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Renewable trust NAV declines are unnerving some investors

QuotedData’s James Carthew looks at how declining forecasts of long-term power prices are impacting renewable investment trusts

ESGClarity, 15 November 2021 / Opinion

Following a successful £210m new issue from Harmony Energy Income, there are now 20 companies in the AIC’s renewable energy sector and at least two more – Atrato Onsite Energy and ThomasLloyd Energy Impact – are looking to come to market.

The existing funds are raking in money too. For example, Greencoat UK Wind is looking to raise hundreds of millions to help fund acquisitions such as its recently announced deal to buy a £250m stake in the Burbo Bank offshore wind farm.

However, at the same time, shareholder returns in the sector have been looking a little anaemic. Many funds have lost money for investors over the past year.

The pace of fundraising is partly to blame for this, but in this article, I want to look at another issue that has unnerved some investors – falls in NAVs triggered by declining forecasts of long-term power prices.

The NAVs of these funds are calculated by discounting forecast cash flows. Much of the income of these funds is predictable with inflation-proof subsidies linked to the amount of energy generated. It is worth remembering that, in the UK, subsidies have not been available on new onshore wind and solar projects for some years. We like JLEN Environmental Assets because its diverse portfolio has a higher proportion of subsidy income relative to its peers, in part thanks to its exposure to anaerobic digestion plants.

Factors such as inflation, interest and corporation tax rates have an impact on NAVs too. The recent increase in UK corporation tax is one reason for recent NAV falls, for example.

The other major element of NAV estimates is forecast revenues from the sale of the power produced.

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