Jersey Electricity — Decarbonisation fuelling growth

JEL is the sole supplier of electricity to the island of Jersey. The energy business was responsible for generating around 75% of group revenues and operating profits in FY23. The key driver for earnings is the spread between the price of wholesale power, which JEL buys from France under long-term contracts with a mix of fixed and capped pricing, and its consumer tariffs. JEL has a selfregulated rate of return on its applicable energy assets of 6–7%. Therefore, consumers are ultimately exposed to changes in French wholesale electricity prices. The company balances the rate of change to consumer tariffs as older more favourable hedges roll off. JEL is fully hedged for FY24 and is one-third hedged for FY25–27.

JEL operates a range of other businesses including property rental, retail and business services. The Government of Jersey (GoJ) remains the largest shareholder, with 62% of the ordinary share capital and 86.4% of the voting rights. JEL is intensifying its focus on energy security and electrification across Jersey, both of which will generate opportunities to accelerate growth.

JEL’s growth will come from the increase in electricity demand throughout Jersey. Some key factors that will drive this demand growth are the continued expansion of new renewable energy projects, greater electric vehicle (EV) adoption and the wider adoption of electric heating tariff switches. JEL has increased its solar PV capacity during 2023, including a 612kWp rooftop array commissioned in 2023. The company received support for the additional use and development of ground-based solar farms, with the aim of increasing on-island solar PV generation to around 20MWp by the end of 2026. JEL is facilitating EV adoption through its EasyCharge home subscription service, launched in 2022, and by upgrading over 100 public charging points in 2023. Furthermore, JEL is supporting government incentives for low-carbon heating and EVs, which encourages customers to switch to electricity. As JEL continues to expand its efforts regarding renewable energy generation and electrification of the island, while supporting government schemes incentivising switching to electricity, JEL is in a strong position to capture the upside and growth opportunity that will follow.

JEL has a highly resilient, low-carbon grid with spare capacity at all voltages. The growth in electricity usage to meet the island’s net-zero emissions target by 2050 is forecast to increase peak demand by 25% and will require a total investment of £125–150m over the next 10–15 years. To manage this increase in demand, JEL has introduced a cyclic design rating (the maximum current of a cable when the load is varied in a sequence of steps, which is repeated cyclically). This allows circuits to carry between 30–50% more power by using time-varying loading, allowing for higher peak load current than steady-state values, therefore reducing the future need for excessive reinforcement to its cable systems.

French wholesale electricity prices eased significantly throughout 2023, relative to the peaks seen in 2022 (as can be seen in Exhibit 6), with the three-year forward curve ranging between €90/MWh and 110/MWh from €50–320/MWh. While the long-term equilibrium price remains highly uncertain, forward prices have trended even lower to €60–70/MWh throughout the start to 2024, although these markets remain quite volatile. These current forward curves remain above JEL’s existing hedged import costs secured in previous years at lower price levels. Therefore, the company must carefully navigate this new price environment to maintain returns within its 6–7% target range, while protecting its customer base as much as possible. Naturally we expect some potential upward pressure on retail prices over the coming years as older hedges expire and new hedges roll in, but the easing of wholesale market volatility is an encouraging sign for JEL and its ability to manage price exposure going forward. Our retail price and imported energy cost models now reflect the bottom of the regulated return on energy assets range of 6–7%. We estimate JEL will need to implement tariff increases of around 5% (in real terms from 2023 averages) in FY25 to maintain the five-year rolling return on capital within the targeted 6–7% range.

We remain of the view that growth of end-use demand for electricity due to decarbonisation will continue to be a key driver for JEL. Our revenue forecasts remain similar to our previous estimates and are still driven more by the passing through of tariff price than unit volume growth. As such, we have trimmed our earnings estimates for FY24 by 12% and EPS by c 14% to better reflect the increased volatility and higher long-term wholesale power prices that JEL faces as its older price hedges begin to expire. We have also introduced estimates for FY25. We see JEL being well funded with a net cash position across our forecast period (£14.2m at end FY23 and £10.9m for FY24 after deducting long-term lease liabilities of £3.3m).

