I’ve written previously about the universe of renewable energy yieldcos, as well as delving deeper into analysing the financial horsepower under the hood. As part of my investments, I’ve amassed a little portfolio of these companies spread out across three distinct geographies in terms of where they operate or focus on: Europe, UK and US.
Today, I’m adding to the UK part of the portfolio, mainly owing to some capital available in GBP that I’m ready to reinvest. I’ve cheated slightly since I already added one company, Foresight Solar Fund, at the end of August 2020. I didn’t really dwell on this selection very much. FSFL had dropped in price and averaging down my position would be useful. Furthermore, I noticed that VT GRAVIS FUNDS ICVC added a significant position in FSFL on 22 July 2020, buying more than 31 million shares worth around £34 million.
I’m particularly interested in the VT Gravis Clean Energy Income Fund, although it is actually the smaller of the two Gravis funds, which together have taken a 5.16% slice in the share capital of Foresight. The VT Gravis Clean Energy Income Fund weighs in at £129 million, compared to the more hefty VT Gravis UK Infrastructure Income Fund, packing a punch with £646 million. The clean energy fund is intriguing to me given its focus on renewable energy, the regular consistent dividends that yieldcos produce (it is packed with them) and the defensive nature of the utility sector. Given all of this, I thought it would be a useful exercise to analyse the holdings of VT Gravis Clean Energy Income Fund to see what it is buying and selling.
The Gravis investment advisor wouldn’t just give up all their secrets, but there are certain determinations we can make from the fund’s monthly factsheets and the top 10 holdings. So I’ve gone through and pulled together the last few months.
July 2020
| Company | Percentage |
|---|---|
| TransAlta Renewables Inc | 8.2% |
| Atlantica Yield PLC | 7.5% |
| NextEnergy Solar Fund Ltd | 6.7% |
| Renewables Infrastructure Group Ltd | 5.7% |
| Foresight Solar Fund Ltd | 5.0% |
| Bluefield Solar Income Fund Ltd | 4.9% |
| Hannon Armstrong Sustainable Infrastructure Capital Inc | 4.7% |
| TerraForm Power Inc | 4.5% |
| Greencoat UK Wind PLC | 4.5% |
| JLEN Environmental Assets Group Limited | 4.4% |
June 2020
| Company | Percentage |
|---|---|
| Atlantica Yield PLC | 9.1% |
| TransAlta Renewables Inc | 8.4% |
| NextEnergy Solar Fund Ltd | 6.5% |
| Renewables Infrastructure Group Ltd | 6.4% |
| JLEN Environmental Assets Group Limited | 5 .1% |
| Hannon Armstrong Sustainable Infrastructure Capital Inc | 4.9% |
| Bluefield Solar Income Fund Ltd | 4.8% |
| TerraForm Power Inc | 4.8% |
| US Solar Fund PLC | 4.3% |
| Gresham House Energy Storage Fund PLC | 4.0% |
May 2020
| Company | Percentage |
|---|---|
| Atlantica Yield PLC | 9.4% |
| TransAlta Renewables Inc | 7.6% |
| Renewables Infrastructure Group Ltd | 6.4% |
| NextEnergy Solar Fund Ltd | 6.0% |
| JLEN Environmental Assets Group Limited | 5.8% |
| TerraForm Power Inc | 4.7% |
| US Solar Fund PLC | 4.6% |
| Gresham House Energy Storage Fund PLC | 4.5% |
| Hannon Armstrong Sustainable Infrastructure Capital Inc | 4.4% |
| Aquila European Renewables Income Fund PLC | 4.3% |
Tracking portfolio changes
Before identifying which yieldcos have been bought or sold over the last three months by this fund, I’m going to dismiss a couple because they don’t really fit with the ethos of my renewable selection. First of all, TransAlta Renewables Inc because it’s portfolio contains a considerable portion of natural gas assets. Secondly, Hannon Armstrong Sustainable Infrastructure Capital since it is not focused specifically on the generation of electricity.
Four yieldcos have been bought by the Gravis fund, according to a comparison of the top 10 holdings.
- NextEnergy Solar Fund Ltd – this didn’t feature in the top 10 in May, but climbed to 6.7% of the fund in July.
- Foresight Solar Fund Ltd – this jumped to 5% of the fund’s holdings in July, and as mentioned was notified in a RNS as a major holding.
- Bluefield Solar Income Fund Ltd – this hit the top 10 with 4.8% of the fund in June and then increased by 0.1% in July.
- Greencoat UK Wind PLC – this entered the chart with 4.5% in July.
A number of yieldcos have had their positions reduced over this same period, with, for example, Atlantica Yield PLC dropping almost 2% over the three months. It is certainly as a result of profit taking, as this same yieldco experienced a sustained price rise from May to July. Nevertheless, this method is clearly a rough and ready approximation of the fund’s operations, since we’re not aware of changes in the actual number of shares in individual yieldcos or the cash position.
From the four I’ve identified, I’m immediately going to dismiss Foresight since I had already added to my position in this. The next denominator I’ll consider is where the price stands to my current position and average cost since I don’t plan in disposing of any of my holdings, but would like to further reduce my average cost.
