Where renewable energy trusts are investing

High dividend yields, a compelling investment theme and a level of inflation protection are just three of the reasons why renewable energy infrastructure trusts remained popular in a difficult 2022. The Association of Investment Companies sector for such funds raised £1.5bn last year despite weak market sentiment, and 13 out of 22 trusts in that group delivered a positive share price total return. The sector also continues to offer plenty of interesting buying opportunities, with many trusts trading on share price discounts to net asset value (NAV) and juicy yields.

But which trust is best for you? That question can be difficult to answer, especially as a relatively new asset class continues to evolve. New trusts have emerged in recent years focusing on specialist areas such as battery storage and energy efficiency, while more generalist funds have in many cases expanded their investment remit by geography or asset class. It can be worth breaking some of these differences down before conducting further research.

Wind, solar and beyond

As we noted in July, trusts in this space can have hugely different risk/return profiles depending on their area of focus. Broadly speaking, solar power should be lower-risk than wind, being a more predictable energy source and involving less technological complexity. But that means it can also come with lower returns. Offshore wind is typically more reliable than onshore wind, but the infrastructure takes longer to establish.

But geographical preferences make a difference, too, as do the extent to which a trust might be exposed to assets under construction, the degree to which a fund hedges shifts in power prices, and the mixture of subsidised revenues and those based on demand.

Most wind and solar funds hold a significant number of assets that are supported by government subsidy schemes, the flipside of which is that power can only be sold on at a fixed price.

But a portion of many portfolios is also affected by wholesale electricity prices, which – as the past two years have shown – can fluctuate significantly. That is because prices in countries including the UK are set based on the marginal source of electricity generation, which in times of high demand tends to be gas – a more expensive energy source. That exposure can help portfolios when prices are high. But the visibility provided by fixed-term revenues is greatly valued by investors over the long term.

The government has said it will seek to ‘decouple’ gas prices from wholesale electricity prices in the years ahead. Its separate levy on electricity generators’ returns has now been incorporated into most trusts’ share price valuations, although there remains the suggestion that some portfolios could seek more overseas assets as a way of limiting their exposure to the extra tax.

Many trusts focus predominantly or entirely on one type of technology, be they battery storage funds or solar portfolios. Octopus Renewables Infrastructure (ORIT) and Aquila European Renewables (AERI) each had around 39 per cent of their assets in solar assets at the end of September, with a greater focus on wind. Renewables Infrastructure Group (TRIG), a stalwart of the sector, has an even bigger weighting towards wind, with an 85 per cent allocation at the end of June last year.

Even so, TRIG is in some ways more diversified than the more specialised offerings, and Charles Stanley chief analyst Rob Morgan points to it as a one-stop shop for investors seeking to own just a single trust in the space. “There is diversification across various geographies, regulatory regimes and technologies, which increases the resilience from localised risks to individual weather patterns, tax regimes, shifts in government policy and power prices,” he says. The fund had a 30 per cent allocation to England and Wales at the end of June, with 27 per cent in Scotland, 12 per cent in Sweden, 9 per cent in Germany and 8 per cent in France.

The fund continues to stand out for its dividend yield, which came to 5.3 per cent on 27 January, with the shares at a 2.5 per cent discount to NAV on the same date. Some names offer bigger yields and wider discounts, albeit that’s sometimes because recent performance has suffered. For example, Triple Point Energy Transition (TENT), which launched in 2020, fell nearly 19 per cent in the year to 27 January, offering some explanation for a 7.5 per cent yield and a discount of more than 28 per cent.

Home turf

Over time, the more generalist trusts have sought to diversify by asset exposure but also by geography. However, there is still a strong bias to the UK: Octopus Renewables Infrastructure had around half of its exposure in the UK and the other half in European markets at the end of September. Bluefield Solar Income (BSIF) and Greencoat UK Wind (UKW) are entirely UK-focused, while Foresight Solar (FSFL) is mainly focused on the domestic market.

But different exposures are available: regional specialists such as Aquila European Renewables or VH Global Sustainable Energy Opportunities (GSEO), a generalist trust that makes a point of diversifying extensively across both technologies and regions. The portfolio had a 38 per cent weighting to Brazil at the end of September, with 26 per cent in the US, 25 per cent in the UK and 12 per cent in Australia.

Greencoat UK Wind stands out as a particularly focused play in various respects. As the name suggests it focuses on one part of the world, and on one form of technology. As Morgan notes: “Quite often solar does comparatively well when the wind doesn’t blow and vice versa, so diversification with another trust can help iron things out.”

What’s more interesting, however, is that Greencoat UK Wind enters into fewer pre-agreed power price deals than its peers, making it more exposed to price shifts. That has served it particularly well in the past year, with shareholders enjoying a total return of nearly 19 per cent over the 12 months to 27 January. Liberum analysts have continued to favour the fund despite European power prices declining from their September highs, recently noting: “We continue to view it as best placed to benefit from the energy crisis given its market-leading wholesale price exposure and cautious [power curve] assumptions.” TRIG and Foresight Solar also have some exposure to the wholesale price, albeit much less than the Greencoat fund.

What’s in store

Exposure to battery storage assets can be found via some of the more generalist funds: VH Global Sustainable Energy Opportunities, for one, has had a good weighting to this area in the past. But investors may again want to use a dedicated vehicle for this and other niches.

Gresham House Energy Storage (GRID) had a particularly strong 2022, making huge returns and recently commanding a share price premium to NAV of nearly 8 per cent. Winterflood analysts recently made the case that more good news might be still to come, arguing that the portfolio NAV should receive a boost as more of its assets become operational. Winterflood has also argued that the fund's scale should be an advantage. Investors may, however, wish to hold off from a subsector that is still fairly new in the grand scheme of things – or instead take limited levels of exposure via the more generalist funds.