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Hardman & Co November Investor Forum – Registration open now

UK Renewable Energy Infrastructure Funds

18 Jul 2019 / Corporate research

We share with you our first insight into UK’s top renewable generation funds. For many investors, REIFs offer an attractive means of securing exposure to the benefits of rising UK investment in renewable energy sectors, much of which is backed by long-term contracts delivering generally solid and secure returns.

Following an industry-wide consultation and the Association of Investment Companies’ (AIC) reclassification of sectors in May, we have applied our analyst’s 30+ years of sectoral expertise to tease out the investment-critical characteristics of these funds. We believe this market requires specialist sector knowledge and expertise, which we are able to deliver.

  • Over the past two decades, onshore wind power has prospered and now exceeds 12 GW in the UK. The termination of subsidies for new plants from 2017 onwards has cut investment. Instead, offshore wind power is the new ‘go-to’ investment sector, as there has been a sea-change in costs.
  • The key event was the 2017 auction for the development of the Hornsea Project Two and the Moray East fields, when 15-year contract for differences (CfDs) were awarded, at just £57.50p per MWh; this compares with the 2018 £100 per MWh target that had been set previously by the Government.
  • In recent years, solar power has come of age. Total UK solar capacity now exceeds 12 GW. Inevitably, most solar farms are based in the Midlands or in the South, where irradiation levels exceed the UK average. A typical solar farm portfolio might include 50 sites with 8 MW of capacity per site.
  • Despite the removal of subsidies for new solar plants, the prospects remain bright for new build, since costs have fallen appreciably in recent years. The levelised cost (LCOE) of solar power should fall below £70 per MWh. The UK’s first subsidy-free solar farm has been commissioned at Clay Hill in Milton Keynes.
  • For many investors, REIFs offer an attractive means of securing exposure to the benefits of rising UK investment in these sectors, much of which is backed by long-term contracts delivering generally solid and secure returns.
  • Our sector research focuses on 11 quoted REIFs, which mirror those selected by members of the Association of Investment Companies (AIC). The recently floated Aquila European Renewables Income Fund is included, despite its declared policy not to invest in UK generation.
  • Since May 2014, REIF returns have been solid, with total returns approaching 10% per year. As a group, their combined market capitalisation is ca.£7bn; the most valuable quoted funds are Greencoat UK Wind (£2.1bn) and The Renewables Infrastructure Group (£1.8bn).
  • The sector premia over net asset valuations (NAVs) for most REIFs now lie in the 9%-19% range. The premium for Greencoat UK Wind, following its £375m gross fundraise, is ca.14%; The Renewables Infrastructure Group premium is similar.
  • Targeted real dividend increases underpin the attractions, in particular, of wind and solar investments; major earnings shortfalls are low-risk, with little likelihood of a dividend cut. Prospective dividend yields for most REIFs currently lie in the range of 5.0%-6.0%.
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