James Carthew: How the renewables class of 2013 has changed beyond recognition

Following recent shares issues the 17-strong Renewables investment company sector has a combined market value of about £10.5bn and is close to overtaking the UK Equity Income trusts.

Following the recent new issues and the oversubscribed £198m placing by Greencoat UK Wind (UKW ) last week, the now 17 investment companies in the sector have a combined market value of about £10.5bn and are within a whisker of overtaking the UK equity income sector on that measure. 

When the renewable energy sector launched in 2013 with the flurry of flotations from UKW, Bluefield Solar Income (BSIF ), The Renewables Infrastructure Group (TRIG ) and Foresight Solar (FSFL ), it was a pretty parochial affair. Some closed-emd funds had the freedom to invest overseas but the initial focus was the UK and, within that, onshore wind and solar. It was relatively easy for investors to get their heads around the investment proposition.  

Today, as the sector goes through yet another phase of explosive growth, the breadth of opportunity offered to investors is considerable. This goes for the range of technologies on offer as well as the spread of geographies. It is becoming increasingly hard to make direct comparisons between the different players. 

If you are prepared to invest through a listed fund making equity investments rather than investments in individual projects, the opportunity set is even broader. For example, Ecofin Global Utilities and Infrastructure (EGL ) holds stakes in companies such as Brookfield Renewables, which has a 20GW global portfolio of generation assets with a bias to hydroelectric projects, and EDP, which, through its stake in Spain’s EDP Renovaveis, is one of the world’s largest developers of wind farms. 

There is a benefit in diversification, which is a message that I have repeated many times in connection with JLEN Environmental Assets (JLEN ). It regularly comes up with new investment ideas, many of which are unique. The latest of these is compressed natural gas refuelling stations. The gas can be used to power HGVs which are too heavy and range too far to rely on battery power. 

Having access to a spread of technologies and geographies should help increase the reliability of JLEN’s income streams. A range of subsidy types and regimes imbue predictability into its revenue income. JLEN is already less reliant on merchant power prices than many of its peers. 

Nonetheless, it wants to go further still and is asking its shareholders to expand the definition of what constitutes environmental assets to include areas such as vertical farming (where plants are grown on racks, often hydroponically) and district heating, which is one of the areas targeted by Triple Point Energy Efficiency (TEEC ). 

JLEN is also asking for permission to invest in eastern European (Europe non-OECD) countries. It might have its eye on Bulgaria, where VH Global Sustainable Energy (GSEO ) plans to invest some of its recent flotation proceeds. 

The four funds from the class of 2013 have evolved over the years too. Initially, BSIF had a narrow focus on UK solar and a policy of paying out most of its income rather than reinvesting in new projects. As UK subsidies for solar were curtailed and prices of second-hand assets rose, BSIF sat on its hands.

However, last summer, it secured permission from shareholders for a broader remit which allows investment into other technologies, countries and subsidy-free projects. It also removed the inflation-linkage from its dividends and said it would reflect shareholders’ desire to see sustainable, ongoing asset growth, which suggests some reinvestment of cash flows. 

Since then, BSIF has spent almost £200m on solar plants with a capacity of around 134MW, funding this with debt and a small equity raise. So far, it has stuck to buying pre-existing UK solar plants that come with subsidies, but it has been saying for some time that ‘subsidy-free solar projects’ are becoming economically viable, so it will be interesting to see what it goes for next. 

FSFL has already made substantial forays into the Spanish and Australian solar markets. Its shareholders just gave it permission to invest up to 10% of its portfolio in battery storage projects. Others may follow suit. 

TRIG and UKW have grown to become the largest funds in the sector and, with greater firepower, have been able to target offshore as well as onshore wind. Offshore projects tend to come with much larger price tags but this is the fastest growing part of the renewable energy market in the UK. TRIG has the largest portfolio in the renewable energy investment company sector, with the capacity to generate 1.8GW.

Over a third of this is now in offshore wind and 37% of the portfolio is invested outside the UK in countries such as France, Germany and Sweden. The UK has ambitions to quadruple its offshore wind capacity from 10GW to 40GW by 2030. These companies aren’t going to run short of things to invest in. 

The number of investment companies in the renewable energy sector has not stopped rising either. NextEnergy Renewables is out raising money in its initial public offer (IPO). If the launch goes ahead, it plans to invest in existing funds with exposure to renewable assets in the United States, Portugal, Chile and India at launch. Deploying flotation proceeds this way should help it to hit the ground running.

Again, it extends the geographic boundaries of the sector. In most quarters, there is a growing understanding that we need to decarbonise, along with the dawning reality that significant investment is going to be required, across the globe, if countries are to achieve their targets for net zero emissions. Despite this spectacular growth, it would appear that we are just getting started and I can envisage the launch of other investment companies with similar ambitions.  

James Carthew is a director at Marten & Co. The views expressed in this article are his and do not constitute investment advice.

 

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