NextEnergy Solar Fund Ltd
Average cost – 122.5
Price (at close on 18 September 2020) – 103.4
Current profit/loss – 16%
Bluefield Solar Income Fund Ltd
Average cost – 144.8
Price (at close on 18 September 2020) – 136
Current profit/loss – 6%
Greencoat UK Wind PLC
Average cost – 156.4
Price (at close on 18 September 2020) – 133.60
Current profit/loss – 15%
So I’ll therefore rule out Bluefield since NextEnergy and Greencoat are much deeper in the red. Finally, I want to consider a few metrics, notably the premium or discount to NAV, and dividend yield using the financials from the latest reports. I’m not going to go for a complete analysis, generating my own metrics, instead opting to trust Gravis on this occasion.
NextEnergy Solar Fund Ltd
NAV Premium – 4.4%, Dividend yield – 6.8%
Greencoat UK Wind PLC
NAV Premium – 11.2%, Dividend yield – 5.3%
I made calculations based on NextEnergy’s full year results to 31 March 2020 and Greencoat’s half year results to 30 June 2020.
NextEnergy has a considerably more juicy dividend yield and lower premium to NAV compared to Greencoat. Although the latter is over three times as big with a market capitalisation of £2 billion compared to NextEnergy’s £600 million. The size will certainly go some in explaining the additional premium investors are willing to pay for a smaller dividend, lending it a greater degree of safety and stability. Greencoat UK Wind PLC has also been around for a year longer than NextEnergy.
Regardless of the two yieldcos different characteristics, I decided to top up with both to help my average position. But I’m going to buy slightly more NextEnergy with the larger dividend, opting to split my purchase in the ratio of 60% of the solar energy producer and 40% of the wind energy yieldco for the capital sum I had earmarked.
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River Otter Investments 
Thanks, I like the focus on renewable energy!
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You’re welcome, glad it was useful. You appear to focus on Asia – any renewable energy yieldcos you’ve come across?
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Xinyi Solar Holdings Limited listed in Hong Kong Stock Exchange is pretty big.
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May I ask if you have a view on why these funds appear to be in a gentle decline in the last 6 months?
I hold all three Gravis, NESF, Wind and want to keep them. Do you think this just a minor cyclical drop?
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Hi Grant, I personally think this is due to wholesale electricity prices in the UK dropping given the situation with Covid-19 and associated fall in economic activity. I’m not personally too concerned, and couldn’t tell you what to do with your holdings. But for the moment I’m keeping mine. I have too noticed that NESF has been dropping – I’m currently underwater 9.75% on my holding, not taking into account dividends. For UKW I’m also underwater 11.33%, again not accounting for dividends. For me, these yieldcos are both an investment for the regular dividends and a bet on the renewable energy sector. In terms of Gravis, I’m not a holder, but keep an eye on what they’re doing, and I’m not sure what you mean about a drop, since my charts for the two share classes (income and accumulating) appear to indicate a rising share price over last six months. On the electricity prices, there’s certainly an analysis to do on which of these yieldcos have strongest correlation with wholesale electricity prices. As you probably know, lots of these companies have some of their revenues contracted at set prices into the future. I’m guessing that this probably plays into more volatility for some versus others. For example, here’s detail from NESF on power prices from the last half-year report…
Power Prices
Before the impact of COVID-19, UK power prices were declining into March 2020 mainly as a result of lower gas prices and milder weather patterns. In March 2020, the “oil price war” between the USA, Saudi Arabia and Russia and the first effects of the COVID-19 pandemic led to further power price declines. In May 2020, the short-term demand-side effects stemming from the pandemic drove power prices down to an unprecedented level.
65% of the Company’s revenues for the period were derived from government subsidies and, at the end of the period, the average remaining weighted life under the relevant subsidies was 14.5 years. These revenues are fixed for the long term in accordance with the terms of the relevant ROC, NIROC or FiT subsidies.
The balance of the Company’s revenues are derived from selling the electricity generated in the market (representing non-subsidised revenues) and, therefore, are exposed to market power price movements. Our Asset Manager’s electricity sales desk is focused on securing the best terms for our sales and minimising our exposure to short-term price fluctuations by securing fixed prices for specified periods. Fortunately, the Company’s flexible power purchase agreement framework allowed us to lock in higher power prices before and during the period.
The post-lockdown economic recovery, and subsequent increased demand for electricity, has driven a recovery in short- and medium-term power prices; something that is currently reflected in day-ahead prices as well as summer and winter 2021 pricing. Our Asset Manager has been monitoring the market closely since March 2020, waiting for the optimum window to lock in forward power prices. However, with a second wave of coronavirus underway, the short-term horizon remains uncertain. In summary, the Company currently faces a challenging power price environment.
The Company has secured fixed pricing for 87% of generation for the remainder of the current financial year ending 31 March 2021, at a generation weighted fixed price of £49.1/MWh. Furthermore, the Company has fixed 58% of generation for summer 2021 and 42% for winter 2021 with weighted average fixed prices of £44.5/MWh and £49.9/MWh respectively. Our Asset Manager has deliberately left a significant amount of its generative capacity unhedged beyond winter 2020/21, in anticipation of a power price recovery.
Best wishes.
River Otter
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