At the weekend it was reported that the UK government is drawing up plans for a temporary cap on the revenues of renewable energy generators.
The Association of Investment Companies (AIC) has gathered views from investment company managers in the Renewable Energy Infrastructure sector on the proposed energy price cap, the impact of the mini-budget, how renewable energy can help solve the UK’s energy crisis and the outlook for the sector.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Since the launch of Greencoat UK Wind in March 2013, Renewable Energy Infrastructure has grown to be our third largest sector, with 22 companies managing £18 billion of assets. It’s been a success story which has helped fund the transition to green energy.
“Renewable energy investment companies have a vital role to help plug the energy gap created by the war in Ukraine and to ensure the UK reaches its 2050 net zero target. Any measures taken by the government must ensure the renewable energy sector continues to attract investment, rather than stifling growth.”
How will the energy price cap impact the renewable energy sector?
Tom Hovanessian, Director of Sustainable Development Capital, investment manager of SDCL Energy Efficiency Income Trust, said: “As energy price caps continue to emerge in various forms across multiple jurisdictions, there has been a growing perception that the policy initiative represents more of an anaesthetic than a solution to the energy crisis currently facing governments, businesses and individuals. Unlike renewable energy, price caps don’t on their own address the root cause of the problems the energy market is facing and do not incentivise energy savings or encourage support for fossil fuel replacements.
“Inserting price caps, in isolation, does nothing to help reduce the demand for energy, or to reduce the 67% in losses associated with distributing energy to end users. Renewable energy, in particular energy efficiency solutions, are first and foremost the medium to long-term solution to energy market instability and governments should be building policy solutions that incentivise further productivity, growth and investment into these areas.”
James Armstrong, Managing Partner of Bluefield Partners, investment adviser of Bluefield Solar Income Fund, said: “The energy price cap is between the government and consumers. Where the renewable industry can help is that the further rapid deployment of solar and wind, the cheapest forms of energy available, can help bring down the cost of energy, and in doing so, lessen the cost burden on the government which is underwriting the price cap.”
Chris Tanner, Partner of Foresight Group, Co-Lead Manager of JLEN Environmental Assets Group, said: “It could arguably be asserted that the current energy crisis facing businesses and households across the country has been exacerbated precisely because we have not yet invested enough in renewable energy generation in the UK. We have made excellent progress so far and are leading the way in offshore wind energy installation, but there is still a long way to go. Momentum must continue to build and knee-jerk reactions offering a quick fix should be avoided – we must continue to move away from carbon-intensive fossil fuels and instead prioritise clean, renewable energy production and distribution.”
Alex O’Cinneide, CEO of Gore Street Capital, Investment Manager of Gore Street Energy Storage Fund, said: “Although the effects of the price cap may manifest differently across the renewable energy sector more broadly, we do not envisage a material effect on current revenues received by energy storage assets. This is mainly due to a battery’s ability to stack revenues across multiple streams, including grid balancing and trading revenues.
“By optimising batteries across different streams, they can opportunistically benefit from volatile energy prices through trading or high grid balancing services’ prices resulting from generation intermittency, all of which help insulate overall revenue from a downward trend of one source of revenue. An energy price cap could impact price volatility and trading opportunities, but today our portfolio is primarily focused on services to stabilise the grid.”
What impact will the mini-budget and the consequent rise of bond yields have on renewable energy investment companies?
Tom Hovanessian, Director of Sustainable Development Capital, investment manager of SDCL Energy Efficiency Income Trust, said: “Investors in renewables have been balancing the potential valuation tailwinds of higher inflation and energy prices against the headwinds of increased interest/discount rates.
“Publicly listed share prices relative to NAV generally moved from premium to discount territory off the back of the recent UK government initiatives (and rising bond yields), partly driven by a ‘buyers’ strike’ as risk aversion dominated investor sentiment.”
James Armstrong, Managing Partner of Bluefield Partners, investment adviser of Bluefield Solar Income Fund, said: “Rising bond yields impact all infrastructure and renewable energy investment companies are caught up in this as rising gilt yields should mean that discount rates rise also impacting valuations. However, for renewable energy companies in the UK there are a number of counterweights to rising discount rates, such as higher power prices and lower taxes that can offset rising discount rates. One input, such as discount rates, shouldn’t be taken in isolation.”
