So we are looking at those economics in Queensland. We believe the same sort of dynamics apply there. So we’re approaching it with caution. We will have a contract which underpins a portion of the revenue. We’re partnering with Tesla as a tier-one supplier, and we’re looking at some major upside. And of course, the great thing about batteries is they can be built in under 12 from the point of the purchase order, so they’re…

Stuart: I mean, we’re all big fans of Elon Musk around here, but what impressed me was his willingness to actually build the first of those South Australian projects on his own coin in order to be able to demonstrate to people in this part of the world that this sort of stuff works.

Simon: Yes, and he delivered it in 100 days. So that’s, you know, three months from inception to having that project commissioned and installed. So it’s very, very exciting that we can add to our earnings by replicating that strategy in Queensland.

Stuart: Sure. Well, Simon Kidson, well done on everything you’ve achieved at Genex since…and you, and James Harding, and the rest of the team since 2015. Here we are 6 years into the listing, 250 million market cap. But as Frank Sinatra sang back in 1964, the best is yet to come, right?

Simon: Right. Yeah, absolutely, Stuart. We’re very excited about the space we’re operating in, and it’s, in many ways, the hard jobs are setting up the platform. And once that platform is established with a track record, we believe there’s some easy games to be had in the short term.

Stuart: Simon Kidson, thanks for joining “Stocks Down Under.”

Simon: Glad to chat to you, Stuart. Thank you very much.