Renewable infrastructure – income opportunity or value trap?

The government wants the UK to be a “clean energy superpower” and is already the second largest offshore wind market in the world. So, it’s no surprise there are several large renewable infrastructure trusts listed on the London Stock Exchange.

Falls in share prices mean many investment trusts are trading at discounts to the value of their assets (or net asset value/ NAV) and offering sizeable yields of 9% or higher. That sounds appealing, but are renewable infrastructure trusts really the income opportunity they appear or just a value trap?

This article is not personal advice. If you’re unsure about whether an investment is right for you talk to a financial adviser. The value of investments can rise and fall, so you could get back less than you invest. Yields are variable and are not a reliable indicator of future income.

What’s a renewable infrastructure trust?

Renewable infrastructure trusts invest in solar and wind farms, and increasingly also in energy storage projects, like batteries.

Diversification is key in these trusts.

Individual assets can be taken offline by a fault, repairs or upgrades. Hornsea One, one of the UK’s largest offshore wind farms and a large holding in several renewable infrastructure trusts, experienced a cable failure in 2024 which reduced the asset’s electricity output and dented cash generation in trusts that held it.

Then there’s the perennial problem with renewables, the famously unpredictable British weather means that an asset simply doesn’t achieve the level of electricity generation expected. Investments across a range of geographies and technologies – whether that’s onshore as well as offshore wind, or wind as well as solar – help mitigate that risk.

The other big variable renewable trusts have to manage is electricity prices.

Very broadly speaking these assets produce electricity then sell it to the grid. The price at which they sell to the grid could be fixed in advance, or it could be at the market price. Most trusts aim for a blend of the two. Those with more market price exposure can take advantage of the spikes in energy prices, but that means they’re also exposed to price declines.

Because renewable assets are very long life and (British weather aside) reasonably reliable revenue generators, they’re well suited to being funded with debt. Some renewable investment trusts can fund as much as 40% of their asset base with debt.

When it works that can enhance returns, essentially boosting the returns from every pound invested. However, it can also increase risk – especially if the loans need refinancing at some point. If interest rates rise, the cost of refinanced loans will be higher, eating into your overall return.

That’s particularly painful because higher interest rates also eat into the value of long-lived assets like renewable infrastructure.

Why are trusts trading at a discount?

Rising interest rates are one reason shares in infrastructure investment trusts have fallen sharply since rates started rising in 2022.

When you can buy a government bond yielding five percent or more, a riskier renewable infrastructure trust needs to offer a better return to get investors interested. That has knock-on effects on the value of the underlying assets in infrastructure trusts. However, it does not fully explain why trusts themselves are trading at discounts of 15-30%.

One possible explanation is nerves around the valuation of the assets.

The value of long-lived assets, like renewable infrastructure, depends on lots of assumptions – from future electricity prices to weather conditions to future interest rates. Those assumptions are uncertain, which means there’s a risk they could fetch less than expected if they were sold.

Having said that, several trusts have been able to sell assets in recent years for more or less the value at which they were being held at on the balance sheet – which provides some reassurance. Trusts are also increasingly buying back their own shares – which demonstrates a strong belief in the underlying value of their assets.

We suspect some of the discount is also down to structural changes in the market.

The UK investor landscape is consolidating into a few smaller players, who are more nervous about owning comparatively illiquid investment trusts. There has also been a general move out of UK assets – which won’t have helped the sector.

Those problems aren’t unique to renewable trusts, but they exist and there’s no guarantee they go into reverse.

Income opportunity or value trap?

The question for investors is whether infrastructure trusts currently represent an income opportunity, or whether there’s a risk they turn out to be a value trap – something that looks cheap but will ultimately only get cheaper.

There’s certainly no reason to think the headwinds that have pushed the shares to trade at a discount are about to go away. And, if a recovery in their share prices is uncertain, then the main appeal of renewable infrastructure trusts is likely to be the yields of 9% or more – though, as ever, remember that no yield is guaranteed.