Big 12: Renewable pioneer Greencoat plans to ride policy winds of change

Greencoat UK Wind (UKW ) prides itself on being a renewable pioneer and is hoping to be first in line to take advantage of the £170bn opportunity from the UK’s transition to clean energy.

UKW was the first renewable investment trust to hit the London market back in 2013 with a modest raise of £260m and has since grown its assets to £3.2bn, making it a ‘serious contender’ on the FTSE 250, according to Schroders Greencoat manager Matt Ridley.

Ridley, who manages the fund with Steve Packwood after long-time manager and founding partner Stephen Lilley stepped down in April, was quick to address the problems UKW has had in growing its portfolio in the current environment.

In fact, it is in the process of buying back £200m of shares to take advantage of its 25.8% discount – making it the first in its sector to initiate a significant buyback.

It is a far cry from the successful £450m raise UKW undertook in 2021 − its fourteenth since launch − but Ridley said it is the ‘best use of cash for shareholders’, with buying back shares in its own stock a better use of cash than adding to its portfolio of 49 onshore and offshore wind farms.

He had been hopeful of growing the portfolio until the interest rate environment changed − something that scuppered the plans of many alternative trusts, which had been the go-to income investment in an extended period of ultra-low borrowing costs.

‘The last raise was in 2021 and was very well supported, but since then we had the Truss budget, an uptick in short-term interest rates and in long-term gilt yields,’ he said.

Simply put, ‘there are now alternative places to get income’.

‘We have some capital preservation and a 6% dividend yield, which was attractive when you could only get 50 basis points on a 10-year gilt,’ said Ridley.

On top of this, the boom in the alternatives space – not just renewables – saw trusts competing for similar types of shareholders, creating more supply than demand.

Ridley said the sector is now ‘recalibrating to demand’ but does not think there will be a switch away from buybacks and towards asset purchases until interest rates reduce further, allowing him to add to the £1bn UKW has spent on buying assets.

UKW is ‘well positioned’ for when the switch happens, with Ridley adding: ‘We are large and rightly viewed as an established leader.

‘We still have consensus from investors that it is a product that needs to be around.’

Consolidation and optimisation

In the meantime, he believes the ongoing consolidation in the market and trend for private buyers swooping in to pick up portfolios of renewable assets will be a longer-term benefit to UKW, as it reduces competition and reduces supply.

‘We think consolidation and exits are the way forward,’ he said.

‘Capital will come back and investors seeking liquidity will no longer need to get it by selling large liquid stocks [such as UKW].’

Until the environment changes, Ridley is focused on disposing of assets to pay for buybacks, optimising the operations of the remaining assets, extending leases, and ensuring there is plenty of cash to pay the dividend – a total of £1.3bn has been paid out since IPO.

‘The success of the business is about doing the right thing first for shareholders, we were the first to do a material buyback and the first to change our fee basis [to the lower of market cap and NAV],’ he said.

‘We are doing the right things and doing them first.’

When deciding on the assets to sell, the size of the portfolio – which invests in 6.5% of all UK wind farms - gives Ridley a broad range to pick from but does not sell assets ‘we consider a bedrock’, although other smaller funds have been forced to sell the ‘crown jewels’.

There are two types of assets he targets for disposal; the ‘middle of the road’ ones that are not significant to the portfolio, and stakes in largest assets.

The fund is also focused on optimising the assets that are left, including ‘relatively inexpensive’ additions to both software and hardware that allows turbines to operate at higher wind speeds, or convert more wind to energy.

He said there are a number of scale benefits in this area, including reducing costs and being able to see ‘the best of what is happening [at the wind farms] and borrowing ideas’ from one wind farm to another.

Wind woes

While Ridley has full control over the asset management of the trust, one thing he cannot control is the wind, and the fund has suffered from historically low wind speeds over the past 18 months.

This led him to reset wind expectations, revising the P50 – the amount of energy expected to be achieved over the average year within a 10% variable – down by 2.6%.

‘It was the right ting to do, but this is where we have to look over the long-term,’ said Ridley, adding that wind speeds over the past quarter are unhelpful.

‘Meteorology is long-term. Half a year of wind experience does not tell us what to expect over the next 30 years. We are looking at 28 years of data, and one year at the end does not bring the average down that much, or tell you much about next year.’

Poor wind speeds have knocked both the NAV and the share price over the past year, dropping 3.7% and 16.5% respectively. Over three years the NAV is in the black, up 12.1%, but shares have shed 18.7%, according to Deutsche Numis data.

Ocean of opportunities

One other long-term driver of returns will be government policy and the cross-party support for the Clean Energy 2030 Action Plan, with successive governments committing to net zero and a clean power grid by 2030, which will see 95% of emissions eradicated.

‘The only way to get there is through significant investment in renewables and offshore wind is the most scalable, it will do the heavy lifting,’ said Ridley – 45% of UKW is offshore wind.

The target will mean a trebling in offshore wind farms and a doubling of onshore wind farms, only some of which are now in construction.

This means there will be a significant amount of investment needed into renewables for the government to get anywhere near its target.

‘Our estimate is that it is going to require £170bn of capital to build those assets [to achieve the 2030 target],’ said Ridley.

‘At present there is no investment but an ocean of opportunities. If you think of the overall stability of wind, the government policy support, and the magnitude of opportunities, these are all really good for UK wind... even if you half the 2030 target, you will still need £100bn of investment.’

No doubt, Ridley and his team will be first in line.