Infrastructure-focused investment trusts, especially those involved in renewable energy projects, have exploded this year as income-hungry investors and those keen to support the energy transition flocked to participate in a record number of share issues.
There are few signs that this momentum is running out of steam. An energy efficiency trust, Atrato Onsite Energy, is being launched, along with two other generalist trusts with renewable components.
“There is a huge amount of investment needed in the renewable energy sector and it will probably raise a lot more money,” said James Carthew, head of investment company research at research firm QuotedData.
Traditional renewable energy infrastructure trusts make money by owning renewable assets and producing and selling energy. This means that the income earned by trusts will fluctuate depending on the amount of energy they produce (which includes weather impacts) and electricity prices, although many trusts hedge against fluctuations in these. price.
Many also have income from UK government subsidies, although these are being phased out as the cost of producing renewable energy has fallen.
The weighted average net return of the renewable energy infrastructure sector was over 5.2% on November 8, compared to an average of 4.6% for traditional infrastructure or 3.5% for income funds. global equities, according to data from Winterflood.
But David Merriam, investment manager at Tilney Smith & Williamson, suggests investors might want to be cautious. The weighted average sector premium in relation to net assets is almost 10%.
âThey are relatively expensive, reflecting the demand for favorable ESG assets [environmental, social and governance] characteristics and a desperate need for reliable income, âsays Merriam, adding that if you pay a premium of 15% or more for a trust, you risk substantial depreciation (a reduction in premium) and a loss of capital that may even exceed income generated, depending on the length of the holding.
Many renewable energy trusts have seen their net asset values ââincrease in recent years as demand for green energy has driven down the discount rates used to value assets and trusts have extended the life of their assets. Merriam says: âThere is limited scope to pull more on these levers and therefore it can reasonably be expected that net asset value growth will slow down in the years to come. “
Fund Profile: The Renewables Infrastructure Group (TRIG)
Manager: InfraRed Capital Partners,
Market capitalization: Â£ 2.97 billion (November 8)
Ongoing AIC charges: 0.91%
Launch date: 2013
Fund Profile: aims to generate sustainable returns through a diversified portfolio of over 75 different energy projects, the majority of which are located in the UK. Over 90 percent of assets are operational, supporting the 5.2 percent dividend yield. However, the trust is trading at a high premium to the NAV – 16.3% on November 8.
According to Mick Gilligan, head of managed portfolio services at Killik and Co, renewable energy net asset values ââare calculated based on long-term electricity price estimates, which could drive their value down. faster than expected, with implications for overall electricity prices.
“If electricity prices drop significantly, all other things being equal, it will cause the asset values ââand share prices of renewable infrastructure funds to drop,” he said.
According to analysis by brokerage firm Numis, only three of the established renewable power generation infrastructure trusts have met their target total rate of return each year since listing: The Renewables Infrastructure Group, Greencoat UK Wind and Bluefield Solar Income Fund.
Ryan Hughes, head of investment research at AJ Bell, recommends those looking for infrastructure exposure to go with one of the more established players, such as The Renewables Infrastructure Group, as they tend to have a proportion high operating assets, which makes income more reliable. .
Newer and more specialized renewable energy infrastructure trusts are also growing rapidly and offering healthy returns. Gore Street Energy Storage and Gresham House Energy Storage provide batteries to help balance the power grid and both currently produce over 5.5%. Harmony Energy Income, which closed its IPO on November 5, is the latest addition, with contracts pending to use Tesla’s battery storage technology.
For its part, SDCL Energy Efficiency Income Trust, which had a return of 4.8% on November 8, according to Winterflood, provides on-site solar power generation for commercial and industrial buildings.