Power prices have fallen sharply in recent months, spelling relief on many different fronts. But, as always, such a shift raises fresh questions about how the renewable energy trusts, already under some pressure in recent times, might get on.
The effects could be significant, and other factors could also come into play. Stifel analysts note that a halving of the power price achieved, to £40 megawatts per hour from £80, would typically reduce dividend cover on a fund from 1.4 times to around 1.15.
"In addition, a number of funds have fixed-rate debt expiring in the next couple of years," they note. "If we assume this is replaced with debt at current market interest rates, it will typically reduce dividend cover by around 10 to 15 basis points. Putting these two scenarios of lower power prices and higher debt costs together means that dividend covers will typically fall from around 1.4 to 1.0 times over the next couple of years, assuming the current lower power price environment is sustained."
Which funds might be most affected? Stifel expects many funds' power price assumptions to be revised down in the first-quarter and half-year results, and warn that some might have a tougher time than others.
They believe that a 10 per cent change to the assumed base case power price could mean a roughly 15 per cent change in net asset value (NAV) per share for Greencoat Renewables (GRP), a move of around 11 per cent for Aquila European Renewables (AERI), between 8.3 and 8.8 per cent for Greencoat UK Wind (UKW), 8.1 per cent for Octopus Renewables Infrastructure (ORIT) and around 7 per cent for Foresight Solar (FSFL) and Bluefield Solar Income (BSIF).
Looking at existing levels of dividend cover, the funds do differ notably: Greencoat UK Wind still stands out for having fairly high levels at around 2.1 times, although this partly reflects the fact it doesn't amortise debt (where the funds regularly pay off a small amount).
Aquila European has expected dividend cover of 1.5 times over the next five years, with Bluefield Solar expected to be on two times for the year to the end of June 2024. The Renewables Infrastructure Group (TRIG) at the lower end said its cover came to 1.6 times in 2023 but that this would have been much higher, at 2.8 times, had the fund not amortised its debt.
Trying to assess all this is not for the faint-hearted, and that's reflected in Stifel's summary of the bull and bear cases for renewables funds. On an optimistic note, they argue that the big discounts available in the sector offer some value, as do the high dividend yields that do seem to be reasonably well covered. Similarly, a significant chunk of revenues are locked in, via subsidies or other agreements. Many of the funds have also grown significantly in recent years, allowing them to invest across different assets and better diversify.
But the due diligence required is not easy. As the team puts it, there are plenty of "moving parts", with renewable funds affected by many more variables than conventional infrastructure portfolios. All manner of factors from power prices to inflation, discount rates, weather condition and grid connectivity issues can affect the renewables space. Revenues can also be pretty volatile.
That's a reminder that the big discounts on offer aren't exactly a free lunch. But investors who can do the work might pick up some interesting funds.
