Investing in clean energy is nothing new and one of the many ways to tackle carbon emissions and protect our planet from the ravages of climate change. It has also become an attractive investment option – it provides a good income, solid total returns, diversification from traditional asset classes and, in many countries, the sector benefits from governmental support mechanisms. William Argent, fund manager of the VT Gravis Clean Energy Income Fund, lays out the full story.
1. What has been the impact of increasing energy prices and what has the government done?
There are various macro-level influences that impact the clean energy infrastructure sector, including power prices, inflation and interest rates/yield expectations.
While off the highs, UK and European electricity prices remain elevated and volatile, compounded by geopolitical events. This resulted in a period of strong cashflow generation and profitability for low-carbon power generators in 2022. However, we have now seen governmental intervention as a result of the non-normal returns achieved. The UK government introduced the Electricity Generator Levy (EGL), the EU introduced a Revenue Cap. These measures limit upside participation should high electricity prices persist.
Conservative assumptions used by UK-listed renewable generators around future power price expectations (deeply discounted in the expectation of market intervention) have helped offset the impact of factoring in the EGL to valuations, broadly speaking.
2. What does inflation and the current market situation mean for your investments?
Inflation is a key sensitivity for UK-focused renewable energy generators – subsidies (e.g. Renewable Obligation Certificates, Feed-in Tariffs) are indexed to inflation prints. We have seen stronger inflation turnout over 2022 versus assumptions, which has been beneficial in many instances.
In most cases, weighted average discount rate assumptions have edged higher to reflect moves in interest rates and yield expectations. The embedded discount rates imply attractive returns over asset and portfolio lives. Observed benchmarks for transactions support valuations.
Following a de-rating across the renewables sector, yields offered by renewables infrastructure companies are attractive on a relative basis.
During times of economic uncertainty, the clean energy infrastructure sector remains relatively resilient, with critical assets supporting the functioning of society. Therefore, as the prospect of recession in many key regions increases, the case for investing in the sector strengthens to mitigate against more demand-led sectors.
3. What were the opportunities and needs that you identified, which led you to define the fund?
Gravis’ expertise and investment focus lies within the broader infrastructure sector. We identified clean energy infrastructure as an attractive subset of the world infrastructure sector, offering a compelling investment strategy that benefits from long-term structural tailwinds driven by the global energy transition and strong regulatory and governmental support mechanisms.
Since its inception in December 2017, the VT Gravis Clean Energy Income Fund has consistently outperformed the world infrastructure sector, delivering a 11.25%* annualised return (C Acc GBP) versus a 4.86%* annualised return from MSCI World Infrastructure.
4. What are the main characteristics that distinguish the strategy?
We observe a number of Fund offerings that provide exposure to the energy transition by investing in growth-orientated companies involved in the development of new clean energy technologies or operating within the component supply chain. We believe the VT Gravis Clean Energy Income Fund is unique within the open-ended Fund market. This is due to its focus on generating attractive levels of income distributions for investors, which are delivered through its holdings in companies that own operational and cash-generative renewable energy infrastructure. Such companies typically benefit from a high degree of visibility around future cash flows because they enter into long-term contracts with counterparties such as utilities, municipalities, or high-quality corporate entities for the power they produce, and/or by virtue of long-dated government-supported subsidy payments.
5. What is your take on the replacement of fossil fuels by wind and solar?
Replacing conventional forms of electricity generation with cleaner, far less pollutive technologies is clearly a key component of achieving emissions reductions and climate goals over the next few decades. Wind and solar photovoltaics remain the most efficient and scalable forms of renewable power generation, broadly speaking, and will see sustained levels of investment to increase capacity in the UK and globally. However, the intermittent nature of power generation from these sources creates risks to continuity of supply and means that energy markets and grid networks must adapt in order to balance supply and demand. The growing influence of intermittent power generation from wind and solar within the supply mix (typically at the expense of conventional baseload power generation) compounds these dynamics and necessitates the expansion of energy storage capacity, for example. Significant investment in new transmission infrastructure is required in order to facilitate the flow of electricity from the areas of generation – for example, wind power generated offshore or in the north of Scotland needs to be transmitted to the key demand hubs.
* As at 31 March 2023; since inception 18/12/17
Past performance is not a guide to future performance, the value of your investment may go down as well as up. Capital at risk.