Renewable Energy Infrastructure

[UncleEbenezer]

Just to bring together a topic discussed elsewhere - if only one could recollect which board it's on.

The main thread on Investment Strategies board: BusyBumbleBee's 2019 comprehensive review of the sector (as was then) became a long thread following many subsequent developments in the sector, such as new launches. The thread also occasionally wanders into wider green investments.

A shorter, more recent thread on the ITs and Unit Trusts board: https://www.lemonfool.co.uk/viewtopic.php?f=54&t=32428

I'm sure I've seen it crop up elsewhere, but can't find those topics just now.

[UncleEbenezer]

I have several investments in the sector. They are of course an income investment.

One of those is winding up. The Ventus VCTs are constrained by new[1] VCT rules that basically zombifies their holdings. It was felt more sustainable to dispose of the assets to someone not constrained by those rules and wind the VCTs up.

This is a profitable winding up, with prices achieved significantly above the carrying NAVs previously published. That could perhaps be read across to NAVs for the sector as a whole. See for example RNS announcements at https://www.investegate.co.uk/CompData. ... ouncements , and discussion here on TLF at https://www.lemonfool.co.uk/viewtopic.php?f=25&t=113 .

[1] That is, new since the VCTs were launched and built their portfolios.

[funduffer]

Yes there are some very useful threads on this sector, and as a result I have invested modestly in a few companies - Greencoat UK Wind (UKW) and Next Energy Solar Fund (NESF) to name but 2.

My question is - given the recent steep rise in energy prices, won't this make the renewable energy producers (solar, wind) more profitable?

If the cost of gas-produced electricity rises, and coal is not favoured any more, then cheap renewable energy (solar, wind) must become very attractive. Surely this will increase demand, and hence the price paid to renewable energy producers?

Interesting times ahead in this sector I feel.

FD

[RockRabbit]

Yes there are some very useful threads on this sector, and as a result I have invested modestly in a few companies - Greencoat UK Wind (UKW) and Next Energy Solar Fund (NESF) to name but 2.

My question is - given the recent steep rise in energy prices, won't this make the renewable energy producers (solar, wind) more profitable?

If the cost of gas-produced electricity rises, and coal is not favoured any more, then cheap renewable energy (solar, wind) must become very attractive. Surely this will increase demand, and hence the price paid to renewable energy producers?

Interesting times ahead in this sector I feel.

FD

There are a lot of variables which influence the NAV of these trusts and these differ from trust to trust. Its a bit of a minefield.

If you look at the interim/annual reports of renewable ITs you will usually find in the notes to the accounts details of the sensitivity factors determining the NAV of the IT. These will include the discount rate, inflation, interest rates and power prices. In general, a rise in long term inflation assumptions or power prices will increase IT NAVs, while a rise in the discount rate or long term interest rates will reduce NAVs. But you need to look at individual trusts to see their specific sensitivities to these factors.

Also bear in mind that NAVs are also generally based upon the energy output. So if energy prices rise but wind output falls (as in 2021) NAVs may still fall, everything else being equal.

Finally different trusts use different assumptions in their NAV forecasts - ie some are 'conservative' while others are, let us say, more 'optimistic'.

[Dod101]

I think it is best to look at these trusts as an income play as UE has said. There are just too many factors in play to bank on the NAV rising just because the price of energy is. I am not very keen on them because of this and the fact that they keep raising additional funds thus diluting existing shareholders.

I much prefer well spread infrastructure funds.

Dod

[funduffer]

There are a lot of variables which influence the NAV of these trusts and these differ from trust to trust. Its a bit of a minefield.

If you look at the interim/annual reports of renewable ITs you will usually find in the notes to the accounts details of the sensitivity factors determining the NAV of the IT. These will include the discount rate, inflation, interest rates and power prices. In general, a rise in long term inflation assumptions or power prices will increase IT NAVs, while a rise in the discount rate or long term interest rates will reduce NAVs. But you need to look at individual trusts to see their specific sensitivities to these factors.

Also bear in mind that NAVs are also generally based upon the energy output. So if energy prices rise but wind output falls (as in 2021) NAVs may still fall, everything else being equal.

Finally different trusts use different assumptions in their NAV forecasts - ie some are 'conservative' while others are, let us say, more 'optimistic'.

Interesting, thanks.

If I look on the AIC website, the Renewables Infrastructure sector is at an average premium of 10%, with companies ranging from 23% premium to 2% discount to NAV.

I am not sure what to read into this if they are assessing NAV differently, as well as all the other factors you mention.

It makes assessing individual companies in this sector very difficult, yet they all seem to behave the same way - i.e. low share price volatility and high, rising dividends.

FD

[88V8]

It makes assessing individual companies in this sector very difficult, yet they all seem to behave the same way - i.e. low share price volatility and high, rising dividends.

