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Renewable energy fuels new wave of investment trusts

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Investment trusts focused on infrastructure, particularly those involved in renewable energy projects, have boomed this year as income-hungry investors and those wishing to back the energy transition have flocked to participate in record numbers of share issues. 

There is little sign of this momentum losing pace. One energy efficiency trust, Atrato Onsite Energy, is in the process of launching, as well as another more generalist trust with renewable components. 

“There is an awful lot of investment needed in the renewable sector and it will likely raise an awful lot more money yet,” says James Carthew, head of investment company research at research firm QuotedData.

Traditional renewable energy infrastructure trusts make money by owning renewable assets and producing and selling energy. This means the income the trusts earn will fluctuate according to how much energy they produce (which includes weather impacts) and power prices, although many trusts hedge against fluctuations in these prices.

Many also have income from UK government subsidies, though these are being phased out as the cost of producing renewable energy has fallen.

The weighted average net yield of the renewable energy infrastructure sector was more than 5.2 per cent on November 8, compared with an average of 4.6 per cent for traditional infrastructure or 3.5 per cent for global equity income funds, according to Winterflood data.

But David Merriam, investment manager at Tilney Smith & Williamson, suggests investors might wish to tread carefully. The weighted average sector premium to net assets is almost 10 per cent.

“They are relatively expensive, reflecting demand for assets with favourable ESG [environmental, social and governance] characteristics and a desperate need for reliable income,” Merriam says, adding that if you pay a premium of 15 per cent or higher for a trust, you risk a substantial de-rating (a narrowing of premium) and capital loss that may even exceed the income generated, depending on the holding period. 

Many renewables trusts have seen net asset value growth in recent years because demand for green energy has driven down the discount rates used to value assets and trusts have extended the life of their assets. Merriam says: “There is limited scope for further pulling on these levers and thus net asset value growth may reasonably be expected to slow in future years.”

Renewable energy net asset values are calculated according to long-term power price estimates, which could drive their value down, according to Mick Gilligan, head of managed portfolio services at Killik and Co. The cost of producing renewable energy has fallen substantially, and much faster than many people expected, with implications for overall power prices.

“If power prices decline materially, all else equal, this will result in lower asset values and lower share prices of renewable infrastructure funds,” he says.

Only three of the established renewable energy generating infrastructure trusts have a record of delivering their target total return rate every year since listing: The Renewables Infrastructure Group, Greencoat UK Wind and Bluefield Solar Income Fund, according to analysis by brokerage Numis.

Fund profile: The Renewables Infrastructure Group (TRIG)

Manager: InfraRed Capital Partners, 

Market Cap: £2.97bn (Nov 8)

AIC ongoing charge: 0.91%

Launch date: 2013

Fund profile: Aims to generate sustainable returns via a diverse portfolio of more than 75 different energy projects, the majority of which are in the UK. Over 90 per cent of the assets are operational, supporting the dividend yield of 5.2 per cent. However, the trust is trading at a high premium to net asset value — 16.3 per cent on November 8. 

Ryan Hughes, head of investment research at AJ Bell, recommends that those looking for infrastructure exposure opt for one of the more established players, such as The Renewables Infrastructure Group, as they tend to have a high proportion of operational assets which makes income more reliable. 

Newer, more specialised renewable energy infrastructure trusts are also growing quickly and pay healthy yields. Gore Street Energy Storage and Gresham House Energy Storage are providing batteries to help balance the power grid and both currently yield over 5.5 per cent. Harmony Energy Income, which completed its IPO on November 5, is the latest addition, with contracts lined up to use Tesla’s battery storage technology. 

SDCL Energy Efficiency Income Trust, meanwhile, which had a yield of 4.8 per cent on November 8, according to Winterflood, provides on-site solar energy generation for commercial and industrial buildings.

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