Aquila Energy Efficiency Trust (AEET/AEEE) announced its annual results for the year-end 31 December 2022. Company NAV was flat for the year however shares fell -23.5%. The principal contributor to the decrease in NAV was the payment of £2.25m in respect of two dividends in the six months ended 31 December 2022. These payments were not fully covered by earnings and were partly paid out of distributable reserves. The discount has closed slightly over the past few months but still sits at over 20%.
The results come soon after the company failed in its continuation vote which we wrote about here. Further information regarding this will be available following the company’s AGM in June.
Commenting on the share price, the manager noted that:
“The disappointing share price performance has yet to reflect the increasing level of commitments that has been achieved. The company’s share price has been at a significant discount to NAV since January last year with the discount widening with the impact of a higher interest rate environment.”
Regarding the outlook and wider investment environment, the manager continued:
“Electricity prices for industrial and residential customers across Europe have increased significantly since the Company’s IPO in June 2021. Given this strong upward pressure on energy prices, we have seen a noticeable increase in investment opportunities. From our discussions with ESCOs and other market participants, it is clear that higher power prices compared with those seen prior to the Russia /Ukraine conflict, notwithstanding power prices since retreating to pre-conflict levels are accelerating investments in energy efficiency projects, and the Company is well positioned to benefit from this increased demand for funding of such projects.
“Private sector financing has yet to play a more significant role in facilitating energy efficiency projects. Part of the reason is the impact potential of such projects with social implications and the return potential but the constraints to more capital allocation remain with market fragmentation, scalability and scarcity of dedicated players. Energy efficiency in the residential housing segment is one such area.
“There is significant scope for the deployment of private capital in the emerging energy efficiency space. The need is to develop innovative financing models to help adoption. There has been a rise in funding activity in the overall Climate and Sustainability space, with about $37 billion1 in dry powder understood to be available for deployment as of March 2023. Of the various investment subsectors, an important one is the buildings sector. A combination of distributed energy resources (such as solar) and energy efficiency (space heating/cooling) systems present an effective means of mitigating emissions in the buildings sector. The investment upside is significant for the near-untapped potential in most of the markets.
“As of November 2022, the energy efficiency sector had seen investment in 280 deals backed by private equity and venture capital worth $31.79 billion. Comparatively, the total transaction volume for 2021 stood at $16.36 billion across 307 transactions involving companies in the energy efficiency, energy management, innovative energy, and carbon emission sectors. Investments in this field defied the general downward trend of private equity and venture capital deployment in 2022, reflecting nations and companies racing to meet carbon emission reduction targets through sustainable energy management strategies. As VC and PE capital continues to flow into the sector, it is critical to support this with dedicated lending solutions for asset and working capital finance as banks often face internal organisational issues that limit their capacity to follow the market or increase the costs of energy efficiency funding. These issues include the availability of resources, the need to build capacity among loan officers and develop innovative solutions for energy efficiency financing.
“The emergence of dedicated energy efficiency funds in recent years has been notable, but their number and with that competition for projects remains small compared to the market size. This allows them to access a complexity premium for their capital deployed and they also play a significant role in certain markets due to their in-depth understanding of energy efficiency risk characteristics.
“While several funds have also reported initial difficulties in deploying their capital, many have crossed this hurdle and have now established proven models to successfully deploy capital across and expanding the range of energy efficiency sectors such as building retrofit, Building Management System improvements, heating as a service, and storage, among others. These funds are in fact specialised financial players with a strong knowledge of the market, creating a reliable source of capital for such projects and support the development of dedicated service providers.
“In the larger global context, the European region’s funding commitments towards energy would need to rise by a significant margin. A recent and notable example for comparison comes from the US legislation, the Inflation Reduction Act (“IRA”). The latter has been in focus for its generous incentives to attract projects. Under the Recovery and Resilience Facility (“RRF”), the European funding devotes a proportionate amount towards energy efficiency projects. In absolute terms, though, there is a stark difference. The US IRA allocates about $96 billion in energy efficiency, which is 33% higher than the $73 billion allocated by the EU RRF.”
AEET/AEEE : Aquila Energy Efficiency Trust closes out tough year
After the failed continuation vote it always seemed a stretch for AEET to do a merger/transaction with another trust. The two likely candidates were SEIT and TENT. SEIT has seen it’s own share price drop to a sizeable discount and TENT it trading on what is now a massive discount because imho the credit quality of it’s loans is poor and too concentrated.
Whilst one cannot argue that AEET took too long to deploy their capital (which by luck or design meant they didn’t invest at the top of the market), it is now fully invested and I am not sure what a managed wind down achieves compares with carrying on. Sure, certain big investors get their capital back and that may be a desire given their decreasing AUM, but it seems a sad end to a Trust which was helping in assisting with global warming. I would like to hope the investors might be named who have decided they no longer want to support AEET and would prefer their money back.