Someone recently described them as a bond proxy, which I think is a fair comparison.
How resilient their divis will be long-term remains to be seen of course.

V8

[EarnestHummingbird]

I like many of us here am invested in renewable energy investments for both the green credentials and the income/growth nature of the business.
Hopefully after a few years if solid Growth and income being trounced by tech shares massive gains and crypto magic money tree - now is the time for these projects to start bearing fruit.
Or at least help us all pay for our electric bills.

[richfool]

It makes assessing individual companies in this sector very difficult, yet they all seem to behave the same way - i.e. low share price volatility and high, rising dividends.

Someone recently described them as a bond proxy, which I think is a fair comparison.
How resilient their divis will be long-term remains to be seen of course.

V8

Agreed re the low volatility and the dividends, but the downside to me seems to be their lack of capital growth.

[richfool]

With the increase in energy prices, exacerbated by the UK's and (more so) Europe's realisation that they have become overly dependent on Russian gas and oil, which they now want to reduce, can one assume that there will be an increased demand for renewable energy, and will that translate into an increase in the attraction of renewable energy trusts such as: JLEN, TRIG, BSIF, UKW? Or alternatively, might it mean that such renewables will have their margins squeezed?

[BullDog]

With the increase in energy prices, exacerbated by the UK's and (more so) Europe's realisation that they have become overly dependent on Russian gas and oil, which they now want to reduce, can one assume that there will be an increased demand for renewable energy, and will that translate into an increase in the attraction of renewable energy trusts such as: JLEN, TRIG, BSIF, UKW? Or alternatively, might it mean that such renewables will have their margins squeezed?

Can't help feeling there's an opportunity arising. Volatility and rising prices plays into the hands of energy storage businesses. The recently floated Harmony Energy Income Trust HEIT is still trading at the 100p launch price. They published their first update a few days ago. They are now forecasting around ~8% income stream with around ~10% a year total return. The first storage projects are coming on stream later this year and early next year. The income then starts rolling in. They are partnered with Tesla for the storage systems and trading software. We know it works.

Contrast HEIT with the other players in the same business and it looks cheap to me.

[Wuffle]

NESF (Next Energy solar fund) are moving into the storage area to an extent.
It would seem a given that renewable power companies will need a buffer to smooth or time shift a percentage of output.
It won't do much for my combi boiler though.
The electric car revolution will be where this matters.
The morality of massively taxed ICE usage by poor people vs tax evasive electric car usage with a high financial bar for entry is going to get messy fairly soon though.

W.

[UncleEbenezer]

Contrast HEIT with the other players in the same business and it looks cheap to me.

Thanks for posting. You prompted me to take a look. From my perfunctory reading, HEIT (which is not the only newcomer) seems to be positioned as something of a generalist in the sector rather than specifically storage.

More generally, the premia have shifted and there are even some discounts in the sector, with storage commanding big premia followed by wind, while solar funds have moved to nil premium or even a hint of discount. I can only speculate on why that should be.

If you think about it, in the past, storage was necessary but was never a separate business in the same way. Was there ever a comparable investment focussing on gasometer assets?

[richfool]

With the increase in energy prices, exacerbated by the UK's and (more so) Europe's realisation that they have become overly dependent on Russian gas and oil, which they now want to reduce, can one assume that there will be an increased demand for renewable energy, and will that translate into an increase in the attraction of renewable energy trusts such as: JLEN, TRIG, BSIF, UKW? Or alternatively, might it mean that such renewables will have their margins squeezed?

Can't help feeling there's an opportunity arising. Volatility and rising prices plays into the hands of energy storage businesses. The recently floated Harmony Energy Income Trust HEIT is still trading at the 100p launch price. They published their first update a few days ago. They are now forecasting around ~8% income stream with around ~10% a year total return. The first storage projects are coming on stream later this year and early next year. The income then starts rolling in. They are partnered with Tesla for the storage systems and trading software. We know it works.

Contrast HEIT with the other players in the same business and it looks cheap to me.

Thanks for mentioning HEIT and energy storage, though I already hold both GRID and GSF, so am well endowed with energy storage. It was the wind and solar farms that I was thinking about.

Does the increased demand and cost of (renewable) energy make wind and solar farms more profitable and thus more sought after, or does it put greater pressure on their margins and profitability?

[BullDog]

Can't help feeling there's an opportunity arising. Volatility and rising prices plays into the hands of energy storage businesses. The recently floated Harmony Energy Income Trust HEIT is still trading at the 100p launch price. They published their first update a few days ago. They are now forecasting around ~8% income stream with around ~10% a year total return. The first storage projects are coming on stream later this year and early next year. The income then starts rolling in. They are partnered with Tesla for the storage systems and trading software. We know it works.