JEL recorded a group revenue of £125.1m for FY23 (ending 30 September, excluding the £3.6m rebate JEL received), which was an increase of £7.7m from FY22 and a year-on-year increase of 6.5%. This growth was mainly due to the rise in revenues from its energy due to the 5% tariff price increase. This was implemented at the beginning of 2023, despite unit sales of electricity falling by 0.8% y-o-y to 608m kWh, from 613m kWh in FY22. PBT for the year was £14.9m (FY22: £10.6m). The increase in profit was attributable to £1.3m from operations, £1.6m from income and £3.6m from the rebate in the prior year regarding wholesale energy costs. JEL’s property portfolio was also devalued by £1.2m. EBT, excluding the impacts of the rebate and property valuation, stood at £12.5m (£9.6m in FY22), which was up by 30% y-o-y.

JEL’s normalised earnings per share (EPS) of 36.81p was significantly higher than the 27.17p reported for FY22, due to increased profitability in the energy business.

Dividend per share (DPS), net of tax, for 2023 rose by 6% y-o-y from 17.8p in 2022 to 18.8p. The final proposed dividend, recommended by the board, for 2023 was 11.4p, which was also a 6% increase compared to the previous year, payable on 15 March 2024. The dividend cover rose from 1.5x in FY22 to 2x in FY23.

Net cash flows from operating activities for FY23 were £17.6m, £3.6m lower than 2022. Cash used for investing was 3% higher than the previous financial year at £11.4m. This, therefore, meant that net cash at the year-end was £17.4m, consisting of £30m of long-term debt offset by £47.4m of cash and cash equivalents.

JEL operates on a self-regulated basis with two self-imposed regulatory targets:

JEL is able to manage its returns through consumer tariff changes. It imports c 95% of its electricity from France through Électricité de France (EDF), so a sustained upward movement in French wholesale prices and/or a deterioration in the foreign exchange rate would require JEL to raise tariffs to preserve its rate of return. Naturally, managing the rate of change, the relative price of electricity for consumers and foreign exchange rates (it buys electricity in euros) are all considerations that make returns less straightforward. JEL’s 15-year agreement with EDF runs until the end of FY27.

In terms of regulated returns, JEL’s return on energy assets in FY23 was 7.2%, which was a significant increase from 4.2% in FY22, although this includes a one-off rebate from EDF relating to past energy costs (Exhibit 2). On a five-year rolling basis, regulated returns were 6.2% and have tended to remain within the 6–7% regulated target range, except for 2015 and 2016 when they were 5.8% and 5.5%, respectively, which can be seen in Exhibit 2. We expect regulated returns on energy assets to move back towards the 6% mark over the next few years, due to rising wholesale power price costs and as JEL’s older attractive fixed price hedges will roll out in 2025.

Operating profit from JEL’s energy business for FY23, excluding the rebate of past energy costs, was £9.3m (£12.9m including rebate). This was £1.8m above the £7.5m achieved in FY22. This was primarily due to a £7.4m increase in revenues following JEL’s tariff price raise, which began on 1 January 2023. This growth, however, was partially offset by a £5.6m increase in wholesale energy costs and operating costs. Operating costs grew due to higher inflation and greater investment in JEL’s systems and workforce as the company entered a period of expanded capital investments. These investments will support the enhancements needed to achieve JEL’s net-zero emissions goal and align with the GoJ’s Carbon Neutral Roadmap objective of a net-zero Jersey by 2050.

JEL’s key focuses for the future include energy sovereignty as well as security of imported power supply. The company will look to achieve these by continuing to expand its on-island solar PV generation capability and, in 2023, JEL expanded its research into offshore wind generation, having appointed Cambridge Economic Policy Associates as consultants to help define the role that JEL should take if such a project were to come to fruition.

The use of local renewable energy to increase energy sovereignty and solar PV at utility and commercial scale is supported by the Carbon Neutral Roadmap, the Bridging Island Plan, as well as JEL’s customers and shareholders. JEL’s 612kWp rooftop array on the Albert Bartlett potato processing plants has been commissioned and is JEL’s fifth commercial-scale array, as well as the largest in the Channel Islands. The company has received support for the use of ground-based solar with a 4.9MW array in St Clement gaining formal planning consent in 2023 and due to be built in 2024, subject to tender pricing. Its 3MWp array, scheduled for Sorel on the north coast, is in the planning stage, subject to public and statutory comments.

