From low wind speeds and expensive debt to failed mergers and government U-turns, renewable trusts have been hit by a number of crises, but there may be more pain to come.

The early 2020s marked a boom period for renewable trusts, with 2021 welcoming nine new investment companies to the London market, raising a total of £10bn.

However, this period wasn’t to last. At the end of 2022, after a year of gradual interest rate rises, renewables slowly started to lose their allure as a go-to sector for income seekers, who were gradually flocking back into cash and gilts where yields were moving upwards in tandem.

With investor interest waning, renewables found themselves serving increasingly expensive debt and higher inflation, but the woes did not end there. Over recent years, the sector has been hit by a succession of problems, including low wind speeds and a lack of sun putting pressure on energy delivery, delays connecting to the National Grid, and most recently, a decision by the government to switch indexation of subsidies – known as renewable obligations certificates (ROCs) – from the retail price index (RPI) to consumer price index (CPI), reducing a relied upon income source for trusts.

With all these problems weighing on the sector, it is no surprise that persistent discounts are the norm. Trusts in the Association of Investment Companies’ (AIC) Renewable Energy Infrastructure trade at an average share price discount of 34.2% to their net asset value (NAV).

While the wide discounts reveal the poor investor sentiment towards renewables at present, they pose a bigger problem: discounts make it impossible for trusts to raise cash to invest, grow and upgrade their portfolios.

William MacLeod, managing director of Gravis, which runs GCP Infrastructure (GCP) and GCP Asset Backed Income (GABI), said most renewable trusts have an income mandate which has been their main focus.

This has been met, with many trusts ‘delivering repeatable and dependable income for shareholders’.

However, portfolio growth is another story and ‘will only return when the wider economic environment allows’. This should narrow discounts, but investors will need patience.

Bumper buybacks are underway in renewables and the investment trust industry more broadly, with the former using cash to pay down debt. Reducing the number of shareholders to pay out to means performance improves and thereby should increase demand for a smaller supply of shares.

This is sound in principle but MacLeod said ‘fundamental macro shifts’ will need to happen before shares can recover.

‘Firstly, a reduction in base rates will help and may encourage renewables companies to borrow to invest. If the companies in the sector are able to generate a positive return on the cost of debt, they may well return to the capital markets to seek new sources of finance,’ he said.

‘Secondly, if the inputs − the amount of wind and sunshine − are greater than the economic models that each strategy has forecast, then the NAV performance of these companies will improve and a growing NAV is a positive sign for investors; that in turn should drive demand for shares in these companies, which will positively impact share prices.’

Portfolio growth can also be achieved by a rotation of assets but MacLeod said the right price needs to be agreed.

‘A canny manager may identify elements in their portfolio and make alterations through sales and purchases, to reposition the overall shape of their portfolio,’ he said.

‘It isn’t a given that this approach works, particularly in an environment where there is little trading of assets.’

Catch 22

Large discounts have drawn out bargain hunters, with Harmony Energy Income (HEIT) being the most recent success having been taken private at par by Foresight. However, it appears to be an anomaly as other trusts fail to find a way out.

Most notable is the failed merger between InfraRed stablemates HICL Infrastructure (HICL) and Renewables Infrastructure Group (TRIG), which faced a shareholder revolt.

‘Takeovers are a gift for the beneficiaries but require a gap in the portfolio of the acquirer or the vision to spot an opportunity that has been missed by the market,’ said MacLeod.

‘Activity amongst the UK’s renewables companies may well come to pass but corporate activity is costly to both the acquirer and their shareholders and there has to be a clear path to a positive outcome. It seems likely this will come, but it is difficult to predict when.’

Renewables are in a ‘catch 22’ situation, where it is agreed that ‘bigger is better’ but none of the attempted mergers have worked out. The issue with the TRIG and HICL was it would reduce ‘optionality’ for investors, although MacLeod said mergers remain a ‘viable option’ for both trusts but ‘perhaps picking a better partner and more attention to the completed entity is what is required’.

‘If discounts persist, this may well become a reality in the not-too-distant future,’ he added.

RBC analyst Joseph Pepper said restructuring was ‘proving difficult’ in the renewable sector. He noted that funds therefore need to find ‘new routes to accretive growth’ such as becoming operational companies or consolidating.

This has been met with shareholder push back as per HICL and TRIG, but also the proposal by Bluefield Solar Income (BSIF) to become an independent power producer.

‘As a result, we think investment managers will remain very cautious regarding pursuing similar transactions in 2026, with take private acquisitions and/or individual asset sales the most likely M&A outcome,’ said Pepper.

‘While the M&A market for renewables remains illiquid, we think shareholder’s willingness to accept pricing below NAV has increased since disposal programmes first launched two years ago, particularly for take-private deals of entire funds such as the listing of BSIF.’

Government U-turn

The latest hit to the renewables sector is from the government, which cut the payouts it makes to renewable trusts via ROCs.

AIC chief executive Richard Stone said the decision to cut the subsidy ‘drives a coach and horses’ through the government’s commitment to deliver a ‘safe and predictable’ renewable investment environment.

‘Changing the terms of the scheme damages investor confidence in the British government as a business partner,’ he said.

‘It undermines the government’s ambitions to attract investment to make Britain a clean energy superpower. Over the long term, rather than reduce costs, households will face higher charges as investors lose faith and the cost of capital to fund future projects increases.’

MacLeod agreed the decision ‘chips away’ at confidence in UK’s regulatory stability but ‘does not necessarily undermine it’.

Instead, confirmation of the government’s plan has removed a layer of uncertainty for renewable energy companies, and led to a trust rally.

‘Markets had priced in the risk of a more punitive outcome, and the positive share price reaction reflected a sense of relative relief,’ he said.

‘The decision removes a major overhang for the sector and could also help unlock asset transactions, as buyers now have clearer visibility on the revenue framework at a time when many listed companies are looking to dispose of assets to strengthen balance sheets,’

Dividend dilemma

Investors are already dealing with share price falls and stalling portfolios, but there could be another problem on the horizon: dividends.

Pepper is expecting dividends to remain covered in 2026 thanks to power price hedging and inflation-linked subsidies supporting cash cover.

‘However, cover has declined materially versus energy crisis highs, and downside risk from power prices and budgeted generation leads to increased risk of uncovered dividends from full-year 2027, with high operational and financial leverage meaning cashflows are susceptible to volatility, particularly at lower return solar funds.’

By 2027 dividends could be uncovered and cuts could be seen as higher debt levels, coupled with below budget energy generation and further downside risk to power prices bite.

Gearing levels at core renewable funds has increased to an average of 45% of gross asset value as asset values have fallen more quickly than debt is repaid.

‘Several funds are now approaching investment gearing limits, limiting scope for buybacks, and further debt drawdown,’ said Pepper.

With a wave of concerns pushing against the sector, renewables have underperformed infrastructure peers by approximately 12% on a total share price returns basis in 2025.

Pepper expects positive returns to continue in infrastructure, and although he said renewables were ‘oversold at current levels, significant investor pushback to corporate activity last year and a slow M&A market limit potential self-help strategies for the sub-sector’.