Government pledges and renewable energy

This article is part of
Sustainable Investing - March 2014

Renewable energy investing has become trendy in recent years, but investors are still wary of jumping into an area that is very dependent on government policy.

Going green has not just been a thing for hipsters, it’s also been a trend for investors hoping to get access to a market that are backed by assets and provide consistent yields.

Access to the renewable energy sector is generally found through investment trusts, which dominate a sector where many of the opportunities are major capital projects with characteristics that are more akin to infrastructure.

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Ian Scouller, analyst at Oriel Securities, says: “The projects typically have 20 year lives and cashflows. The lack of daily liquidity makes these unsuitable investments for open-ended funds and much more suited to investment trusts”.

‘Double-edge sword’

In 2014, investment trusts that focus on renewable energy infrastructure raised £773m from new shares issued. This was up from £93m in 2013, according to figures from the Association of Investment Companies (AIC).

Indeed, energy investment trusts in general have also started to increase their allocation to renewables.

James Smith, manager of the £79m Premier Energy and Water trust, has increased his exposure to renewable energy in the past few years. At the end of 2012 he had about 5 percent of his fund; a year later this was at 8 per cent and at the end of last year it was up to 12.6 per cent.

However, Mr Smith is not completely convinced by the sector and thinks that renewable energy companies are “more volatile”. He adds: “The hesitation is the planning and political system.”

Part of the incentive for investing in renewable energy is because it is underwritten by the government.

But while there are often visible earnings from government subsidies, intervention is a double-edge sword as it makes investors nervous about changes and political commitment to a sector.

Money often flows in to catalyse growth for particular policy ends, but then ceases when the immediate needs are met. This was the case with incentives to boost solar provision in recent years, with solar farms no longer able to benefit from feed-in tariffs for new projects.

Matt Setchell, head of renewable energy at Octopus Investments agrees. He said investors are “nervous about the politics of energy and cautious about investing in renewable energy, unsure of long term political commitment to the sector”.

He adds: “Financial advisers and investors often have concerns about the impact of subsidy or policy changes on renewable energy funds.”

This anxiousness is amplified by the upcoming general election.

Mr Setchell continues: “Inevitably with a general election only a few months away there will be political posturing around the appropriate way to deliver on renewable targets while tackling concerns around the impact of renewable subsidies on energy prices.”

Pricing pledges

When you are in the right place at the right time, however, government incentives can tangibly boost the returns on offer - or, as upcoming changes could be set to prove, particular energy policies could ensure price stability and remove some of the market volatility for some renewable routes.