While the government seeks to accelerate Britain’s drive to “net zero” through the increased adoption of renewable energy, the private sector is going in the opposite direction. Since the middle of 2023, The Renewables Infrastructure Group (TRIG) has sold £210m of assets at an average premium to book value of 11%.
Admittedly, most of these assets were in Ireland and Germany but it is notable that the proceeds are not being reinvested in the UK but used to reduce borrowings and initiate a £50m share buyback programme. With TRIG’s shares trading at a 21% discount to net asset value (NAV), this makes sense.
Greencoat UK Wind, trading at a 9% discount, is also prioritising buybacks over investment. It launched a £100m buyback programme last autumn and expects to have £1bn of surplus cash flow in the next five years, based on its current power price forecasts. With borrowings of £2.3bn, it is likely to focus on debt reduction over buybacks.
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Foresight Solar, whose shares trade at a discount of 23%, is also buying back shares, though with borrowings equivalent to 65% of net assets, debt reduction is the priority. It has stopped making new investments and announced a disposal programme. Bluefield Solar, trading on a 19% discount, has also been selling assets to reduce debt and finance new projects.
With combined assets of more than £10bn, these are not small companies. The story in the rest of the sector is the same – shares trade at significant discounts to NAV, making the raising of new capital impossible. Share buybacks and the reduction of debt are a priority, as are asset sales to speed the strategy along.
Is the renewable energy push destined to fail?
No wonder the UK Offshore Wind auction last September failed, securing no bids at all – the previous government set an ambitious price cap of £44 per megawatt-hour (MWh). This was similar to the price set in the previous auction but, since then, inflation has increased costs significantly. Industry experts estimated a price of £60 per MWh would be necessary for any bid to be viable, and the government responded with an increase in the maximum price at the next auction to £73.
That, though, is above the current wholesale price of electricity and takes no account of the cost of the intermittency of renewable generation. If the new government conducted an auction on this basis the cost of electricity would rise, yet the Labour Party is committed to “cutting household energy bills by up to £1,400 a year and saving businesses £53bn by 2030”. So where will “the clean and cheap power” it has promised come from?
Not from onshore wind generation – the turbines are too small and onshore arrays lack the huge scale of offshore. The new National Wealth Fund and GB Energy, funded with borrowed money, are supposed to “unlock critical investment in key UK infrastructure” by “co-investing with the private sector in larger projects such as onshore wind and solar farms”. Presumably, the government is looking to the big pension funds for this investment but they are unlikely to find economies the listed funds can’t. And a liberal sprinkling of honours is unlikely to tempt them into investments with low returns.
Are the risks of renewables worth the reward?
Even if the additional investment was forthcoming, whether from the private sector or the new public bodies, the result would be a glut of electricity when weather conditions were favourable – and hence very low prices – while shortages and very high prices would persist at other times.
This would undermine existing providers of renewable energy, added to which the government’s wary tolerance of the private sector, while it is hoping for investment, could be replaced by hostility if, as is likely, investment is not forthcoming.
On attractive discounts to NAV and with dividend yields above 7%, the investment funds specialising in renewables in the UK are superficially attractive, especially now they are focused on efficient operation, cash generation and enhancing shareholder value rather than expansion. Still, the political risks are significant, so investors should hold off.
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