I have been doing some work with Aquila European Renewables (AERI ) recently. Like every other renewable energy investment company, AERI trades at a discount, with the shares currently around 12% below net asset value (NAV). However, AERI has been one of the most proactive in addressing the problem and my hope is that it will soon have it under control.

Launched in July 2019, AERI managed to expand before the discount appeared so that it is a reasonable size with a market value of £320m and assets capable of generating 464MW of power. Its focus on the European renewables market makes it a useful diversifier to hold alongside more UK-centric funds. It also made sense for it to use the euro as its reporting currency. The shares trade on the LSE both in euros (under the AERI ticker) and in sterling (as AERS). These are the same shares, with the same rights, underlying portfolio and voting rights.

AERI had permission from the outset to invest up to 30% of its portfolio in assets under construction. That is good news for the NAV, as these assets tend to get written up in value as they move from the construction phase to the operational phase and become less risky. This has been one of the factors that has helped drive AERI’s NAV from 98 cents per share at flotation to 110.1 cents at 31 March 2023.

The last of AERI’s construction-phase assets, Guillena, a 50MW solar farm in Andalucia, Spain, became operational in April. In the context of AERI’s portfolio, it and sister plant Jàen are likely to generate a significant proportion of the fund’s power in future periods. The adviser managed to secure long-term power purchase agreements (PPAs) for these plants at €66/MWh, around twice that budgeted at the time that these assets were being acquired.

The extra revenue that these solar plants and the other assets that came on stream in recent quarters will bring to AERI’s revenue account mean the investment company’s dividend cover is set to soar, from 1.4 times in 2022 to an estimated 1.8 times this year. The excess cash is estimated at a cumulative €73m over the next five accounting periods. That provides some cash to invest in new assets, but this is inadequate to cover the adviser’s immediate pipeline of potential deals.

The 400MW pipeline covers hydropower (where AERI already has some exposure in northern Portugal), solar and battery storage assets. Battery storage is a good add-on for many renewable energy assets and AERI already has a likely project lined up to develop a 20MW two-hour, co-located battery storage opportunity alongside its Ourique solar plant in Portugal.

One other option AERI has to fund some of this pipeline is to raise debt against its €250m solar portfolio, which is currently ungeared. The company is said to be talking to lenders about the possibility of this. The proceeds could be used to reduce the balance on its revolving credit facility – it’s likely the solar debt would be cheaper – as well as fund new purchases. Commendably though, the board has said that any potential acquisition will be weighed against the benefit of buying back more shares.

AERI’s share price discount started to open up late in 2021. It is hard to pin down the exact cause, but I think there was a little frustration about the pace of investment and bad publicity about AERI’s Norwegian ‘Rock’ wind farm which was caught up in a case over the land rights of Sami herders. There there may have been a knock-on from the woes of its sister fund Aquila Energy Efficiency (AEET ), which lost a continuation vote in February and has begun a lengthy windup.

AERI raised €90m in September 2021, but didn’t invest the last of that until it bought Tiza, an operational 30MW solar plant in southern Spain, in May 2022.

The board recognised that it had a problem and early in February 2023, with the discount close to 20%, announced a €20m share buyback, which I think was the first in the sector. The buyback seems to be working. More than 19m shares have been repurchased already, and this will be accretive for AERI’s NAV. In addition, directors and members of the advisory team also bought shares.

A continuation vote was already scheduled for this year’s AGM, which is being held on 14 June. Honestly, I cannot conceive why anyone would want to wind it up just as it starts to fire on all cylinders, but the board wants shareholders to have their say. These continuation votes were supposed to happen every four years, but the board has brought forward the next one from 2027 to 2024. Commendably (again), the manager – which receives its pay in shares – has said it won’t vote its 2.1% stake.

AERI seems to be shaping up to be a model for good corporate governance in the sector, and, if it can bolt on some extra revenue by buying more of its pipeline with existing resources, its cash generation is going to look attractive too. Of course, I would much prefer that these closed-end funds were back trading around asset value and issuing stock to fund more badly-needed projects. In the meantime, AERI is on the right track.

James Carthew is head of research at QuotedData.

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