It was good to see Bluefield Solar Income (BSIF ) announce it had managed to raise £150m in an oversubscribed share issue before the Jubilee holiday. This follows a similar-sized fundraise by Gresham House Energy Storage (GRID ).

I had been concerned that uncertainty over a windfall tax on renewable energy generators might derail the BSIF issue altogether. In the event, the shares are trading at a modest premium to the 130p issue price and to the last published NAV.

The money raised has helped repay most of the company’s revolving credit facility, which had been maxed out following the £112m acquisition of a portfolio of 15 solar and four wind assets earlier in May. BSIF will now focus on its pipeline of development opportunities, which includes 108MWp of new solar and 125MW of battery storage.

BSIF pushed back the closing date for its fundraise after its share price was knocked by rumours, later confirmed, that the government was considering extending the scope of its energy profits levy to include renewable energy generators.

Other funds were affected too. For example, shares in Greencoat UK Wind (UKW ) fell from over 159p on 23 May to 148.7p on 25 May, a small discount to the end March NAV of 149.3p announced on 28 April. I bought a few; it is rare to see them trade close to asset value.

A windfall tax/energy profits levy was always on the cards. The government’s attempts to rule it out in February made little sense. As we know, soaring natural gas prices have a significant influence on UK power prices because it’s the gas-fired plants that kick in when wind and/or solar generation drops. Gas prices are over five times what they were at the start of 2020, and UK power prices are up almost 6.5 times. It’s no surprise that consumers are suffering.

If you produce gas (and oil) from anywhere outside Russia, or if you are producing electricity from anything other than gas-fired plants, you are making a lot more money. Although, in the electricity generation sector, the situation is complicated by the myriad of power purchase agreements and forward sales of power that mean that generators tend not to receive the spot price for power.

On 26 May, the government published its energy profits levy factsheet. This made it clear that, while its new levy did not apply to the electricity generation sector, certain parts of it had seen extraordinary profits partly due to record gas prices. It said that a longer-term consultation is underway to ‘to drive forward energy market reforms and ensure that the price paid for electricity is more reflective of the costs of production’.

The real shock was that oil and gas companies caught by the levy would be able to offset their tax against investment made in new oil and gas projects, but not against investment in other areas such as renewables. That seems hugely counterproductive given our need to encourage investment in renewables and the commitments that the government has made to doing so.

The worry would be that oil and gas companies stop investing in renewables because it is tax disadvantageous for them to do so, and renewable energy generation businesses stop investing because the threat of a future windfall tax makes it hard for them to raise the necessary funding. Fortunately, a report in the Sunday Telegraph last weekend indicates the government is considering excluding wind farms from a levy.

Investors have a yield in mind at which they are prepared to fund the equity needed for renewable energy projects. Within the investment companies sector, that yield seems to be about 5.3-5.4% on average. The highest yield available at now is 6.9% offered by NextEnergy Solar Fund (NESF ), which is also one of very few funds trading at a discount. I have not been able to fathom a reason for this.

If the government creates uncertainty, investors are going to demand a greater risk premium. That either means that future renewable energy projects will be more expensive to fund or that they might not even get built.

Spain offers a good example of this. It already shot itself in the foot once when it reneged on subsidies in 2013 and investment in renewables slowed dramatically. When it tried to ramp this back up again, it ended up paying higher prices to compensate investors for political risk.

In September 2021, Spain cut taxes including VAT on electricity and introduced a levy on generators to help fund this. However, by November, following a buyers’ strike in its auction of renewable power permits, the government backtracked, exempting generators selling power under PPAs or those that had hedged power prices. The big generators were quick to warn that the Spanish government’s actions were putting its renewable energy generation targets at risk.

More clarity is urgently needed, but while acknowledging that UK renewable energy generators have had a good time of it recently, I would suggest that it makes more sense to find ways of ensuring that the extra cash flows from high power prices are reinvested into new renewable capacity rather than penalising these companies with a tax/levy. If carefully designed, this could help to expand the UK’s renewables generation capacity, without dampening investors’ appetite to provide capital to the sector.

James Carthew is a director at Marten & Co. Any opinions expressed by Citywire, its staff or columnists do not constitute a personal recommendation to you to buy, sell, underwrite or subscribe for any particular investment and should not be relied upon when making (or refraining from making) any investment decisions. In particular, the information and opinions provided by Citywire do not take into account people’s personal circumstances, objectives and attitude towards risk.