Adventurous Investor

July 2, 2010 6:11 pm

Wind power has not been blown off course

David Stevenson: a number of more focused funds have caught my eye

Over the past few years I’ve written frequently about the opportunities in the clean energy sector for adventurous types. Overall, my favoured approach to this collection of technologies and sub-sectors is through a diversified fund, such as the Impax Environmental Investment Trust.

But over the years, a number of more focused funds have also caught my eye – such as Climate Change Capital’s Ventus range of venture capital trusts. Peruse the annual report from May and you’ll get an insider’s view of what’s really happening out there in the green energy market – in spite of the financial chaos, 2009 proved to be a record year for the wind industry.

According to Ventus, in the UK “approximately 650 megawatts of new capacity was installed onshore during the year (532MW during 2008) and 200MW installed offshore. The UK now has more than 4,000MW of installed wind capacity, including 1,000MW offshore.”

The market seems to have turned in favour of green energy funds with spare money – the number of banks supplying funding has pretty much stayed the same, but the number of projects has increased, forcing a much-needed “deterioration in the likely purchase price of sites”, says Ventus. Add in lower power and turbine prices (aided by shorter delivery times) and you have the makings of a “turn” in the renewables market.

The regulators have also weighed in, with the introduction of feed-in tariffs in April, which were introduced by the government to support the uptake of microgeneration technologies in the UK. The schemes incentivise individuals and businesses to install solar and wind units up to a maximum installed capacity of 5MW, with smaller projects benefiting from a subsidy that pays a supplier for each kilowatt hour (kWh) that they generate, and a further payment for each kWh of electricity that they feed into the national grid.

The Labour government said it wanted investors to receive between 5 per cent and 8 per cent per annum for well-sited installations, index linked to RPI – a change that is likely to be endorsed by the new coalition government. This last regulatory move has, not unnaturally, generated its own share of newspaper hot air, with one newspaper columnist claiming that the feed-in tariff meant that “Buying a solar panel is now the best investment a householder can make!!”.

Personally I think this last claim is bunk – but the target of 5 to 8 per cent index-linked returns over 20 to 25 year terms is a massive move forward for the industry and is already prompting some innovative new investment schemes. One of the first off the block comes from Downing, namely its soon to be launched Low Carbon EIS Fund, advised by a specialist firm called LCA (see box).

There are, of course, masses of caveats that one needs to place around this type of investment – it could suffer from short-term technical issues that derail the four-year time table and it will be competing with plenty of other investors for prime projects. The ConLib government could change its mind about things green, or it could simply slash feed-in tariffs a few years down the line if it sees too much supply on the market (as has
already happened in Germany). And of course, all tech-based, project schemes are by their nature hugely risky.

LCA, the specialist manager involved in the underlying projects, is also hugely experienced in this space, and already owns a bunch of assets in its publicly quoted fund, including Vigor Renewables, which is developing its own pipeline of solar and wind assets. Vigor itself also has in place an agreement with Proven Energy (another LCA investment), Europe’s leading wind turbine manufacturer for the smaller-scale market. According to LCA, any wind projects developed are likely to use Proven turbines. This will probably be good news for LCA shareholders, which include yours truly (I’ve held shares in this for more than two years).

As for the Downing EIS, I think its focus on small-scale schemes, especially in solar, is a differentiator and I think the scheme is probably only “mid-risk”, with a more than decent chance of it hitting its projected 110p payback in four years’ time. But I think Ventus VCT looks even better value at 82p with its stated intention of paying 8p a year dividend still in place and net asset value of more than 100p.


adventurous@ft.com

Downing’s place in the sun
 

A new tax-efficient enterprise investment scheme (EIS) from Downing, the Low Carbon EIS Fund, aims to provide an exit in approximately 4 years (30 September 2014) at 110p, based on investors paying a net 80p per 100p share. The scheme will invest in both small wind power projects and, intriguingly, solar panel arrays. It is early days for the latter technology in the UK but LCA reckons sun power could be as important as wind power.

The Downing managed fund will focus exclusively on these smaller solar and wind projects, which benefit disproportionately from the feed-in tariffs – crucially it’s also an ungeared fund (as are its underlying projects) and thus a little lower risk than many of its peers, which use large dollops of bank funding to amp up the returns. Its managers hope to raise £10m to quickly (within one year) roll out a small portfolio of assets that should be able to generate compound returns of between 7 and 8 per cent per annum for the three operational years of the fund.


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