Two further sites have been identified in St Mary (5MWp and 2.9MWp); agreements are currently being finalised and planning studies are being conducted. Two other sites in St Lawrence (c 5MWp) are also being evaluated, which will be presented to the public for comments once contracts have been secured as JEL looks to increase on-island solar PV generation to around 20MWp by the end of 2026.

JEL’s initial scoping for offshore wind development concepts focused on:

The five areas above were considered in the context of three main potential options:

JEL has engaged with the government’s Future Energy group (a subcommittee of the Council of Ministers) and RTE (Réseau de Transport d’Électricité) to seek initial feedback from the French distributors regarding the options above. Next steps for JEL include defining the role(s) that the company could perform in any such offshore wind project and agreeing how JEL and the GoJ could work together to successfully deliver such a project post-2032.

JEL’s strategy of importing low-carbon nuclear and hydro power from France has enabled it to reduce emissions from the supply of electricity in Jersey by over 90% since 1990. Sustainability, as well as Jersey’s transition to net-zero emissions, is deeply engrained in JEL’s corporate values. The company continues to develop the digitisation of its systems, leveraging smart meter data to better understand its operating network. This will enable JEL to target its infrastructure investments more efficiently so it can support the peak demand increase that a netzero environment would bring. JEL understands that sustainability involves more than just reducing the island’s carbon emissions, protecting its wildlife habitats and increasing the biodiversity of Jersey is paramount.

To better understand its own footprint, JEL has begun the process of baselining its current position, which involves working with suppliers and stakeholders to measure the carbon cost of completing works. One of the main ways JEL is cutting carbon is turning its vehicle fleet fully electric. Half of the fleet has already switched, and the remaining vehicles are set to be replaced by the end of 2025. During 2023, through its corporate technology physical environment restructuring, JEL reduced its carbon footprint by 93%.

Jersey has a highly resilient, low-carbon grid, with spare capacity at all voltages. However, the growth in electricity usage to meet the island’s net-zero 2050 target is forecast to increase peak demand by 25% and will require a total investment of £125–150m over the next 10–15 years. A key area that JEL is working on is optimising its capability so customers can move from fossil fuels to electrification as easily as possible. Following a review of its loadings against the UK network cable loading best practice, JEL has introduced a cyclic design rating (the maximum current of a cable when the load is varied in a sequence of steps, which is repeated cyclically), which allows circuits to carry 30–50% more power by using time-varying loading. This allows for higher peak load current than steady-state values, therefore reducing the future need for excessive reinforcement of JEL’s cable systems.

Throughout 2023, JEL supported the GoJ in facilitating and providing administrative services for two low-carbon schemes:

The transition to electric transport and the wider adoption of EVs across Jersey remains a key element of JEL’s transition to net-zero emissions and is split into home and public charging.

In addition to supporting the GoJ’s EVPI, JEL’s all-inclusive home EV charging subscription service EasyCharge (launched in May 2022) had 150 installations within its first year. The service benefits JEL’s customers as they gain access to convenient charging, and it allows the company to move load from peak times to overnight off-peak periods when there is spare capacity and energy costs are lower.

In 2023 JEL invested in a complex project to upgrade 109 charging points in its Evolve public charging network. The upgrades will future-proof the network, improve the charging experience for customers and support the growing demand for low-carbon electric transportation. The upgrade involved migrating to a new technology platform, including an improved payment system that can be accessed through JEL’s mobile app. Run in partnership with Virta, the new platform is compatible with tens of thousands of public charging points off the island of Jersey, including in the UK and Europe.

JEL is currently in the process of securing sites for two further dual 150kW ultra-raid chargers in the east and west of the island to add to its existing one at the Powerhouse headquarters, enabling faster charging for newer cars with larger batteries.

JEL will look to expand its home charging capabilities into 2024, enabling multi-residential dwellings with communal, designated parking spaces to access its EV subscription-based charging services, as well as migrating the EasyCharge proposition on to the new Evolve platform. The company will also develop the first high-speed EV charging hub for Jersey, with a roadmap for deploying more charging hubs across Jersey in the coming years.

