Renewable Energy: Risk or Reward?

Utility companies offer investors a proxy for bonds - reliable income with capital preservation. Can renewable energy firms do the same?

Emma Wall 16 October, 2013 | 3:47PM
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Read more on ethical and sustainable investing in Morningstar's Ethical Investing Week 2013.

The renewable energy sector is big business - and growing rapidly. While the industry was once synonymous with individual roof top solar panels, now you can find thousand-acre solar farms and 250 foot wind turbines across Britain.

The Conservative Party recently confirmed councils in Scotland have received more than 2,500 wind farm applications in the past 18 months.

There is even a listed company that manages wind farm projects in the UK. Greencoat UK Wind (UKW) floated on the London Stock Exchange in March - having raised £260 million in initial investment.

The company's aim is to provide shareholders with an inflation linked yield - starting with an initial dividend of 6p. Since floating it has acquired two new onshore wind farms.

Stephen Lilley, of Greencoat UK Wind, said: "Many institutional investors are struggling to find long-term inflation linked yield to immunise defined benefit and other long-term liabilities. Renewable generation assets - particularly wind - provide one such stable, inflating, income stream and have a very low correlation with GDP and the broader stock market. Whilst wind generation was once considered part of the alternative investment sector, it is now a mature technology, and is finding a place in core portfolios."

Income biased portfolios are stock full energy companies - oil and gas giants provide investors with a reliable yiled and slow but steady growth. 

Royal Dutch Shell (RDSA) is yielding 5.5% for example - and BP (BP.) is paying 5.2%, what hope does an alternative energy provider have of matching those kind of results?

Nick Anderson, manager of the Henderson Global Care Growth fund said that ethical investing may not be able to offer as many income stocks to investors - but that the sector could more than compete when it came to total return. 

"In our portfolio we are more growth orientated, we do think it is important for investors to consider the total return," he said. "A lot of renewable energy and energy efficiency companies are US based, which tend to do share-buybacks with excess cash rather than issue dividends."

One risk with renewable energy investments is that the government keeps moving the goalposts. Feed In Tariffs for solar energy determine what you earn for supplying the National Grid, but they are not set in stone. While reductions cannot be backdated, not knowing what you will be paid in return for the energy generated by the solar panels on your roof is a barrier to investment for some households.

Jamie Richards, partner at Foresight Group, who are launching the Foresight Solar Fund said that industrial size solar plants do not have the same concerns.

"Solar power has been the biggest source of new electricity generation for the past two years in Europe," he said.

"This year the UK is seeing a significant increase in installed capacity of utility scale solar PV power plants based on Government support in the form of the Renewable Obligation Certificate (ROC) regime which provides a stable 20 year revenue stream that increases in line with RPI.

"Our fund will give investors access to the more predictable financial returns that UK solar offers over wind."

Wider global politics also support the renewables sector. Even carbon guzzling China is pulling its socks up - introducing new policies that encourage investment in wind, solar and gas.

The UK government introduced carbon budgets as part of the Climate Change Act 2008 to help the UK reduce greenhouse gas emissions by at least 80% by 2050. A carbon budget places a restriction on the total amount of greenhouse gases the UK can emit over a five year period. This covers heavy industry, power plants, road transport and agriculture, as well as residential buildings. 

Richard Crawford, of InfraRed Capital Partners, the investment manager to The Renewables Infrastructure Group said the demanding UK and EU-wide carbon reduction targets place renewables as a key element in the future of energy generation.

"We continue to see extensive growth opportunities – both in onshore wind and, especially in the near term, in the UK’s solar PV segment. A broad range of attractive sites, reducing technology costs and strong regulatory support are creating momentum in the sector’s expansion."

Not all ethical funds choose to invest in renewable energy or energy efficiency companies, preferring the broader remit of socially responsible investment. But Anderson extols the virtues of stocks such as Suez Environnement (SEV) a French water and waste management company yielding around 5%.

The Old Mutual Ethical Fund also invests in Suez, and is advised by Impax Asset Management. 

Co-manager Hubert Aarts said: "The commitment to investing in efficiency solutions speaks to the problem of finite resources across high growth global environmental markets. This endorses the important theme of optimising our limited resources and in finding alternative solutions."

The Parvest Environmental Opportunities fund (https://im.morningstar.com/im/premIcon.gif Bronze Rated) also invests in renewables, targeting markets that aim for cleaner or more efficient delivery of the basic services of energy, water, and waste.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
BNP Paribas Climate Impact Cl C273.14 EUR-0.53Rating
BP PLC491.30 GBX0.41Rating
Greencoat UK Wind141.00 GBX-0.70
Janus Henderson Global Sust Eq A Inc578.72 GBP-0.55Rating
Quilter Investors Ethical Eq A (GBP) Acc2.10 GBP-0.47Rating
Shell PLC2,804.50 GBX-0.87Rating

About Author

Emma Wall  is former Senior International Editor for Morningstar

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