Investment trust insider on renewables – James Carthew: Navigating the NAV declines in renewables
If you follow the renewable energy sector, you will have noticed the reductions in net asset values (NAVs) that have been prevalent over the last few quarters. Last week JLEN Environmental Assets (JLEN) and GCP Infrastructure (GCP), which has around 60% of its portfolio exposed to renewable energy, announced NAV falls over the year ended 31 March 2021 of 5.4% and 8.2% respectively.
The simplest of the renewable energy funds – Greencoat UK Wind (UKW) is a good example – have portfolios of investments in UK solar and wind. In the UK the revenues from these assets are a mix of power sales and government subsidies.
The government subsidies are fixed and therefore predictable and inflation-linked. The profits from power sales depend on the amount of power produced, which is relatively predictable within reasonable bounds, and the price achieved, which by contrast has fluctuated wildly for some time.
To work out an NAV for these funds, you could just try to come up with a price for the individual projects in the secondary market. Transactions do happen but the market is not deep and liquid and so this is not an approach that is used in the sector. Instead, NAVs are calculated by discounting forecast cash flows over the life of the projects. The same approach is used to value infrastructure projects and property portfolios.
Changes in power prices have a direct impact on NAVs, therefore, as do other factors such as corporation tax rates and inflation.
Some of the factors that go into the NAV calculation are more subjective than others. Power price forecasts come from…
read more here