Renewable infrastructure trusts on the road to ruin?

Investors in renewable infrastructure trusts have had a dismal few months. Share prices have kept falling, pushing up discounts to net asset value (NAV) and dividend yields from tempting to alarming.

The £2.2 billion Renewables Infrastructure Group (LSE: TRIG) now trades on a 26% discount and yields 8.3%, the £2.9 billion Greencoat UK Wind (LSE: UKW) trades on a 21% discount and yields 8.7% and the £580 million Bluefield Solar (LSE: BSIF) trades on a 24% discount and yields 9.2%. Elsewhere, some discounts are over 30% and some yields in double digits.

Explanations for this have followed rather than led the share prices. In September, David Bird, manager of Octopus Renewables Infrastructure Trust, warned of the increasing prevalence of negative power prices across Europe as a result of the roll-out of wind and solar capacity. He expected negative prices to reach 10% of hours by 2030 and 20% by 2050. Octopus is protected by long-term power purchase agreements (PPAs), he said, but the difference between the price at which renewable generators sell electricity and the baseload price is expected to widen.

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The latest forecasts for power prices from Bloomberg New Energy Finance (BNEF) are 45% below the average forecasts of the renewables sector for wind and 61% for solar. BNEF expects baseload electricity prices to fall by 3.5% per annum in real terms up till 2050. This assumes the UK misses its target for net zero, but BNEF also publishes a forecast of annual falls of 1.6% in real terms in a net-zero scenario.

Wholesale power prices are set to fall

The UK government’s ambitious plan to significantly increase renewable power generation is based on the assumption that the wholesale price of gas will increase steadily until 2035, then flatten out. However, the International Energy Agency (IEA) expects fossil fuels to become cheaper and more abundant as consumption peaks and falls. In particular, the IEA expects liquefied natural gas (LNG) capacity to increase by 50% by 2030, which would make BNEF’s new forecasts highly plausible.

What’s more, the continued expansion of renewable energy will result in a glut of output when it is needed least (and hence negative power prices) and shortages when the wind isn’t blowing and the sun isn’t shining. Back-up generation by gas plants will still be expensive, since high fixed costs and overheads will have to be paid for, but while wholesale power prices are likely to be volatile in the short term, the overall trend will be downwards.

This volatility actually helps the battery-storage companies, who buy electricity when it is abundant to release when it is scarce, but battery lives are still too short to reconcile intermittent power generation with fluctuating demand.

The renewables gravy train could come to a grinding halt

Thus the renewables sector in the UK and Europe will increasingly rely on subsidies, even without the new capacity of which governments dream. With new capacity, the cost will be ruinous. The UK wants most of this investment to be financed by the private sector, but it would be insane for investors to rely on a growing rip-off for consumers and taxpayers. Generators such as Octopus may think they are protected by PPAs, but the market senses that this is unsustainable. Sooner or later, the gravy train could come to a grinding halt.

For the renewables trusts, “there is still downside risk that could negatively affect future net asset values”, as Christopher Brown at JPMorgan Cazenove says. A better alternative is Ecofin Global Utilities & Infrastructure Trust (LSE: EGL), of which I am a non-executive director. By investing globally in listed electricity generators, grids and other utilities, its shares have returned 21% in the last year against a weighted average of -8% for the renewables sector. It currently trades on a 12% discount to NAV and yields 4.2%.

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