Renewable energy accounted for just 25% of US installed electricity-generating capacity in 2018, well behind the UK and Europe, and 43% of that was from long-established hydroelectricity schemes. About 22% of US capacity still came from coal-fired generation, which has all but disappeared in most of Europe. Yet renewable energy is expected to account for 53% of US capacity by 2040, of which just 14% will be hydroelectric.
This offers a major opportunity for the two specialist funds recently listed in London. The US Solar Fund (LSE: USF) raised $200m in April 2019 and the Ecofin US Renewable Infrastructure Trust (LSE: RNEW) raised $125m last December. The former is fully invested and, at $1.04, trades at an 8% premium to net asset value (NAV). The latter has only invested $61m in the seed portfolio and, at $1.02, trades at a 4% premium. Both promise a 5.5-cent dividend when fully invested, which means this year for USF.
Texas goes green
Jerry Polacek, RNEW’s manager, points to “tremendous growth in the last four years, encouraged by states setting minimum generation requirements. This does not just apply to progressive states such as California but also, Polacek says, to Texas, a conservative state that is rich in oil and gas but also “has a fantastic wind resource, is great for solar and has a liberal regime for granting the necessary permits.”
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With his ambitious climate agenda, Joe Biden hopes to accelerate the trend to renewables but renewable energy is already “an economically compelling source of power”, especially relative to coal, as a result of huge cost reductions. Still, the commitment to switch federal agencies to clean-energy and electric vehicles and the granting of offshore wind licences by the federal government will be a help. US solar capacity, just one gigawatt (GW) at the end of 2009, increased by 13.3GW during 2019 to 76GW, helped by a 77% fall in costs in ten years. Investment of $175bn over the next ten years is expected, despite the reduction of investment tax-credits.
Wind capacity reached 107GW in 2019 and a further $255bn of investment is expected by 2050 despite a similar reduction of tax credits. The diameter of rotor blades has increased by 245% since 1999 and by 62% since 2009, reducing construction, maintenance and replacement costs while multiplying capacity. A doubling of the radius of rotor blades increases capacity eightfold. The US power market is 13 times larger than the UK’s and 30% larger than the EU’s – but solar penetration is 40% lower than in Europe and wind penetration around 40%-60% lower. Yet solar irradiation in the US is, on average, 2.7 times that in the UK while the US’s larger land mass provides more and cheaper sites. Polacek expects bifacial solar panels to further increase output capacity.
High targeted returns
RNEW, with the broader investment remit, targets investment returns of 7.5% from contracts ranging from ten years to over 25. The seed portfolio comprised 57 solar assets across three states with revenue contracted for an average of 18.7 years. It is “evaluating over 128 deals totalling $4.6bn of potential investment over the next 12 months”. USF’s portfolio comprises 41 assets with 443MW of capacity, 99% of which is in three states, and revenue is contracted for an average 15.4 years.
What are the risks? Dollar weakness would lower returns to UK investors. While the contracts are long term, the pricing terms are not clear and not necessarily fixed. Lower electricity prices would reduce returns but would probably be the result of lower costs or higher efficiency. Higher costs or bad weather could also reduce returns. Overall, the returns relative to the risk look attractive for both funds. They are likely to be a multiple of their current size in a decade.
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