In this publication, Hardman & Co’s focus is on the 17 quoted Renewable Energy Infrastructure Funds (REIFs), as we update our publication of February 2020 – the stocks analysed are members of the Association of Investment Companies (AIC). As a group, their combined market capitalisation is now ca.£10.6bn. The most valuable quoted funds are Greencoat UK Wind (£2.5bn) and TRIG (£2.4bn). Comparisons with the seven Infrastructure Investment Companies – a sector worth ca.£12.8bn – are also undertaken.
All 17 REIFs and, for the most part, the Infrastructure Investment Companies, have weathered COVID-19 with relatively minor dislocation. Unlike many FTSE-100 bank, oil and leisure stocks, there have been few dividend cuts. But dividend cover in some cases, such as that of NextEnergy Solar, TRIG and JLEN, is tight – a feature that also applies to HICL, the leading quoted Infrastructure Investment Company.
Lower power prices, due partly to the economic impact of COVID-19, have depressed valuations – TRIG took a £123.1m hit in 1H’20. While payments for both long-term Power Purchase Agreements (PPAs) and Renewable Obligations (ROs) have offered real protection, weak power prices will continue to drag down Net Asset Valuations (NAVs) and share price ratings; both are also sensitive to any upward discount rate adjustments.
Up to 60% of the REIF sector’s valuation is accounted for by wind power generation. On the back of subsidies, UK onshore wind power has prospered, and now exceeds 14GW of capacity. But the end of subsidies for new onshore wind plants from 2017 onwards has cut investment, especially in England and Wales.
Offshore wind power is the new “go-to” investment sector, given the sea change in costs. The pivotal 2019 auction for the development of some North Sea sites saw several Contracts for Difference (CfDs) being awarded. The lowest, on the Dogger Bank, was struck at just £39.65p (2012 prices) per MWh. This figure should be compared with both the 2018 £100 per MWh Government offshore wind cost target and the £92.50 (2012 prices) per MWh price guarantee for the new nuclear plant at Hinkley Point C.
Up to 25% of the REIF sector valuation is accounted for by solar power generation, which now exceeds 14GW in the UK. Most solar farms are based in the Midlands or further South, where irradiation levels are higher. The removal of subsidies for new solar plants from 2017 is challenging, but unit costs have plummeted. The levelised cost of solar power should eventually fall to well below £50 per MWh.
The underlying sector premia over NAVs for most REIFs now average ca.8%; the two largest REIFs, Greencoat UK Wind and TRIG, currently trade at premia of 3.9% and 7.5%, respectively: both have major share issuance programmes under way currently. This range is comparable with most of the seven Infrastructure Investment Companies, although BBGI – at a formidable near 22% premium to its NAV – is a notable outlier.
Despite more challenging times, targeted dividend increases underpin the attractions of these stocks. While major earnings shortfalls, especially among the wind and solar generators, are low-risk, TRIG and NextEnergy Solar have both confirmed that their projected dividends for 2021 will be held at the 2020 level. Underlying prospective dividend yields for most REIFs are currently just under 6%; the equivalent figure for the seven Infrastructure Investment Companies is ca.5%.
The largest renewable generation capacity in the UK is owned by FTSE-100 stock SSE, which was privatised in 1991. Its portfolio now increasingly focuses on energy networks – with a Regulatory Asset Value (RAV) of £9.1bn – and on renewable generation – it has a capacity of ca.4GW – over twice that of TRIG.
During the last six months, four funds have launched IPOs: Triple Point Energy Efficiency, Downing Renewables and Infrastructure, Ecofin US Renewables Infrastructure and Victory Hill GSEO. Furthermore, many successful – and oversubscribed – secondary fund raises have taken place.
BBGI, one of 23 Investment Companies/Funds analysed in this report, is a client of Hardman & Co Research. Our Research Principles can be found here.