JEL aims to deliver secure, low-carbon electricity supply, while maintaining relatively stable and competitive tariffs both now and in the future. JEL’s electricity requirements are well hedged for 2024 and roughly one-third is hedged at largely fixed prices between 2025 and 2027. JEL’s risk management policies covering power procurement and foreign exchange, combined with priceprotection measures negotiated with its supply contract with EDF, have enabled it to secure strong long-term hedges. These hedges have somewhat protected JEL’s customers from rising prices in the electricity market, while providing some certainty to a relatively unstable and volatile market in recent years.

Despite JEL’s strong hedges, which have sheltered its customers from the most extreme period of material rises in electricity prices, management stated that it is not immune to rises in forward power prices. The prices which JEL will use to secure its hedge positions for 2024/2025 remain significantly above historical norms. Therefore, to enable a smooth transition to the environment where historical prices hedges are rolling off and new price hedges are rolling in, in January 2023 JEL implemented a 5% tariff increase and since then has also applied a further 12% tariff rise effective from 1 January 2024.

Despite the tariff increases seen over the past year, JEL’s standard domestic tariff remains extremely competitive in comparison to other jurisdictions, especially compared to the UK’s standard variable tariff (between 1 January and 31 March 2024), which is more than 60% higher than JEL’s standard tariff (see Exhibit 5).

Exhibit 5 shows EU-15 retail electricity prices for H123 using the latest available data from Eurostat (updated 18 October 2023). We use JEL’s currently advertised standard tariff domestic price of 20.15p/kWh (or 23.37c/kWh), which is 20% below the EU-15 average price for H123.

Current wholesale prices in France have lowered significantly since the peak of 2022 (as can be seen in Exhibit 6) but remain higher than JEL’s current import costs. These extra costs will inevitably be passed on to its customer base post-2027 once its current hedges drop off. Although long-term pricing is inherently uncertain, based on the current forward markets and our long-term wholesale electricity price assumptions, we expect JEL may have to implement additional tariff rises of 3% (in real terms) in future years, which is lower than recent increases and should maintain competitive domestic tariff rates. Naturally, the evolution of forward price curves may change these assumptions.

JEL imports c 95% of Jersey’s electricity requirements from Europe. It purchases power alongside Guernsey Electricity from EDF in France under a supply contract that ends in December 2027. The supply contract allows power prices to be fixed in euros. It combines a fixed-price component with the ability to price fix future purchases over a rolling three-year period based on a market-related mechanism linked to the EEX European Futures Exchange. JEL’s electricity purchases are well hedged for 2024 and around one-third of its expected 2025–27 requirements are hedged at largely fixed prices.

French wholesale electricity prices eased in 2023 relative to the peaks seen in 2022, as shown in Exhibit 6. The three-year forward price ranged from €50/MWh to €320/MWh during 2022 but only €90/MWh to €110/MWh in 2023. This demonstrates declining prices and volatility in the French wholesale market across 2023, though prices remained elevated and more volatile versus historical levels. Current forward price curves are above JEL’s current and previous long-term hedged position. As a result, we expect some potential upward pressure on retail prices in the coming years as older hedges expire. However, the tempering of wholesale market volatility is an encouraging sign for JEL’s ability to manage exposure going forward.

While the long-term equilibrium price remains highly uncertain, forward prices have trended lower to €60–70/MWh since the start of 2024 from €80–90/MWh at the end of 2023. Our updated retail price and imported energy cost models now forecast a regulated return on energy assets at the bottom of the 6–7% range. We estimate tariff increases of around 5% (in real terms from 2023 averages) will be needed in FY25 to maintain the five-year rolling return on capital within the target 6–7% range.

JEL’s system is designed to meet an adapted ‘N minus 1’ security standard. This consists of:

However, its enhanced supply security standard for 2027/28 consists of:

JEL’s energy business saw revenue increase by 9.3% y-o-y to £97.1m with operating profit of £9.3m (excluding the rebate). Unit sales for the second year in a row fell to 608m (down 0.8% from 613m in FY22) due to a combination of a mild winter as well as increases in energy efficiency. Peak demand stood at 159MW (recorded 13 December 2022), which was up on the previous year’s 145MW but was still significantly below JEL’s highest-ever peak demand of 178MW set in March 2018. Of the required energy for FY23, 94.5% was imported from France (FY22: 95.3%) and 0.4% (FY22: 0.3%) was generated on Jersey Island from its solar PV arrays and diesel plant. The remaining 5.1% was purchased from the GoJ’s energy from waste plant.

