Renewable energy trusts were already struggling before the government decided to kneecap them at the end of October. In a major shock, it has launched a consultation on changing the inflation linkage on the subsidies they receive from the retail price index (RPI) to the consumer price index (CPI) in April 2026, three years sooner than expected.
Even worse, the government has floated a second, complex option that would backdate the switch to 2002. This may have been thrown in mainly to make a April 2026 change sound like a concession, but if actually implemented could reduce the income received by generators by billions of pounds over the coming years. The market reacted accordingly and the sector as a whole lost about 5% of its market value on the day.
Why is the renewable energy trusts industry struggling?
The proposals have created yet another cloud of uncertainty over a sector that was already unloved by investors. The industry has been caught in a “perfect storm” and is ill-equipped to deal with its current challenges, says Pietro Nicholls of RM Funds, an activist that has been battling battery-storage fund Gore Street Energy Storage Fund (LSE: GSF). Many of the trusts’ boards lack the experience required to address these problems, he argues. So instead, they’ve turned to easy ideas such as share buybacks.
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Part of the problem is uncertainty over reported net asset values (NAVs). “An infrastructure or renewable investment trust NAV calculation is generally based on a number of different asset-specific (eg, output, power prices or project cash flows) and macro (eg, inflation or foreign exchange rate) assumptions, with individual trusts using different inputs to calculate the NAV value,” says Ashley Thomas of broker Winterflood. For example, if Greencoat UK Wind (LSE: UKW) were to use the same power price assumptions as Renewables Infrastructure Group (LSE: TRIG), its NAV would be lower than currently reported, estimates Winterflood. Since these are just assumptions, it is hard to say which numbers are more appropriate, but with so many variables, NAVs are undoubtedly highly subjective and volatile. Across the sector over the past 18 months, NAV changes have ranged from +8% to -7%, says Winterflood.
Feuding with renewable energy trust managers
It is regrettable that many managers were paid fees based on a percentage of NAV rather than performance. This became increasingly controversial once shares traded far below NAV. In the past year, many trusts have belatedly shifted to levying fees on a 50/50 mix of NAV and market value (or in UKW’s case, entirely on market value). Dealings with managers are becoming a common point of contention. Take Aquila European Renewables (LSE: AERI), which has agreed to sell assets to another fund advised by Aquila at a large discount to the current NAV, says Nicholls. How can the same manager assign two different values to the same assets? Or take a plan by Bluefield Solar Income Fund (LSE: BSIF) to merge with its manager, saying this would make to easier to invest in new projects. The trust has instead put itself up for sale after a backlash. Or just this week, TRIG has said it will merge with HICL Infrastructure (LSE: HICL), run by the same manager.
These developments show a lack of concern for investors, says Nicholls, which is clouding the real value of the assets. “If boards were more respectful of shareholders, the share prices would be a lot higher.”
It isn’t clear what it will take to shift sentiment towards the sector. The government’s consultation certainly won’t help. Still, there needs to be a substantial change in the way these trusts are run, with a primary focus on the interests of shareholders. Only then can investors begin to trust NAVs are what managers say they are.
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