Have you ever watched a sector that seemed like the perfect investment story slowly unravel? That’s pretty much what’s happening right now with UK-listed renewable energy funds. What started as a promising blend of reliable income and feel-good environmental impact has turned into a cautionary tale about policy risks and broken trust.
The Latest Blow: Changes to ROC Subsidies
Late October brought yet another headache for anyone holding shares in renewable infrastructure funds. The government kicked off a consultation that could fundamentally alter how subsidies are calculated under the old Renewables Obligation Certificate scheme.
Right now, these subsidies – crucial revenue for many older wind and solar projects – rise in line with the retail price index. The proposal on the table is to switch that to the lower consumer price index. And there’s a twist: one option would effectively freeze payments until a retroactive CPI calculation catches up, which could take years.
It’s not hard to see why share prices took an immediate hit. These aren’t new projects; the ROC regime largely closed to newcomers back in 2017. But existing assets were banking on inflation-linked payments stretching out to 2037 in some cases. Tampering with those assumptions feels, to many investors, like moving the goalposts after the game’s already underway.
How Significant Is the Financial Impact?
The funds themselves have tried to quantify the damage. Several major solar-focused vehicles suggested that the milder option might knock around 2% off their net asset values. The harsher retroactive version? That could mean closer to 10%.
On paper, those numbers don’t sound catastrophic. But when funds are already trading at 30-40% discounts to those same NAV figures, it raises a bigger question: how much faith do investors actually have in the valuations being presented?
In my view, this latest development didn’t create the scepticism – it simply poured fuel on an already smouldering fire. The sector has been through plenty of rough patches in recent years, from soaring interest rates to falling power price forecasts. Each setback has chipped away at confidence.
Why the Subsidy Change Feels So Damaging
Let’s be clear: the amounts involved for household bills are tiny. We’re talking pennies, perhaps, spread across millions of consumers. Yet the signal it sends to capital markets could be far more costly.
The UK’s ambitious clean power targets rely heavily on private money flowing into green infrastructure. When policymakers appear willing to revisit long-standing subsidy arrangements, it inevitably makes future commitments feel less certain. Higher perceived risk means higher required returns, which translates into more expensive capital for tomorrow’s projects.
It’s a classic case of short-term budgetary tinkering potentially undermining long-term strategic goals. And for listed funds holding legacy assets, it’s another reason for investors to demand an even wider margin of safety.
The Broken Business Model
Perhaps the deepest problem, though, lies in how these funds were structured from the start. Many were designed around a growth-through-equity-issuance model that only works when shares trade at a premium to net asset value.
In the low-yield environment of the 2010s, that wasn’t hard. Investors hungry for income and excited by the ESG narrative were happy to buy new shares issued above NAV, providing cheap capital for acquisitions. The pitch was simple: steady, inflation-linked revenues from essential infrastructure, plus growth.
But once premiums turned to discounts – first gradually, then sharply – the virtuous circle broke. Suddenly, issuing new equity would dilute existing holders. Debt became more expensive as interest rates rose. And the funds found themselves in a tricky spot.
- Cut dividends to preserve cash and reduce leverage? That alienates income-focused shareholders.
- Keep paying generous dividends while shares languish? That drains capital and widens discounts further.
- Try to sell assets to raise cash? Often difficult to achieve prices close to reported NAVs.
It’s not that managers haven’t tried various solutions. Share buybacks have been popular, though often too small to move the needle meaningfully. Asset disposal programmes have been announced with fanfare, only to progress slowly or stall entirely when bids come in below expectations.
The Opacity Problem
If the structural issues weren’t enough, there’s also the question of transparency. These funds present themselves as simple, predictable income vehicles. Yet dig into the numbers and things get complicated fast.
Revenues depend on multiple moving parts: actual energy generation, capture prices versus benchmark power prices, curtailment risks, grid availability, and hedging arrangements through power purchase agreements.
Then there are the third-party power price forecasts that drive discounted cash flow valuations. These have proved remarkably volatile. Short-term assumptions have plunged in recent years as wholesale markets normalised post-energy crisis. Long-term forecasts have generally trended downward over time.
When so many variables feed into a single NAV figure that bounces around, it’s natural for investors to wonder whether the accounting flatters reality. Especially when real-world asset sales – the ultimate validation – often seem hard to execute at book value.
The complexity of distilling real-world operational risks into smooth, predictable financial metrics has bred suspicion rather than confidence.
I’ve looked at plenty of these funds over the years, and the sheer number of assumptions required always gives me pause. It’s not that the accounting is wrong, necessarily. It’s that comparing one fund to another, or assessing sustainability of dividends, becomes incredibly difficult for ordinary investors.
Current Valuations: Opportunity or Value Trap?
Today, many renewable infrastructure funds offer double-digit dividend yields and trade at substantial discounts to stated NAV. On the surface, that looks compelling – especially for anyone who believes the underlying assets remain valuable long-term.
But those high yields partly reflect market doubts about sustainability. If power price forecasts keep falling, or if operational challenges persist, or if further policy interventions materialise, then dividends may need trimming. And wide NAV discounts suggest investors are demanding a significant buffer against downside surprises.
Some funds have seen management changes recently, with new chairs coming in. That sometimes signals willingness to take bolder action – whether accelerated asset sales, more aggressive buybacks, or even wind-ups. Battery storage funds, which faced similar scepticism, have arguably reached maximum pessimism and begun to recover.
Could the same happen here? Possibly. But it would probably require clearer evidence that assets can be realised at something approaching book value, or much more conservative forecasting that rebuilds credibility over time.
What Would Rebuild Investor Trust?
In my experience, transparency and alignment go a long way. If funds presented simpler, more conservative metrics – perhaps cash generation per megawatt installed, stripped of complex valuation assumptions – it might help separate genuine quality from financial engineering.
More realistic dividend policies would also help. Promising steady increases when the underlying economics are volatile sets unrealistic expectations. Better to under-promise and over-deliver than the reverse.
- Accelerated, meaningful share buybacks when trading at deep discounts
- Successful asset sales that validate or exceed NAV for portions of the portfolio
- Clearer, more conservative power price and operational assumptions
- Simplified reporting focused on actual cash flows rather than mark-to-model valuations
- Management teams willing to take tough decisions early rather than dragging issues out
Until something changes convincingly, many investors will likely remain on the sidelines. The yields look tempting, but the repeated disappointments have left scars.
Broader Implications for Green Investing
Stepping back, this saga matters beyond just the listed funds affected. Private infrastructure investors will be watching closely. If governments prove willing to revisit subsidy arrangements years later, it changes the risk assessment for all long-dated energy projects.
The transition to net zero still requires enormous capital. Making private investors nervous about policy stability isn’t helpful. There are ways to reduce subsidy costs prospectively without undermining confidence in existing commitments.
Perhaps the most interesting aspect is how quickly sentiment can shift. A few successful asset sales at good prices, combined with stable or rising power markets, could change the narrative dramatically. Conversely, if the harsher subsidy option is chosen, it might prove the final straw for some shareholders.
For now, though, renewable energy funds remain stuck between unfavourable policy developments and their own historical baggage. The path to recovering investor trust looks long and uncertain. Those considering dipping in at current levels should probably expect more bumps along the way – but accept that the potential rewards, if things stabilise, could be substantial.
It’s a classic high-yield, high-risk situation. Only time will tell whether the pessimism has gone too far, or whether there are still unpleasant surprises ahead.
