Put some green in your portfolio
Renewable energy can be a good option for investors as subsidies wind down and fundraising cranks up. By Sarah Davidson
Saturday 21 December 2013
Wind turbines, solar farms and tidal power – renewable energy is moving into the investment mainstream. The launch of several specialist funds and the advent of crowdfunding means private investors can invest in renewables from as little as £5.
"2013 has seen private investment in the renewable energy sector explode as project developers woke up to the potential for raising funding directly from investors," says Julia Groves, managing director of the renewable Trillion Fund.
For a long time, investors could only access renewable energy by investing in complex Enterprise Investment Schemes with a high minimum investment. But this has now changed with dedicated investment trusts – listed on the stock exchange – such as Greencoat Wind, Bluefield Solar, Infinis, the Foresight Solar fund and The Renewable Infrastructure Group, raising a collective £918m .
It's not just funds that have improved access to renewables. Private investors have also had the option to invest through two retail bonds issued this year – Good Energy and Energy Bonds – and there have been five project fundaisers done through crowdfunding platform Abundance Generation.
Each type of investment offers different advantages. Bruce Davis, managing director of the crowdfunding firm Abundance, says: "In general, single company bonds are good for investors looking to get a short-term return on their money and diversify away from conven-tional bonds from building societies and listed companies."
However you choose to invest, returns are generated in part from the sale of electricity to the grid and also from Government subsidies in the form of feed-in tariffs (FITs) for smaller scale projects and Renewable Obligation Certificates for larger scale projects.
This means one of the advantages of including some renewable energy in a portfolio is that returns are linked to energy prices, so rising prices – as we have now – means higher returns.
But a concern for investors has been the reliance of renewable energy on subsidies and indeed, it is because of a wind-down in these that developers are looking to raise capital from private investors.
Groves explains: "Developers have previously relied upon private equity and bank finance. But private equity interest in renewables has dried up as subsidies have declined and bank finance is still quite costly for medium-sized projects."
For that reason Darius McDermott, managing director of broker Chelsea Financial Services, says private investors who still want exposure to renewables but who want lower risk should consider fund and he points to two he likes – Foresight Solar VCT and Ventus.
"This offers diversification and an expert team doing the research for you," he says. "It's a very volatile sector and hugely susceptible to Government interference so individual stocks can be hit hard."
Patrick Connolly from financial planning adviser deVere also urges caution. He says: "They should only be considered by those who already have a significant and diversified investment portfolio in place and are prepared to accept the risks."
For those who think they fit this bill deVere recommends the Oxford Capital Infrastructure EIS or Downing Renewables EIS to its clients.
If you're thinking about including renewables in your portfolio Groves has one last piece of advice.
"These are not savings accounts – even if returns are steady, your capital is at risk," she says.
"If the investment goes belly up, even those with FCA-authorised firms won't get their money back though they may get compensation if they were mis-sold."
How to invest
Investment trusts or companies
Advantages: Funds are closed-ended; funding won’t be withdrawn unexpectedly. Steady dividends and strong revenues.
Disadvantages: Riskier than open-ended funds. Losses in bad times can be steep.
Enterprise investment schemes
Advantages: Income tax relief is available to investors who purchase shares in an EIS at 30 per cent up to a maximum of £1m. Investors in similar venture capital trusts get income tax relief at 30 per cent.
Disadvantages: High minimum investment requirements of £10,000. Tax relief may be curbed.
Advantages: Fixed-term loans to developers, repaid out of cash flow. Minimums of £500 or £1,000.
Disadvantages: Mini bonds are not as heavily regulated as funds and offer investors less protection.
Advantages: Abundance Generation is regulated, so investors are protected.
Disadvantages: Your funds will be tied up for up to 20 years.
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