- The price level of the electricity generator levy is lower than hoped
- Asset valuations are holding up thanks to power prices and inflation
- Most renewable energy trusts are still trading at a discount
Renewable energy infrastructure trusts will take a relatively small hit from the government's electricity generator levy, as its effect on their net asset value (NAV) is offset by high power prices and inflation in the latest round of portfolio updates – but share prices are taking time to recover.
In the 17 November Autumn Statement, chancellor Jeremy Hunt announced that a temporary 45 per cent levy would apply on the “extraordinary returns” being made by electricity generators. The levy affects electricity sold above £75 per megawatt hour (MWh), but only if generation is above 100GWh per year and after a £10mn allowance.
The levy replaces the “cost-plus revenue limit” announced in October, which had worried investors due to its lack of details and the prospect of all profits above a certain level going to the government.
The levy is still a mixed bag for renewable trusts. One the one hand, it puts an end to the uncertainty and allows generators to keep at least a portion of their extra profits. On the other hand, the price level is lower than many hoped for, which may discourage investment in the UK. The European Union intends to tax excess profits generated above €180 (£155) per MWh.
“The proposal removes the 'cloud' of uncertainty from investors, which may help sentiment even if the tax regime is more punitive than we think is appropriate to encourage new renewable investment,” Stifel analysts wrote in a note.
Since the levy was announced, several renewable energy trusts have given updates on its expected impact on their NAV. JLEN Environmental Assets (JLEN), Foresight Solar Fund (FSFL) and Bluefield Solar Income Fund (BSIF) originally calculated their 30 September 2022 NAV before the Autumn Statement, attempting to account for the impact of a potential revenue cap. The new levy resulted in some NAV readjustments, but overall NAV returns for the quarter have remained in positive territory for all three (in the region of 1 per cent).
NextEnergy Solar Fund (NESF) said that the levy was already accounted for in its NAV calculations, and noted that it does not apply to either government subsidised revenues (which make up half of its revenue profile) or energy storage assets. Its NAV also returned around 1 per cent over the quarter.
The Renewables Infrastructure Group (TRIG) estimates that its NAV has remained flat in Q3. Greencoat UK Wind (UKW) has yet to give a post Autumn Statement update but Stifel analysts calculate that its revenues should not be affected unless power prices fall below £120/MWh next year.
Power prices and inflation have so far offset the effect of both the levy and the increase to discount rates caused by higher bond yields.
However, while renewable infrastructure trusts are gradually recovering from their initial slump, and are mostly still trading below their NAV, in the two weeks to 29 November the AIC's renewable energy infrastructure sector saw little improvement, with a couple of exceptions – the Foresight and NextEnergy fund share prices gained 6.7 per cent and 3.5 per cent, respectively, over the same period.
James Carthew, head of investment company research at QuotedData, argued that discount rates and the expectation of a windfall tax were the two main uncertainties facing renewable energy trusts.
“I do feel like people are starting to believe the NAVs again, and may be be a bit more encouraged to put their money back,” he said.
