February was an odd month for markets and the main culprit was stronger-than-expected US inflation data. The knee-jerk response of government bonds was a drop in prices and jump in yields that struck a fresh blow to the ratings of funds, such as those in the renewable energy sector, whose valuations are sensitive to higher interest rates.

As a result, I think some of the yields available in renewable energy are compelling. Although their share prices can be quite volatile, this throws up great opportunities and, early last month, I picked up some SDCL Energy Efficiency Income (SEIT ) when the shares traded close to a 12% yield and a discount of over 40%.

These have already rallied by 24% but still look way too cheap to me.

However, at the same time, shares in NextEnergy Solar (NESF ) have hit new lows and offer a yield over 11% on a discount below asset value of nearly 30%.

I last wrote about renewable energy fund yields in September. Each of the three I looked – Atrato Onsite Energy (ROOF ), VH Global Sustainable Energy Opportunities (GSEO ) and Bluefield Solar Income (BSIF ), another one I hold, are trading at lower prices, higher yields, and wider discounts today.

There is seemingly no logic to this beyond an absence of buyers that at some point will sort itself out. I am thinking about topping up my exposure to the sector.

I sang Bluefield’s praises last time, but if anything, it is looking better positioned than ever. The key to this is the tie-up with GLIL Infrastructure announced in December that gives Bluefield exposure to 274MW of additional solar assets through a joint venture.

The next phase of the deal is the proposed sale to GLIL of a 50% stake in a 100MW portfolio of operational solar assets owned by Bluefield. That is said to be on track to complete in the first half of this year.

Finally, GLIL will help finance some of Bluefield’s considerable pipeline of potential new earnings- and NAV-enhancing projects.

Bluefield is growing its dividend which is a key consideration when choosing between this and a bond investment, for example. The target for the current financial year is 8.8p a share, up 2.3% on the prior year. The chair, John Scott, says that the dividend is expected to be covered around two times by earnings, net of debt amortisation and the government’s windfall tax imposed on the sector last year.

Excess cash is available to help pay down debt with £10m lopped off the revolving credit facility last year, fund share buybacks with a £20m programme underway, and – if it makes financial sense – build new projects.

Based on the new dividend target, Bluefield yields 8.4%. The discount is starting to narrow, moving from over 26% in February to about 22% today.

NextEnergy is also looking to recycle cash from its solar portfolio, having announced in April last year that it would sell five subsidy-free assets and use the proceeds to cut its borrowing, invest in new opportunities and buy back stock if needed.

One sale was made in November of a ready-to-build solar project. NextEnergy got £15.2m for the asset, twice what it was previously valued at. The size of the uplift reflected all the work that its team had done to make the asset more valuable.

The other four sales will be of operational projects totalling 186MW of capacity. In an update at the end of February, NextEnergy said that the disposal process was progressing and would likely be split into two sales of two assets each. That is encouraging. Part of the reason for the discount widening is frustration that these deals have not already happened – patience is needed if the fund is to maximise its returns.

It is hard to say what these sales might generate. A recent deal in January 2024 saw Greencoat buy 513.5MW of capacity from Toucan Energy for about £700m or £1.36m per MW. However, the assets were a bit older than those NextEnergy is selling and so came with subsidies. We will just have to wait and see.

Nevertheless, the Toucan deal – which came as the result of a competitive bidding process – does give us a useful yardstick to look at the valuations in the sector. NextEnergy Solar’s share price implies a valuation of about £1.04m per MW for its portfolio. You can see why I am concerned that we might see opportunistic bids for these funds.

James Carthew is head of research at QuotedData.

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