Our sector research focuses on 13 quoted REIFs, including the recently floated Octopus Renewables, which equates to those selected by members of the Association of Investment Companies (AIC). Since May 2014, REIF returns have been solid, with total returns approaching 10% p.a. As a group, their combined market capitalisation is now £8.7bn; the most valuable quoted funds are Greencoat UK Wind (£2.2bn) and TRIG (£2.2bn).
The sector premia over net asset valuations (NAVs) for most REIFs now lie in the 10%-17% range. The two most valuable REIFs, Greencoat UK Wind and TRIG, trade at premia of ca.15%. Targeted dividend increases underpin the attractions, especially of wind and solar generation investments; major earnings shortfalls are low-risk, thereby protecting quarterly dividend payments. Prospective dividend yields for most REIFs currently lie in the range of 4.5%-6.5%.
Despite the dependence on long-term Power Purchase Agreements (PPAs), lower power prices and output shortfalls would have a material downward impact on both NAVs and share price ratings; both are also sensitive to any discount rate adjustments. Any major regulatory or subsidy changes are also obvious risk factors.
Up to ca.60% of the REIF sector valuation is accounted for by wind power generation. On the back of subsidies, UK onshore wind power has prospered, and now exceeds 14GW, but the termination 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, with the lowest on the Dogger Bank, at just £39.65p (2012 prices) per MWh. This figure should be compared with the 2018 £100 per MWh Government target, as well as the £57.50p per MWh figure, which was the lowest winning bid in the similar 2017 auction.
Ca.30% of the REIF sector valuation is accounted for by solar power generation, which now exceeds 12GW in the UK. Most solar farms are based in the Midlands or in the South, where irradiation levels are higher. The removal of subsidies for new solar plants from 2017 has undoubtedly been challenging for the sector, but unit costs have fallen appreciably in recent years. The levelised cost of solar power should fall, in time, well below £50 per MWh.
Looking forward, delivering the desired returns from unsubsidised wind and solar plants will be challenging. Over time, unsubsidised renewable generation plants will form a rising proportion of the underlying portfolio valuation – and with the risk that earnings targets may be missed.
The largest renewable generation capacity in the UK is operated 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 ca.£9bn – and a renewables generation capacity of ca.4GW – over three times that of TRIG, the largest REIF.
In recent months, the now 13-strong REIF sector has been very active – the key developments are listed overleaf. Octopus Renewables is the latest entrant to the sector and may be followed by Lightspeed Solar, which has plans to invest in US solar plants. Others seem set to follow in coming months.
Exchange rates used: £ to € – 0.84, £ to US$ – 0.76.