This year's investment trust initial public offerings (IPOs) include four successful raisings from renewable energy infrastructure investment trusts, whose attractive yields have contributed to their popularity with investors. These include Greencoat UK Wind (UKW), which is now looking to raise a further £135m with an equity issue.
But there are also doubts about the viability of renewables, with German utility company RWE (LSE: 0HA0) recently cancelling an offshore wind project, while government commitment has been questioned following the prime minister's alleged instruction to his aides to "get rid of all the green crap" from government policies.
However, Stephen Lilley, manager of Greencoat UK Wind, argues there is still a need for energy sources such as wind.
"With wind, investors are putting money into a well-understood model and a simple asset class," he says.
Renewable energy benefits from an attractive government subsidy regime, which accounts for around 50 per cent of the revenues of onshore wind generation. Nine out of 10 of the wind farms in Greencoat UK Wind's portfolio are onshore.
Mr Lilley thinks it is highly unlikely that that what is already in place would be clawed back, even if there are changes in the future. A new subsidy regime is coming in from 2017 but the proposals for the forthcoming Energy Bill maintain the established principle of maintaining the Renewable Obligation regime for existing operational projects. "There is still full cross-party support for the Renewables Obligations Certificates regime," he adds. "The government is looking to decarbonise electricity generation and needs to give confidence to investors when they build a 20 to 25 year asset. So far, all governments have realised the need to say they will honour existing agreements."
He says the government needs a significant increase in wind generation capacity to increase security of supply and meet 2020 renewables targets. This will require a substantial capital requirement, but there is insufficient project finance with a short tenor.
Nevertheless, Greencoat is selective in what it buys, only going for completed and operational wind farms. He adds that operational wind generation assets should be attractive to investors who want to protect capital and earn a premium yield, as is low correlation with gross domestic product (GDP) and the broader stock market at a time of high volatility.
"Greencoat UK Wind only invests in operational assets which do not have debt, eliminating construction risk," he says. "The trust has significant excess cash after paying dividends which can be used to repay any acquisition debt. It also means we can withstand a very poor wind year and still be able to pay a dividend at those times."
Concern has been expressed that if many more renewables funds launch there will not be enough assets to go around, and prices will go up. However, Mr Lilley argues otherwise, adding that around £40bn of assets will emerge in the next three to four years, mostly from utilities. "There is a large supply of assets coming to market which the utilities want to sell," he says. "And we are not competing with that many funds for them."
Tightened balance sheets mean utilities cannot afford to build and own all of the assets, as they originally envisaged.
"RWE pulled its Atlantic Array offshore wind farm because of problems arising from being in deep water and adverse sea-bed conditions, but it has reiterated that it still has a large volume of wind farms under construction," he adds. "It has not stopped investing but rather had a project which didn't work. The benefit of our trust is that we only invest in operational assets, so we know what they produce."
He adds that because of a good supply of assets Greencoat UK Wind is in a better position relative to the broader infrastructure investment trusts that target private finance initiative (PFI) and public private partnerships (PPP) projects, for which there is increasing competition.
Wind versus solar
Two of the other infrastructure investment trusts that have come to market this year, Bluefield Solar Income Fund (BSIF) and Foresight Solar Fund (FSFL), are totally focused on solar. So why wind?
Mr Lilley argues that while there is a case for all sorts of infrastructure investments, the returns and nature of solar investments are different. While solar revenues have been shown to be more stable than wind, over longer-term periods of a year or more wind is less volatile, and wind farms and this trust are a long-term investment.
"Returns from wind farms are typically higher than those from solar parks - investors get less for the lower volatility in solar," he adds. "And because of the supply it means wind farms are more of a buyers market and our ability to transact well is greatly enhanced. We should get assets at a price that allows us to continue."
Read more on the case for renewables infrastructure investment trusts
