Subsidy Cuts and the Future of Specialist Investment Trusts
Following the Summer Budget 2015 the government announced that they plan to cut subsidies for green energy in a bid to reduce costs for consumers. The intention behind this decision is to reduce energy bills for British families and businesses and meet energy goals as cost-effectively as possible.
While this may be a step in the right direction for consumers, cuts to renewable energy subsidies could hinder the expansion of a sector that has drawn billions in investor funds.
Renewable energy assets have grown from nothing to a market capitalisation of over two billion pounds in just three years, thanks to specialist investment trusts. However, analysts predict that expansion will be restricted by the government’s goal of making renewable energy ‘subsidy free’.
It is anticipated that existing portfolios will continue to provide handsome returns. However, changes to laws and regulations could burden the ability for some funds to grow their assets while maintaining their dividend and total returns goals.
Typically, subsidies and incentive schemes, contrived to advocate the development of renewable energy, account for around half of a renewable energy investment trust’s revenue.
After the government communicated its intention to cut back investment in July, future renewable energy subsidies are likely to be less plentiful.
They have already set in place a strategy for the removal of the exemption from the climate change levy (CCL) applied to electricity generated from renewables. During the transition period, participants will still be able to make CCL exempt supplies of renewable electricity that was generated before 1st August 2015 and redeem exemption certificates associated with that electricity. However, exemption for energy generated after this date will be withdrawn.
While CCL accounted for a just a small fraction of the assets in which the trusts trade, its removal acts as a subtle indication of the political nature of renewable energy and the hidden difficulties and unpredictability of investing in regulated sectors.
Other changes currently on the agenda involve the withdrawal of the Renewable Obligation (RO) – an obligation that requires electricity suppliers in the UK to source a proportion of the electricity they supply from renewable sources. The introduction of the Renewable Obligation alone has more than tripled the capacity of eligible renewable electricity generation and has attracted huge amounts of investment.
The RO will be replaced by the less profitable policy Contacts for Difference (CfD), where the government will pay the difference between the ‘strike price’ (a price that reflects the cost of investing in a low carbon technology) and the ‘reference price’ (the average market price for electricity in the current market).
How will specialist investment trusts be affected?
While the proposed changes will create tighter margins and reduced cash-flow, the CfD will provide greater certainty and stability of revenues to investors by reducing their exposure to volatile wholesale prices, thus making renewable investment trusts more attractive.
Thanks to the government’s policy of ‘grandfathering’, existing trusts will be able to rely on subsidies from existing projects. Some are also of the opinion that assets linked to existing projects on the secondary market will provide plenty of opportunities for future investment.
2EA® are registered Low Carbon Energy Assessors, Consultants & ESOS Lead Assessors offering both energy management and reduction services ranging from CCL/CHPQA Management to Energy Saving Opportunity Scheme (ESOS) and Carbon Reduction Commitment (CRC) consultancy.