When the listed renewable infrastructure market started in March 2013 with the launch of Greencoat UK Wind (LSE: UKW) on the London Stock Exchange, few could have predicted how quickly the sector would move into the mainstream. At IPO, Greencoat UK Wind raised £260 million from investors, with £50 million of that investment coming from the Green Investment Bank and the UK Government. Fast forward two years and collectively the six UK-listed investment companies and trusts in the sector now have a market capitalisation of over £2 billion.
The birth and growth of the sector is undoubtedly part of the wider push to reduce our carbon footprint, focus on sustainability and produce a dynamic and multi-dimensional energy landscape. It is also directly linked to the UK’s EU-binding carbon reduction target of sourcing 15% of its energy from renewable sources by 2020. Government subsidies have been vital to the growth of the sector, and although the characteristics of each fund vary, as a general guide roughly half of revenues in each fund are guaranteed via government subsidies, with the other half exposed to wholesale electricity prices.
How renewable energy generates revenues:
Note: Indicative supply chains for illustrative purposes only. Source: JLEN
A great deal of recent publicity has focussed on changes to the UK’s subsidy regimes for new onshore wind and solar projects. However, we do not foresee any short to medium term impact on the funds we rate in the sector, as the majority of projects in the portfolios have a 15-20 year life cycle with Renewable Obligation Certificates (ROCs) already safeguarded.
Additionally, the UK government has stated that up to 5.2GW of new onshore wind capacity could still be eligible if the developer can demonstrate that grid connection, land rights and planning approval are all in place. Combined with an already active secondary market for onshore wind and solar energy, and a number of ROC approved assets in the construction phase nearing completion, it means there shouldn’t be a shortage of operational assets for some time. The challenge for technology in the sector is to further reduce the cost of producing energy so that it is competitive relative to fossil fuels, and to make the ‘price versus environment’ debate a thing of the past.
For investors, the six UK-listed renewable infrastructure funds offer the opportunity to invest in the UK’s growing renewable energy market and potentially receive attractive returns. However, the popularity of the funds in the sector has led to their shares trading at a premium to net asset value on a regular basis. Thankfully, the structure of these investment companies and trusts means that equity fundraisings are fairly common and provide the opportunity for investors to access the funds at small discounts to the share price. Two funds currently raising funds to pay for recent (and pipeline) acquisitions are John Laing Environmental Assets (LSE: JLEN), which we rate three stars, and The Renewables Infrastructure Group (LSE: TRIG), which we also rate three stars. Details of these funds and their placings are available by contacting us on 020 7189 2400, requesting a call back or emailing us at email@example.com
Summary of funds we currently rate in the renewable infrastructure sector: