One of the simplest ways for investors to access environmental assets and renewable infrastructure is via investment trusts. Although these are not a tax efficient wrapper like a VCT or EIS, if you hold the investment trust shares in an individual savings account (Isa) or self invested personal pension (Sipp), you will mitigate some of the tax you would otherwise pay on profits and income.
There are six investment trusts focused on renewable energy infrastructure. Most of these are focused on wind or solar, and government subsidies make up a substantial portion of their returns.
One of their key attractions is the expectation of relatively stable, quasi-government backed revenue, which has the potential to grow in line with Retail Prices Index Inflation (RPI). "Because of this, many are inclined to draw comparisons with the traditional private finance initiative (PFI)/public private partnership (PPP) -focused infrastructure sector, but there are crucial differences," says Iain Scouller, head of the investment funds team at Oriel. "Yields in the renewables sector are higher than for most of the PFI funds, partly reflecting increased risk in terms of portfolio concentration, and the relative immaturity of the sector and projects."
As a result these trusts offer attractive yields of between 2.5 and 5 per cent or more, but like many with an attractive income also trade at premiums to net asset value (NAV). However these are typically single digit and not as high as those on some of the trusts in the broader infrastructure sector, all of which are on double-digit discounts, or some of the UK commercial property investment trusts.
The subsidy regime changes over time but generally this is not retrospective so existing projects should be able to maintain their level of subsidy. Things will be different for future investments, however.
For example, a major change in the UK renewable energy market subsidy regime is planned for April 2015, with the current Renewables Obligation Certificate (ROC) regime being replaced by a Contracts for Difference (CFD) market mechanism for solar. In the case of other renewables including wind power, ROCs will be replaced by CFDs in 2017 and will be linked to Consumer Prices Index inflation (CPI), which is typically lower than RPI.
The trusts also make their money from long-term electricity contracts and short-term excess supply sold on the wholesale market, so risks include a significant decline in the market price for electricity. And these investment trusts only started to launch last year so have little track record to assess.
John Laing Environmental Assets (JLEN) has a slightly wider remit with the ability to invest in biomass plants, though doesn't include this in its portfolio at the moment. Its has three wind assets, one solar asset, and three water and waste management assets.
Read more on renewables infrastructure investment trusts
Renewable infrastructure investment trusts
| Trust | Code | Yield (%) | Premium to NAV (%) |
|---|---|---|---|
| Bluefield Solar Income Fund | BSIF | 5.1 | 1.9 |
| Foresight Solar Fund | FSFL | 2.9 | 2.9 |
| Greencoat UK Wind | UKW | 5.6 | 3.7 |
| John Laing Environmental Assets | JLEN | 2.9 | 5.1 |
| Next Energy Solar Fund | NESF | 2.5 | 0.6 |
| The Renewables Infrastructure Group | TRIG | 5.3 | 3.0 |
Source: Winterflood, as at 5 December 2014
GCP Infrastructure's (GCP) portfolio, meanwhile, includes exposure to anaerobic digestion (13 per cent of assets), hydroelectric power (2 per cent), wind (11 per cent), biomass (7 per cent) and solar (29 per cent) alongside more conventional PFI projects. But the investments are in the debt that finances these assets rather than the equity so it is like holding bonds issued by such companies.
GCP Infrastructure has a longer term track record with positive returns over three and five years, and yields more than 6 per cent, but trades on a premium to NAV of about 15 per cent.
