The Times UK writes, not long ago, clean energy funds were the darlings of the investment trust world.
Rock-bottom interest rates and a clamour for strategies that focused on ESG issues fueled a decade-long boom in funds backing wind, solar and battery storage assets.
Repost Doug Sheridan, LinkedIn
The Times UK writes, not long ago, clean energy funds were the darlings of the investment trust world.
Rock-bottom interest rates and a clamour for strategies that focused on ESG issues fueled a decade-long boom in funds backing wind, solar and battery storage assets. By 2020, the sector traded at an average premium of almost 20% compared with the value of underlying assets.
Greencoat UK Wind, the oldest and largest clean power investment trust, raised just over £1B in equity in 2020 and 2021, almost a third of its stock market value. Today, the GreenCoat trust trades at a discount of just over 10% compared with its net asset value (NAV). Clean energy funds overall are priced at an average discount of about double that amount.
There are questions not only over where interest rates need to settle for share prices to move back in line with net asset values, but also whether they will ever attain the valuations achieved without interest rates returning to sub-one-per-cent lows.
Meanwhile, London's nascent battery storage funds sector is labouring under questions about cashflow. Gresham House Energy Storage, Gore Street Capital's Energy Storage Fund and Harmony Energy Income Trust trade at anywhere between 45% and 55% below their net asset values.
Battery funds largely generate revenue by exploiting differences in wholesale power prices, buying energy when it is cheap and selling it back to the market when prices are higher. A large decline in energy prices is one factor that has set back battery funds.
Harmony, along with Gresham, has scrapped dividends for this year. "The lesson we've learnt has been that taking an asset class that has [an unpredictable] merchant revenue profile and trying to pledge a fixed level of dividend is not always deliverable," Max Slade, an adviser at Harmony Energy, said.
When interest rates were close to zero, investors mistakenly viewed renewables as a bond proxy, according to Alex O'Cinneide, the CEO of Gore Street Capital's investment committee. “It's not a proxy for a bond in that we are selling a service, we're selling electricity."
Our Take 1: The article seemingly suggests the "dumb money" days of funds investing in renewables based on the glib reasonings that come with easy money and naive plans to transition the world's energy sysyem to uber-expensive non-solutions are now a thing of the past. Let's hope so.🤞
Our Take 2: Boy, the huge discount that those battery funds are trading is eye-popping, no? Our guess is this kind of underperformance will prove rampant in many markets in the long-term, including the US. Expensive short-term capacity only has a chance of working when power prices are both high and volatile—and that's not a situation adminstrators or politicians can survive for long.