New legislation on green energy from the new Conservative government looks set to curb the meteoric rise of the renewable infrastructure investment trust sector.
The market, which comprises trusts that buy up mainly solar and wind power projects on private finance initiative contracts, has been one of the fastest-growing sectors in the closed-ended industry in recent years.
But investment trust brokers have warned the unexpected Tory majority government could throw up some obstacles, particularly for trusts investing in onshore wind farms.
The Conservative party manifesto stated it wanted to abolish subsidies for onshore wind farms and would also allow local communities to have the final say on whether projects could go ahead.
While the brokers said existing contracts signed by the companies managing the renewable trusts were unlikely to be changed retrospectively, growth in the sector was likely to be hurt by new regulations.
In 2014, the sector raised £789m through a combination of new launches and existing trusts securing money to invest in more assets.
The sector is highly popular due to the trusts’ high dividends, which are designed to rise in line with inflation.
Winterflood Securities analyst Kieran Drake said while existing investments were likely to be unscathed, new trusts and new investments could face headwinds.
He said: “A reduction in subsidy may reduce the return available for new investments and make reinvesting surplus cash less attractive.”
Stephen Peters, head of investment trust research at Charles Stanley, said while the new government “won’t be catastrophic for the sector”, he thought “the growth potential for the sector is limited”.
“The government has taken steps recently to reduce subsidies for onshore wind and solar [projects], and that will continue as production costs fall,” he said.
Mr Peters also pointed out the trusts were likely to be affected when the UK finally increases its base interest rate, because the hunt for yield had been the main driver of growth in the sector.
Iain Scouller, managing director of investment funds research at Stifel, said the Conservatives’ plans to end subsidies for onshore wind farms “may have implications for Greencoat UK Wind’s future investments”.
However, he added: “It may also mean existing onshore wind projects see some scarcity value and this could be helpful for valuations.”
In spite of the fears about the future of renewable subsidies, Mr Drake said “the Conservatives have still pledged to raise the amount of energy produced from renewable sources to 15 per cent by 2020”.
And in a move that was welcomed by environmental groups, former climate change minister Amber Rudd was appointed Secretary of State for Energy and Climate Change in the new Tory cabinet, suggesting the government may not entirely abandon the green agenda.
A rising interest rate poses a greater threat to renewables
Charles Stanley’s Stephen Peters has argued a greater threat to the renewable infrastructure trust sector is the eventual rise in the UK base interest rate.
The success of the trusts in the years since the financial crisis has largely been attributed to the fact the products are a source of consistent income, yielding more than 5 per cent, with payouts rising with inflation.
In the era of financial repression caused by ultra-low interest rates in the developed world, investors hunting for income have flocked to infrastructure trusts, pushing some of the shares to a premium to net asset value of more than 20 per cent.
Renewable trust premiums have not been stretched to such high levels yet, mainly because they have not built up the same track record of payouts.
But Mr Peters expects both sectors to suffer when Bank of England governor Mark Carney raises the interest rate and their yields become less attractive in relation to bonds.
