Renewable energy trust dividends under threat as subsidies expire
The dividends of renewable infrastructure investment trusts are at risk of growing more volatile as subsidies for clean energy expire in coming years, Stifel has warned.
Many renewable infrastructure projects are due to see their government-backed Contracts for Difference, which provide developers with a stable revenue stream, expire between 2032 and 2035.
These subsidies are essential to providing a strong stream of ‘fixed’ revenue, which allows the trusts to back their dividends, the analysts explained, and typically account for around 60 per cent of a fund’s income.
“We think the switch from the certainty of subsidy revenues to a higher degree of market revenues will increase the risk profile of the sector, reflecting volatile power prices, said Stifel analysts Iain Scouller and William Crighton.
While renewables trusts often make reference to the ‘average asset life’ of the portfolio, meaning the expected time until their infrastructure is no longer operational, less attention is paid to when subsidies are due to expire.
Some do provide the information, however, as The Renewable Infrastructure Group states that “the weighted average subsidy life remaining is nine years,” while Octopus Renewables has provided a detailed breakdown.
Octopus Renewables revenue forecast
“We suspect the boards would be prepared to pay dividends effectively out of capital, if necessary, given the importance of dividends for the sector,” said Scouller and Crighton.
This would lead to trusts slowly selling off their assets to cover the dividend, leaving its underlying value to slowly dwindle.
However, it is possible that a new subsidy or price guarantee mechanism is introduced, with a consultation currently underway to see if older projects should be eligible for further subsidies when they expire, the analysts noted.
Renewable energy trusts have struggled with performance in recent years, falling 9.3 per cent in stock price over the last year and 3.4 per cent over the last five, according to data from the Association of Investment Companies.
They also trade at a hefty 33.2 per cent discount to their underlying assets, suggesting investors are sceptical over the valuation process for the trusts.
In total, of the 19 renewable infrastructure trusts on the market, only one trades above a 28 per cent discount, Harmony Energy Income, and this is only due to its ongoing takeover by a private equity group.