Investors in renewable energy have emphasised how the sector can help solve the UK’s energy crisis after reports emerged that the UK government is drawing up plans for a temporary cap on the revenues of clean energy generators.
An energy price cap "represents more of an anaesthetic than a solution to the energy crisis currently facing governments, businesses and individuals", Tom Hovanessian, director of sustainable development capital and investment manager of SDCL Energy Efficiency Income Trust PLC (LSE:SEIT) told The Association of Investment Companies.
"Unlike renewable energy, price caps don’t on their own address the root cause of the problems the energy market is facing and do not incentivise energy savings or encourage support for fossil fuel replacements," he said.
“Inserting price caps, in isolation, does nothing to help reduce the demand for energy, or to reduce the 67% in losses associated with distributing energy to end users. Renewable energy, in particular energy efficiency solutions, are first and foremost the medium to long-term solution to energy market instability and governments should be building policy solutions that incentivise further productivity, growth and investment into these areas.”
Chris Tanner, partner of Foresight Group, co-lead manager of JLEN Environmental Assets Group Ltd (LSE:JLEN), said: “It could arguably be asserted that the current energy crisis facing businesses and households across the country has been exacerbated precisely because we have not yet invested enough in renewable energy generation in the UK.
He added: "We have made excellent progress so far and are leading the way in offshore wind energy installation, but there is still a long way to go. Momentum must continue to build and knee-jerk reactions offering a quick fix should be avoided – we must continue to move away from carbon-intensive fossil fuels and instead prioritise clean, renewable energy production and distribution.”
Alex O’Cinneide, CEO of Gore Street Capital, investment manager of Gore Street Energy Storage Fund PLC (LSE:GSF), said he does not envisage a material effect on current revenues received by energy storage assets, "mainly due to a battery’s ability to stack revenues across multiple streams, including grid balancing and trading revenues".
He added that an energy price cap could impact price volatility and trading opportunities, but currently the portfolio is "primarily focused on services to stabilise the grid".
Mini-budget, maxi effect?
After Kwasi Kwarteng's misfiring mini-budget sent gilt yields soaring and forced the Bank of England to intervene in markets to stave off the threat of a wider collapse, SDCL's Hovanessian said: “Investors in renewables have been balancing the potential valuation tailwinds of higher inflation and energy prices against the headwinds of increased interest/discount rates.
“Publicly listed share prices relative to NAV generally moved from premium to discount territory off the back of the recent UK government initiatives (and rising bond yields), partly driven by a ‘buyers’ strike’ as risk aversion dominated investor sentiment.”
James Armstrong, managing partner of Bluefield Partners, investment adviser of Bluefield Solar Income Fund (LSE:BSIF), said that rising bond yields impact all infrastructure and those companies that invest in renewable energy infrastructure "are caught up in this as rising gilt yields should mean that discount rates rise also impacting valuations.
"However, for renewable energy companies in the UK there are a number of counterweights to rising discount rates, such as higher power prices and lower taxes that can offset rising discount rates. One input, such as discount rates, shouldn’t be taken in isolation,” he said.
Can renewable energy help solve the UK’s energy crisis?
A robust infrastructure for domestic renewable energy generation is a "key pillar" of the UK’s energy security strategy, noted Foresight's Tanner, as it not only reduces the carbon footprint of the entire country, "but also reduces the UK’s overall reliance on foreign energy sources and lessens our vulnerability to geopolitical upheaval of the kind we are currently witnessing".
Michael Bonte-Friedheim, CEO and founder of NextEnergy Group, investment adviser to NextEnergy Solar Fund Ltd (LSE:NESF), pointed out that enough solar energy hits the Earth in a single hour to power the energy needs of the entire human population for a year, demonstrating that it is an abundant energy source, while also being "the cheapest form of renewable energy generation and the quickest to construct".
This, he said, placed solar "in a strong position to rapidly tackle high power prices and energy security globally in a timely fashion".
“By increasing solar generation capacity in the UK, and renewable energy generally, the country will reduce the purchasing of hydrocarbons from abroad and increase its energy independence," said Bonte-Friedheim.
"Solar generation also contributes to replacing generation from carbon-emitting power plants. The UK government has pledged to increase solar capacity from 14GW to 70GW by 2035, and in a time of energy price uncertainty, solar is going to have one of the biggest and quickest impacts on reaching government goals across both the UK and EU."
O’Cinneide noted that energy prices have soared over the past year, which has been caused by the rapid increase in energy demand as economies re-opened following Covid-19 lockdowns and exacerbated by the current geopolitical situation in Europe.
He noted that the average price of renewable generation in the UK is now below that of a conventional generator "and not subject in the same way to the volatile movements in price that we are seeing".
"With an energy mix comprising a more significant proportion of renewable energy, we will likely see more consistent pricing and greater energy security," he said.
“However, the inherent intermittency of renewables requires additional flexibility, which until recently has been provided by conventional generation. Renewables cannot produce this flexibility independently, so energy storage systems, such as the utility-scale battery assets operated by our fund, are needed.”
Outlook for renewable energy investment companies
Looking at the investment attractions of the sector, Bonte-Friedheim said: “Investment companies are highly attractive vehicles to hold and grow a renewable asset portfolio, providing investors with the opportunity to fund the expansion of renewable energy in the UK and offering attractive dividends to shareholders."
Solar in particular is estimated to grow from 800GW of global capacity in 2019 to 8,000GW by 2050, he noted.
Although a windfall tax is proposed, the rapid growth of renewable energy infrastructure is driven by stronger support from government policies and more ambitious clean energy goals, which are set to continue in the coming years.
Armstrong said: “With sensible government policy, and sensible management of the economy, the outlook for renewable energy should be incredibly positive. Which rational government wouldn’t look to the cheapest, cleanest, most secure and easily deployable options, namely solar and wind, as a central part of their energy policy?”
Despite the current volatility in financial markets, O’Cinneide said the fundamental growth drivers for many renewable energy investment companies remain strong.
"There is a clear shift toward low-carbon energy generation, and flexible assets are required to enable renewable generation growth," he said.
"Here in the UK, the government has committed to achieving carbon neutrality by 2050. This mandate provides a tailwind for the deployment of battery energy storage systems and has led to rapid growth within the sector.”
For Hovanessian, renewable energy is a key part of the solution "not just to the impact of greenhouse gas emissions, but to the energy crisis we are currently facing".
"Investment companies focused on the sector remain well-positioned to benefit from the value that these solutions will bring, both today and over the long term. Looking at current prices across publicly traded renewable energy investment companies, there may be some attractive buying opportunities."