Contrast HEIT with the other players in the same business and it looks cheap to me.

Thanks for mentioning HEIT and energy storage, though I already hold both GRID and GSF, so am well endowed with energy storage. It was the wind and solar farms that I was thinking about.

Does the increased demand and cost of (renewable) energy make wind and solar farms more profitable and thus more sought after, or does it put greater pressure on their margins and profitability?

I assumed it to be the case. Apparently it's not that straightforward. In another thread it was mentioned that renewable energy is supplied to the grid under a contract for difference arrangement which would mean the government gets the benefit of higher than contracted energy prices. However, I would have thought there's also a spot market for hourly energy supply contracts in the short term rather than baseload. So, I am not sure is the answer and I haven't had time to investigate.

(My own experience in energy supply is that the supplier usually has long term base take off contracts that fund the billions of $$$$ capital to build the plant in the first place. And any capacity beyond that base load is sold into the spot market and represents the icing on the cake for the plant owners. Well, that's how it works in oil and gas, including LNG. Indeed, it is reasonably common for an LNG carrier at sea to be sold to the highest bidder when it's actually at sea and thus turned around to sail to the import terminal of the highest bidder.

I kind of thought there would be the equivalent short term/spot market in the UK/European electricity market too. Maybe there is?).

[Wuffle]

According to the recent quarterly report by NESF, a lot of output is hedged. Like, a lot.
Like 99% for this year, 70 something % for the next couple of years after that.
Exactly what that means in practice, I don't know.
Some of the commentary about future energy costs looks stale already.
It was my toe in the water quite recently.

W.

[UncleEbenezer]

According to the recent quarterly report by NESF, a lot of output is hedged. Like, a lot.
Like 99% for this year, 70 something % for the next couple of years after that.
W.

I'm guessing that's because their buyers - our suppliers - are very prudently hedging their costs in a challenging market?

[vand]

The 3 renewable plays that I hold (NESF, FSFL, BSIF) have not only held up amid the recent turmoil, they've actually gone up to hedge some of the falls in other parts of the portfolio.

In fact they've done a much better job at diversifying the portfolio than the traditional go-to hedge - bonds, which have been lousy in the face of rising inflation. I'm feeling pretty good about my decision to swap most of my bonds for these plays... I think even by themselves they represent very attractive risk/reward play - and they compliment a traditional stock portfolio very well indeed.

Happy to be holding, and I see no reason to not add more as and when my funds allow.

[richfool]

The 3 renewable plays that I hold (NESF, FSFL, BSIF) have not only held up amid the recent turmoil, they've actually gone up to hedge some of the falls in other parts of the portfolio.

In fact they've done a much better job at diversifying the portfolio than the traditional go-to hedge - bonds, which have been lousy in the face of rising inflation. I'm feeling pretty good about my decision to swap most of my bonds for these plays... I think even by themselves they represent very attractive risk/reward play - and they compliment a traditional stock portfolio very well indeed.

Happy to be holding, and I see no reason to not add more as and when my funds allow.

Yes the renewables seem to be doing a good job at diversifying and holding up the overall portfolio performance.

I hold: GRID, GSF and SEIT, in that sector, and have been wanting to add one or more of the following: JLEN, UKW, or BSIF, because of the energy issues arising with Russia and Europe. However, whilst I've been looking for suitable available funds to deploy, the SP's of UKW and BSIF have been marching steadily upwards. JLEN has started to move a bit today, but the other 2 have moved up quite significantly over the last week or so.

BERI and BRWM have understandably both been doing very well.

[BullDog]

The 3 renewable plays that I hold (NESF, FSFL, BSIF) have not only held up amid the recent turmoil, they've actually gone up to hedge some of the falls in other parts of the portfolio.

In fact they've done a much better job at diversifying the portfolio than the traditional go-to hedge - bonds, which have been lousy in the face of rising inflation. I'm feeling pretty good about my decision to swap most of my bonds for these plays... I think even by themselves they represent very attractive risk/reward play - and they compliment a traditional stock portfolio very well indeed.

Happy to be holding, and I see no reason to not add more as and when my funds allow.

Yes the renewables seem to be doing a good job at diversifying and holding up the overall portfolio performance.

I hold: GRID, GSF and SEIT, in that sector, and have been wanting to add one or more of the following: JLEN, UKW, or BSIF, because of the energy issues arising with Russia and Europe. However, whilst I've been looking for suitable available funds to deploy, the SP's of UKW and BSIF have been marching steadily upwards. JLEN has started to move a bit today, but the other 2 have moved up quite significantly over the last week or so.

BERI and BRWM have understandably both been doing very well.

Recent all time high at BERI, I believe. Quite a bit more to come yet though.