The renewable energy sector, once a darling of investors, is now facing a brutal reckoning. Share prices of renewable infrastructure trusts have been in freefall, pushing discounts to net asset value (NAV) to alarming levels and dividend yields to tempting highs. The £2.2 billion Renewables Infrastructure Group (LSE: TRIG) now trades on a 26% discount and yields 8.3%, while the £2.9 billion Greencoat UK Wind (LSE: UKW) trades on a 21% discount and yields 8.7%. Even the £580 million Bluefield Solar (LSE: BSIF) trades on a 24% discount and yields 9.2%. Some trusts are trading at discounts exceeding 30% with yields in double digits. This is not a blip; it’s a trend that demands attention.
David Bird, manager of Octopus Renewables Infrastructure Trust, recently warned of the increasing prevalence of negative power prices across Europe. As wind and solar capacity expands, so does the likelihood of negative pricing. Bird expects negative prices to reach 10% of hours by 2030 and 20% by 2050. While Octopus is shielded by long-term power purchase agreements (PPAs), the gap between the price at which renewable generators sell electricity and the baseload price is expected to widen. This is a stark warning that the renewables sector is not as resilient as once thought.
Bloomberg New Energy Finance (BNEF) forecasts paint an even bleaker picture. Their latest forecasts for power prices are 45% below the average forecasts of the renewables sector for wind and 61% for solar. BNEF expects baseload electricity prices to fall by 3.5% per annum in real terms up till 2050, even if the UK misses its target for net zero. In a net-zero scenario, the annual falls are expected to be 1.6% in real terms. These forecasts are not just pessimistic; they are a wake-up call for the sector.
The UK government’s ambitious plans to increase renewable power generation hinge on the assumption that wholesale gas prices will rise steadily until 2035. However, the International Energy Agency (IEA) expects fossil fuels to become cheaper and more abundant as consumption peaks and falls. The IEA predicts a 50% increase in liquefied natural gas (LNG) capacity by 2030, making BNEF’s new forecasts highly plausible.
The continued expansion of renewable energy will result in a glut of output when it is needed least and shortages when the wind isn’t blowing and the sun isn’t shining. Back-up generation by gas plants will remain expensive, but the overall trend in wholesale power prices will be downwards. This volatility benefits battery-storage companies, but battery lives are still too short to reconcile intermittent power generation with fluctuating demand.
The renewables sector in the UK and Europe will increasingly rely on subsidies, even without the new capacity of which governments dream. With new capacity, the cost will be ruinous. The UK wants most of this investment to be financed by the private sector, but it would be insane for investors to rely on a growing rip-off for consumers and taxpayers. Sooner or later, the gravy train could come to a grinding halt. As Christopher Brown at JPMorgan Cazenove puts it, “there is still downside risk that could negatively affect future net asset values.” This is a clear signal that the renewables sector is facing a significant challenge.
For investors, this presents a dilemma. The renewables sector, once seen as a safe bet, is now fraught with uncertainty. However, opportunities still exist. Ecofin Global Utilities & Infrastructure Trust (LSE: EGL), for instance, has returned 21% in the last year against a weighted average of -8% for the renewables sector. It currently trades on a 12% discount to NAV and yields 4.2%. This trust invests globally in listed electricity generators, grids, and other utilities, providing a more stable investment option in a volatile market.
The current situation in the renewables sector is a stark reminder that even the most promising industries are not immune to market forces. The sector must adapt to the realities of falling power prices and increasing reliance on subsidies. Investors, on the other hand, must be more discerning and consider diversifying their portfolios to mitigate risks. The future of the renewables sector is at a crossroads, and the path it takes will shape the energy landscape for decades to come.
