The Times - UK (2020-08-01)

64 1GM Saturday August 1 2020 | the times

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Mark

Ather ton

Activist investor

T

he pandemic has accelerated

a trend that has existed for

some time now. I’m not talk-

ing about working from

home, but the rise of renew-

able energy.

This transfer of power away from the

fossil fuel industry looks set to be a

seismic shift and I am ready to buy into

this up-and-coming sector when the

moment, and the price, is right.

In the first quarter of 2020, 52 per

cent of German and 45 per cent of Brit-

ish electricity came from renewable

sources. Fossil fuels have accounted for

less than 15 per cent of electricity

generation. The speed of the change-

over may have been given a push by the

virus crisis, but the trend was there to

see long before Covid-19 struck.

In 2000 coal, gas and oil accounted

for about 75 per cent of the UK’s power

generation capacity while renewables,

cess, partly because so many funds hold

them and partly because I am always a

reluctant seller of funds. While I fully

back the move to renewable energy, I

have been slow to buy funds specifically

devoted to this area.

One way UK investors like me can

tap into this field is to buy one of the half

dozen or so investment trusts operating

in the sector. Some, such as Nextenergy

Solar fund, Foresight Solar fund and

Bluefield Solar Income fund, deal only

with solar energy. Others, such as

Greencoat UK Wind and Greencoat

Renewables, focus on wind farms.

Trusts such as the Renewables Infra-

structure Group offer a combination of

the two, as does JLEN Environmental

Assets Group.

About 60 per cent of their revenues

come from subsidies and fixed price

agreements. Despite this cushion, all

the companies keep a close eye on the

key benchmark — the Day Ahead

Power Price — which helps to deter-

mine the level of their fixed price agree-

ments and which, at £31 per MWh, has

halved since 2018, although it has

bounced back from close to £10 earlier

this year.

Stifel, a stockbroker, warns that if the

bounceback in the Power Price does

not continue many funds will have

reduced income when they come to

renegotiate fixed price agreements.

If renewables are to achieve a signifi-

cantly higher share of the energy

market in the next decade there need to

be many more wind farms, the develop-

ment of large energy-storage projects

and back-up energy generation to

cover the fact that sun and wind cannot

be relied upon to produce a continuous

stream of power.

The share prices of trusts in the

renewables sector took a hammering in

the general market slump, but have re-

covered strongly and the sector is now

trading at a premium of about 15 per

cent to its real or net asset value (NAV).

Stifel has changed its recommend-

ation on the sector from “buy” to “neu-

tral”, however, Iain Scouller from the

brokerage says that this does not indi-

cate a change of heart on renewables,

but merely that they look less of a bar-

gain than they did a few months ago.

If you are deterred by the premium to

NAV, one cheap way into the sector

would be to wait until one of the compa-

nies issues fresh shares (which happens

fairly frequently) because they tend to

be cheaper than the existing shares.

I am watching and waiting.

Old v new

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

% return

100

80

60

40

20

0

-20

-40

-60

-80

Renewable energy infrastructure

Commodities and natural resources

Source: FE Fundinfo

October

I’m ready for a

burst of energy

in the form of wind and solar power,

were virtually non-existent. Fast-

forward to 2017 and coal, gas and oil

made up less than half the total, while

wind and solar power accounted for

more than a third.

So what explains this significant

reversal? One element is growing

public pressure. From the climate

change protests led by the young activ-

ist Greta Thunberg to the increasing

number of pension funds whose mem-

bers say that they do not want to invest

in fossil fuels, the message is getting

through to companies and govern-

ments. Many European countries plan

to phase out all sales of internal com-

bustion engine vehicles within ten

years while France, Canada and the UK

aim to do so by 2040.

Another element is the continu-

al driving down of the cost of

renewables. Suppliers will

switch to the cheapest form

of energy as a logical eco-

nomic choice, irrespective

of whether they are environ-

mentally aware.

Bloomberg, the financial

analyst, forecasts that the cost

of solar power as an energy

source, including operating

and capital costs, will fall

from between $39 and $62 dollars per

megawatt hour in 2019 to $17-$26 per

MWh in 2050. It is on the brink of be-

coming a cheaper power source than

gas, the cheapest fossil fuel, which costs

between $38 and $76 per MWh. (On-

shore wind is already the cheapest

power source overall in the US).

The recent collapse in the oil price

triggered by the pandemic has tempo-

rarily altered the cost equation, but it

can only delay, rather than reverse,

the long-term trend. An increas-

ing number of institutional in-

vestors are recognising that oil

and gas companies are likely

to end up with substantial re-

serves that won’t be eco-

nomic to exploit — “stranded

assets”.

In response to this shift I am

starting to reduce my exposure

to companies such as BP

and Royal Dutch

Shell, although it

Greta Thunberg is a slow pro-

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