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The cost of producing renewable energy has fallen substantially, and much faster than many people expected, with implications for overall power prices.ROY ISSA/AFP/Getty Images

Investment trusts focused on infrastructure, particularly those involved in renewable energy projects, have boomed this year in Britain as income-hungry investors and those wishing to back the energy transition have flocked to participate in record numbers of share issues.

There is little sign of this momentum losing pace. One energy efficiency trust, Atrato Onsite Energy, is in the process of launching, as well as another more generalist trust with renewable components.

“There is an awful lot of investment needed in the renewable sector and it will likely raise an awful lot more money yet,” says James Carthew, head of investment company research at research firm QuotedData in London.

Traditional renewable energy infrastructure trusts make money by owning renewable assets and producing and selling energy. Thatmeans the income the trusts earn will fluctuate according to how much energy they produce (which includes weather impacts) and power prices, although many trusts hedge against fluctuations in these prices.

Many also have income from British government subsidies, though these are being phased out as the cost of producing renewable energy has fallen.

The weighted average net yield of the renewable energy infrastructure sector was more than 5.2 per cent on Nov. 8, compared with an average of 4.6 per cent for traditional infrastructure or 3.5 per cent for global equity income funds, according to data from Winterflood Securities Ltd.

But David Merriam, investment manager at Tilney Smith & Williamson Ltd. in London, says investors might wish to tread carefully. The weighted average sector premium to net assets is almost 10 per cent.

“They are relatively expensive, reflecting demand for assets with favourable [environmental, social and governance] characteristics and a desperate need for reliable income,” he says, adding that if you pay a premium of 15 per cent or higher for a trust, you risk a substantial de-rating and capital loss that may even exceed the income generated, depending on the holding period.

Many renewables trusts have seen net asset value (NAV) growth in recent years because demand for green energy has driven down the discount rates used to value assets and trusts have extended the life of their assets. Mr. Merriam says that “there is limited scope for further pulling on these levers and thus net asset value growth may reasonably be expected to slow in future years.”

Renewable energy NAV is calculated according to long-term power price estimates, which could drive their value down, says Mick Gilligan, head of managed portfolio services at Killik and Co. in London. The cost of producing renewable energy has fallen substantially, and much faster than many people expected, with implications for overall power prices.

“If power prices decline materially, all else equal, this will result in lower asset values and lower share prices of renewable infrastructure funds,” he says.

Only three of the established renewable energy generating infrastructure trusts have a record of delivering their target total return rate every year since listing: The Renewables Infrastructure Group, Greencoat UK Wind and Bluefield Solar Income Fund, according to analysis by brokerage Numis.

Ryan Hughes, head of investment research at AJ Bell, recommends that those looking for infrastructure exposure opt for one of the more established players, such as The Renewables Infrastructure Group, as they tend to have a high proportion of operational assets which makes income more reliable.

Newer, more specialized renewable energy infrastructure trusts are also growing quickly and pay healthy yields. Gore Street Energy Storage and Gresham House Energy Storage are providing batteries to help balance the power grid and both currently yield over 5.5 per cent. Harmony Energy Income, which completed its initial public offering on Nov. 5, is the latest addition, with contracts lined up to use Tesla Inc.’s battery storage technology.

SDCL Energy Efficiency Income Trust, meanwhile, which had a yield of 4.8 per cent on Nov. 8, provides on-site solar energy generation for commercial and industrial buildings, according to Winterflood.

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