By Val Cipriani, Investors’ Chronicle, October 19, 2022:
While equities and bonds have taken a battering, infrastructure has become an increasingly popular asset class in the past year, with a reputation for helping investors’ fortunes while traditional strategies were busy plummeting.
Renewable energy in particular looked attractive in an environment where energy can be sold at gas-linked prices, while production costs have remained relatively stable by comparison…
Fast forward a month and the picture is strikingly different…
The revenue cap
On 12 October a “cost-plus revenue limit” was proposed for low-carbon electricity generators by the government as part of its Energy Prices Bill. The limit is meant to “ensure electricity generators are not unduly profiting from the energy crisis caused in part by Russia’s invasion of Ukraine” and enable them to “move onto fixed prices”.
Although the limit is due to come into force at the beginning of 2023, how it will work, to whom it will apply, and the level at which it will be set are all unknowns…
When news of the cap first hit the papers, a level of £50-£60 per megawatt-hour (MWh) was initially floated, much lower than the €180 (£156) per MWh set by the EU. The markets seemed to price it in and sent share prices tumbling. This now appears to be the starting level in the negotiations, rather than the expected outcome.
Depending on its final level, the cap could end up having zero impact on trusts’ net asset value (NAV), or becoming a fairly serious problem…
Impact on trusts
Irrespective of the level at which the price is ultimately set, it will impact trusts in different ways depending on their geography, asset mix, exposure to market pricing and price projections…
James Carthew, head of investment company research at QuotedData, notes that the battery storage funds are not going to be directly affected by the cap, and that JLEN Environmental Assets (JLEN) will be much less impacted thanks to the diversification of its income sources.
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