Powerhouse.je, JEL’s retail store business, saw revenues fall by 1% with profits decreasing by 22% from £1.2m to £0.9m, primarily due to higher overhead and storage costs.

Jersey Electricity Building Services (JEBS), which undertakes JEL’s fuel switching from gas and oil to electric heating and cooling systems, was temporarily affected throughout FY23 by the launch of the LCHI scheme in May 2023. Customers delayed changing their heating systems until the scheme was fully implemented and grants became available. Despite this setback, JEL’s JEBS business recovered well, recording a profit of £0.2m on revenues of £4m, roughly in line with the previous year.

Jersey Energy and its sister business unit, Channel Design Consultants in Guernsey, are now the largest mechanical, electrical and plumbing consultancy services in the Channel Islands. Throughout 2023, some of the projects completed by this unit were a new-build, first-time buyer housing development project in St John, the refurbishment of Le Marais high-rise residential blocks and the power and cooling infrastructure upgrades of various telecom exchanges. To further aid in the transition to net-zero emissions, JEL was the first business in Jersey to be accredited for undertaking commercial energy performance certificates and will lead the scheme over the coming years. JEL invested in new monitoring equipment, which will allow its clients to understand their energy usage. The equipment will also use dynamic simulation software to provide detailed analysis of a building’s energy performance, even before it has been constructed.

Jendev provides comprehensive digital enterprise resource planning solutions across all JEL’s business domains, serving both internal and external clients.

JEL’s property portfolio includes a B&Q store, a medical centre and several other commercial spaces on Queen’s Road (where JEL’s Powerhouse retail administration office is located), as well as 29 private houses and flats rented on the open market. The property business’s profit for FY23 was £1.1m (excluding the revaluation impact), which was down by £0.3m on the prior year due to the commercial spaces being vacant in March 2023. JEL is aiming for the spaces to be occupied by April 2024.

Using the average of a 10-year DCF valuation of 611p and our SOTP valuation of 755p, we value JEL at 683p/share. This is a reduction from our previous valuation of 722p and is largely due to trimming earnings to reflect the higher power price environment that JEL will be operating in moving forward.

For our DCF valuation, we assume a WACC of 6%, a cost of equity of 6.3% and a cost of debt of 4.5% (with total debt at c 15% of capital), which is unchanged from our previous note. Our valuation assumes a terminal growth rate (TGR) of 2% (unchanged) and reflects forecasts of underlying demand growth due to the decarbonising of the Jersey economy (electricity displacing other fuels). We outline the sensitivity of our DCF valuation to assumptions in WACC and TGR in Exhibit 7 below.

Our SOTP valuation values JEL’s regulatory assets at £176m (slightly down from our last valuation of £177m), based on their book value and assumes JEL earns a return on these assets equal to its cost of capital (unchanged from previously). We also value the property business (rental properties owned by JEL) using a balance sheet carrying value. For the other minor assets, we apply a 10x earnings multiple.

As a cross-check on our valuation, we compared JEL’s P/E ratio to those of its appropriate utility peers focused on energy grids and transmission, which include National Grid (UK), Red Eléctrica de España (Spain) and Terna Rete Elettrica Nazionale (Italy). This peer group currently trades at average forward FY24 and FY25 P/E multiples of 15.3 x and 15.8x, respectively. Applying these multiples to our forecast EPS for FY24 and FY25 of 29.0p and 30.7p implies valuations of 443.7p and 485.1p, respectively. Compared to JEL’s current share price of 440p, the 2024 cross-check is reasonably aligned, while the 2025 peer multiple is significantly higher. However, both valuations are below our DCF value of 611p. Due to JEL’s smaller scale and distinct decarbonisation goals, it likely has superior growth potential versus its peers, in our view, and therefore warrants a higher earnings rating. Overall, this cross-check supports our view that JEL remains attractively valued relative to the sector.

Profitability and returns: our forecasts for FY24 and FY25 assume that JEL’s core energy business delivers profitability within the range of the targeted return of 6–7% on a five-year rolling basis. For FY23, the reported return on energy assets was 7.3% (FY22: 4.2%), with a five-year rolling return of 6.2%. JEL’s operating profit for its energy business for FY23 was £12.9m (£9.2m excluding the cost of the rebate), which was up from FY22 profit of £7.5m. This increase was largely due to the increases seen in JEL’s tariffs across the year.