How can renewable energy help solve the UK’s energy crisis?
Chris Tanner, Partner of Foresight Group, Co-Lead Manager of JLEN Environmental Assets Group, said: “A robust infrastructure for domestic renewable energy generation is a key pillar of the UK’s energy security strategy. Having a ‘home-grown’ source of green energy not only reduces the carbon footprint of the entire country, but it also reduces the UK’s overall reliance on foreign energy sources and lessens our vulnerability to geopolitical upheaval of the kind we are currently witnessing.”
Michael Bonte-Friedheim, CEO and Founder of NextEnergy Group, investment adviser to NextEnergy Solar Fund, said: “Enough solar energy hits the Earth in a single hour to power the energy needs of the entire human population for a year, demonstrating that it is an abundant energy source. Solar is also the cheapest form of renewable energy generation and the quickest to construct, therefore placing it in a strong position to rapidly tackle high power prices and energy security globally in a timely fashion.
“By increasing solar generation capacity in the UK, and renewable energy generally, the country will reduce the purchasing of hydrocarbons from abroad and increase its energy independence. Solar generation also contributes to replacing generation from carbon-emitting power plants. The UK government has pledged to increase solar capacity from 14GW to 70GW by 2035, and in a time of energy price uncertainty, solar is going to have one of the biggest and quickest impacts on reaching government goals across both the UK and EU.”
Alex O’Cinneide, CEO of Gore Street Capital, investment manager of Gore Street Energy Storage Fund, said: “Over the last year, we have seen energy prices soar. This has been caused by the rapid increase in energy demand as economies re-opened following Covid-19 lockdowns and exacerbated by the current geopolitical situation in Europe.
“The average price of renewable generation in the UK is now below that of a conventional generator and not subject in the same way to the volatile movements in price that we are seeing. With an energy mix comprising a more significant proportion of renewable energy, we will likely see more consistent pricing and greater energy security.
“However, the inherent intermittency of renewables requires additional flexibility, which until recently has been provided by conventional generation. Renewables cannot produce this flexibility independently, so energy storage systems, such as the utility-scale battery assets operated by our fund, are needed.”
What is your outlook for renewable energy investment companies?
James Armstrong, Managing Partner of Bluefield Partners, investment adviser of Bluefield Solar Income Fund, said: “With sensible government policy, and sensible management of the economy, the outlook for renewable energy should be incredibly positive. Which rational government wouldn’t look to the cheapest, cleanest, most secure and easily deployable options, namely solar and wind, as a central part of their energy policy?”
Alex O’Cinneide, CEO of Gore Street Capital, investment manager of Gore Street Energy Storage Fund, said: “Despite the current volatility in financial markets, the fundamental growth drivers for many renewable energy investment companies remain strong. There is a clear shift toward low-carbon energy generation, and flexible assets are required to enable renewable generation growth. Here in the UK, the government has committed to achieving carbon neutrality by 2050. This mandate provides a tailwind for the deployment of battery energy storage systems and has led to rapid growth within the sector.”
Tom Hovanessian, Director of Sustainable Development Capital, investment manager of SDCL Energy Efficiency Income Trust, said: “Renewable energy remains a key part of the solution not just to the impact of greenhouse gas emissions, but to the energy crisis we are currently facing. Investment companies focused on the sector remain well-positioned to benefit from the value that these solutions will bring, both today and over the long term. Looking at current prices across publicly traded renewable energy investment companies, there may be some attractive buying opportunities.”
Michael Bonte-Friedheim, CEO and Founder of NextEnergy Group, investment adviser to NextEnergy Solar Fund, said: “Investment companies are highly attractive vehicles to hold and grow a renewable asset portfolio, providing investors with the opportunity to fund the expansion of renewable energy in the UK and offering attractive dividends to shareholders. The global solar sector is estimated to grow to 8,000GW by 2050, up from 800GW in 2019. Renewable electricity growth is accelerating faster than ever, which is increasingly powered by clean energy, including solar. This is driven by stronger support from government policies and more ambitious clean energy goals which are set to continue in the coming years.”
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Notes to editors
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s vision is for closed-ended investment companies to be considered by every investor. The AIC has 357 members and the industry has total assets of approximately £269 billion.
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