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Greencoat UK Energy: wind energy in Clim8’s portfolio

October 29 2020 - Vincent Gilles, Chief Investment Officer Sustainable Investing

In the course of the next few weeks, we will share more details about the components of the portfolios that we have curated at Clim8 Invest.

We will try to minimise technical investment jargon and make clear what our users are investing in. We are starting with 3 portfolios, investing in our 6 key sustainable themes. These include clean energy, clean technology, smart mobility, sustainable food, clean water and recycling. Our aim is to create value for our investors and make sure we are investing in “impact” stocks.

Greencoat UK Wind

I will start with one of our main investments in the fascinating space of wind power: Greencoat UK Wind Plc is a share listed on the London Stock Exchange that holds investments in wind energy assets in the UK. Greencoat is one of our top holdings at close to 2% in our balanced portfolio. We run a well diversified portfolio and such a 2% position is actually very significant. 

Given the complexity of their business, Greencoat typically targets fund managers and other professional investors, rather than retail investors. Part of Clim8’s job is to give our retail investors access to such quality assets thanks to our selection and due diligence process.

Greencoat UK Wind is one of the largest listed wind energy asset holders with a total value (or “market capitalisation”) in excess of £2bn.

It owns more than 1 GW of onshore and offshore wind farms (split: 83% onshore and 17% off-shore). A total capacity of 1 GW can provide, in typical weather conditions, the power for around 800,000 homes. Their assets are very new (more than 80% are less than 10 years old) and they are all operating.

Translation: investors do not get directly exposed to the risk of development and construction…anybody who has built a house will get this point straight away!

Their goal is to deliver between 8 and 9% return [1], each year, to investors through a combination of a generous dividend committed to rise with RPI (inflation) every year. And Greencoat has delivered this return since day 1 in 2013 [2], along with a rise in value of the share. The trust that investors have for the team at Greencoat is reflected through the stock trading at a premium to NAV.

*NAV = “net asset value”, a bunch of words to say the underlying value of the assets, that valuation specialists have calculated.

Currently, Greencoat Wind UK is trading at close to 10% premium to NAV i.e. it is currently well regarded [3]. 

Wind Energy

This share (legally classed as an “Investment Trust”) is focused on an area of high growth in the renewable energy space: wind energy. Anyone who lives in or visits the UK will realise that the island is blessed with abundant natural wind resources. This is “free fuel” and doesn’t emit greenhouse gases like coal and oil. The trick is how best to harness those resources, to turn them into power and therefore into money.

The UK is currently one of the leaders in terms of ambitions in the world to decarbonise the economy, along with the likes of Denmark and Germany. It has a goal to stop emitting carbon by 2050.

True, the goal is a ‘net zero carbon’ which means that residual emissions will have to be offset. My cynical self will probably say that 30 years is a long time away. And that no politician making the decision today will be around to face the consequences of their decisions. Yet it would probably be a bit unfair. It’s not possible to turn the economy on a dime with regards to how it creates power. But we have made tremendous progress already – a third of the power produced in the UK is based on renewables and this places the country very high in the world hierarchy.

Currently, nearly 24 GW of wind is installed in the UK, 10GW offshore (i.e. on the sea) and 14 GW on the land.

The role of subsidies

In order to kick-start the development of clean power, the UK created a number of complex incentive schemes that aimed to financially support the achievement of returns for the operators and, therefore, to the investors into those operators [4].

Gradually though, over the last few years, the cost of producing power with wind (and solar) has plummeted. As a result, Governments across the world -including the UK- have been moving towards removing expensive subsidies (better for you as a tax-payer) and encouraging companies to share a growing exposure to market-based power prices. This means that the operators have to find a balance between the remaining Government subsidies and long-term contracts (“power purchase agreements”, or PPAs) that give full visibility to their investors.

At the end of June 2020, more than 50% of Greencoat’s revenues were Government-backed (i.e. sovereign backed, so low risk). While the rest was largely free of market risk. True, the higher the power price, the better off Greencoat will be but they can achieve the needed profitability with the prices that are currently envisaged in the UK.

Anyway, in my view, the risk is limited because the cost of producing wind energy with a wind turbine has plummeted in the last 20 years to a level where it is now nearly as cheap to produce with zero carbon emission as to generate with a modern gas burning plant.

When we interviewed the team at Greencoat as part of our selection process, we came to the view that they have a very good grip on the risks and know how to mitigate them, plus they have a good vision of the future of wind energy in the UK. Note that as I am writing these lines, Greencoat UK Wind Plc has announced a £400m capital increase that will help the company finance one very large asset acquisition and also reduce its current debt level (they can carry debt like any other company).

And if you are a big kid like me, here is a fantastic image: the diameter of modern wind turbines are so gigantic that you could fly an Airbus 380 between the tips of the blades! These are awesome machines. And they have become incredibly reliable over the years, as well as more energy efficient, as engineers and operators have learnt how to “tune” them. A great combination in my view.

Investments of this nature carry risks to your capital. Investing in private equity involves a high degree of risk. Please invest aware. Please note this information is for illustrative purposes only and it must not be construed as investment advice. Past performance is not a reliable indicator of future results and the value of investments may rise as well as fall.

[1] Source: Greencoat
[2] Source: Greencoat and FE Analytics
[3] FactSet as of 29.09.20
[4] Irena and UK Government
[5] Proactive Investors

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