We forecast a regulated return of 5.5% for FY24. This is lower than the return in FY23, which in turn was higher than anticipated due to the rebate JEL received. Our FY24 estimate includes the 12% tariff increase JEL imposed from 1 January 2024. We are forecasting recurring energy operating profit of £9.5m versus £9.3m in FY23 (excluding the rebate).

Through FY25–27, when JEL has roughly one-third of its requirements hedged at largely fixed prices, we forecast returns on energy assets on a five-year rolling basis of 5.7%, 7.1% and 7.6%, respectively, assuming a further c 5% tariff increase in FY25 (in real terms from 2024 average tariff rates) to maintain a return on capital for FY26/27 in the 6–7% range.

Capex: JEL’s capital expenditure for FY23 was c £13.1m. The increase in capex for FY24 and FY25 includes the installation of new gas turbines at JEL’s La Collette Power Station as it will provide an extra 50MW of capacity at an estimated cost of £14.5m. The entire project is expected to take up to four years at a total cost of £22.6m (excluding the replacement costs of the gas turbine). JEL’s five-year capex plans consist of c £3m contracted and c £122.2m not contracted (approved in principle but still subject to formal business cases being reviewed in due course) spend, for a total of £125.2m (£94m in 2022).

Pensions: JEL has a defined benefit pension scheme on its balance sheet, which was closed to new members in 2013. The surplus at 30 September 2023 (excluding deferred tax of £5.1m) stood at £25.5m, down from £26.4m at 30 September 2022. Discount rate assumptions, which heavily influence the calculations of liabilities, rose from 5.2% in 2022 to 5.4% in 2023 to reflect sentiments in the financial markets. This resulted in liabilities decreasing 0.6% from £86.1m at FY22 to £85.6m at FY23 and assets falling by 1.3% from £112.5m to £111.1m. Given the unique nature of the pension arrangements (a growing surplus but with cost-of-living adjustments made on an ex-gratia basis) and a growing interest rate environment, we have removed the pension surplus from our valuation of the enterprise value of JEL. While the pension assets and liabilities both remain on JEL’s balance sheet, in a high interest rate (and cost of living) environment, liabilities for further increases on an ex-gratia payment basis cannot be excluded. We have historically included an allowance for some pension surplus in our valuation, but believe a cautious approach is to exclude this surplus from our valuation at present.

Tax: for tax payable (P&L), we assume an effective tax rate of 20% for FY24 and FY25 (FY23: 23%).

Dividends: our forecasts assume a c 6% increase in the DPS for FY24 and FY25 (20.5p and 21.7p), with a cash impact from payments of £6.27m (FY23 final and FY24 interim dividend) and £6.64m (FY24 final and FY25 interim dividend). The DPS is forecast to be substantially covered by earnings at 1.4x in FY24 and 1.5x in FY25.

Cash flow and balance sheet: in the absence of any repayment of outstanding long-term debt of £30m (which expires in 2034 and 2039) or a special dividend, we forecast that cash and cash equivalents will remain relatively stable at £44.2m in FY24 (FY23: £47.4m). We also forecast that cash and cash equivalents will continue to remain stable in FY25 at £43.7m.

Since a substantial proportion of JEL’s cost base relates directly to the importation of power from Europe, which is contractually denominated in euros, the company enters into forward currency contracts to hedge as much exposure as possible so it can have greater certainty on potential future tariff planning. As a result of the hedging programme, the average euro/sterling rate underpinning its electricity purchases during the financial year was €1.13/£. The average applicable spot rate during this financial year was €1.15/£ against €1.18/£ during the 2022 financial year. JEL has a long-term loan of £30m, which was drawn down on 17 July 2014 via a private placement consisting of two tranches: £15m for 20 years at a fixed-rate coupon of 4.41% and £15m for 25 years at a fixed-rate coupon of 4.52%. The terms of the loan contain financial covenants that require a net debt to regulated asset value ratio of less than 50% and an EBITDA to borrowings cost ratio greater than 4%, as defined in the loan agreement. The net debt to regulated asset ratio and the EBITDA to borrowings ratio are both calculated from JEL’s interim and annual results performance, and the company continues to meet these covenants.