Many people who invested in renewable energy investment trusts over the past few years might well run for the hills if anybody suggested putting more money into the sector.
The average investment trust in the Association of Investment Companies’ Renewable Energy Infrastructure sector has delivered a 5% loss over the past five years, compared to a 67% gain for the average investment trust. Much of that disappointing return is due to a double-digit premium to net asset value (NAV) five years ago turning into a double-digit discount today (currently 31%).
However, despite the lingering pain of burned fingers, it is arguable that the fundamentals have changed enough to consider putting money to work in the renewables sector once again.
Double-digit yields
The 19 trusts in the AIC’s Renewable Energy Infrastructure sector invest largely in wind and solar generation, with some exposure to battery storage, energy efficiency projects and other technologies such as anaerobic digestion.
Their appeal as income producers was ravaged by higher interest rates – hence the falling share prices. Their average yields have doubled from 5% to 10% as investors have dumped them for the relative security of fixed income.
Nevertheless, dividends are well covered, especially at the bigger, well known trusts, while the sector average of 1.3x cover is respectable. Much of the earnings are linked to government subsidies that provide a stable and growing income stream, with some linkage to inflation.
There is the chance of rising share prices as and when interest rates fall, but arguably the main reason for holding these trusts is for the high income they can produce in the meantime. Their green credentials will also be attractive to sustainability-conscious investors: two trusts in the sector (Greencoat UK Wind and VH Global Energy Infrastructure) already have a sustainability label and others may follow when the FCA rolls out the labelling regime to non-UK funds.
Another tailwind is M&A activity. Acquirers are sniffing around the sector, with the competing bids for Harmony Energy Income Trust (HEIT) by Drax Group and funds managed by Foresight being the most recent example. Foresight’s bid at 84p per share was at a 29% premium to HEIT’s closing price on 14 March, but Drax followed this with a competing offer of 88p. Foresight then upped its offer to 92.4p, which the board recommends shareholders accept.
Subsidy cliff edge
Renewables trusts are not without risks. One uncertainty is the eventual expiry of the subsidy schemes that underpin 50% to 60% of the revenues, according to analysis of trusts’ reports by Stifel. The majority of these subsidies and price guarantees are due to expire in around ten years, giving good visibility of earnings for the next decade or so but uncertainty after that.
While there is no definitive answer on what the future holds post-subsidies, the government’s pledge to become a “clean energy superpower” offers some reassurance. It has promised to invest £5 billion a year in renewable power to help decarbonise our electricity supply by 2030 and meet the UK’s legally binding net zero objective.
Given the scale of the build-out of new renewable energy capacity, it seems unlikely that the government or a successor will allow existing sites with grid access and agreed licences to simply fail. Solutions could range from further government support to bids from private equity houses or other publicly listed operators. Shareholders could do well either way.
What is more certain is that in the shorter term, investors can enjoy double-digit yields and, if interest rates begin to fall, a potential increase in the share prices to give some capital return too.
Indeed, in the aftermath of the Trump-induced market carnage at the beginning of April, analyst Iain Scouller at Stifel cited infrastructure and renewables as a potential beneficiary, due to the “attractive, stable income streams”, increased demand if gilt yields fall further, and a likely end to discount rate increases which have contributed to falling NAVs over the past two years.
Scouller highlights three trusts in particular: Greencoat UK Wind due to its inflation-linked dividend, Foresight Solar thanks to its strategy of reducing debt through the sale of projects, and Octopus Renewables Infrastructure Trust, which he says has a diversified portfolio and has delivered some good asset sales.
James Wallace, analyst at Winterflood Securities, predicts more M&A this year but underlined his view that high and consistent dividends remain the base case for investment. He said: “Over the long term the sector has been able to deliver sustainable dividend growth, supported by a significant portion of fixed revenue with inflation linkage, and benefitting from cash covered dividends.”
He picks out Bluefield Solar Fund as an example of a renewable energy investment trust that has paid reliably growing dividends, with 2.8% compound annual dividend growth over the past five years. The trust yields 9.2% – food for thought for income investors. Since the first renewable energy trusts were launched just over ten years ago, they have provided a way for investors to back the energy transition while diversifying their portfolios and earning an attractive income. Those factors are still in place. With uncertainty hanging over global trade due to Donald Trump’s tariffs, renewables trusts may represent one investment opportunity that is relatively immune to these headwinds.
