Premier Miton Global Renewables Trust PLC: The future is bright, the future is renewable

James Smith

Trust Manager – Premier Miton Global Renewables Trust PLC

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the content of this document or the trust mentioned, please speak to a Financial Adviser.

The value of stock market investments will fluctuate, which will cause trust prices to fall as well as rise and you may not get back the original amount invested.

Please refer to the glossary at the end of this document.

Looking back, looking forward

As we look back on 2022, and look forward to 2023, I can identify four major economic influences on the share prices of investments in the Trust’s portfolio. I believe that the two negatives are now largely reflected in share prices, whereas the two positives may not be, but hopefully will be more appreciated as we move through 2023. Let us get the negatives out of the way first.

Negative #1. Higher interest rates

Higher interest rates hurt share prices in two ways. Firstly, to the extent a company has taken on floating rate debt, its finance costs are increased, and its profits will therefore fall. However, most renewable energy companies tend to use long-term fixed rate debt, so this is not a major concern for the time being.

Secondly, as inflation has increased over the year, interest rates have increased to combat it, and this has had a significant effect on the valuations of many renewable energy generators in the year, as future cash flows are discounted to present day values at a higher “discount rate.” The Trust’s US holdings are particularly exposed in that they tend to sell their energy at relatively fixed long-term prices. Therefore, their revenues do not necessarily increase by inflation, but their valuations are hurt by interest rate increases to combat inflation.

On a brighter note, the outlook for higher interest rates appears to be moderating. On this basis, and assuming inflation is approaching its peak, I would contend the future path of interest rates is now largely anticipated, and therefore reflected in share prices.

Negative #2. Political risk

It is difficult to anticipate major political risks in advance, such as the Russian invasion of Ukraine. It is possible that China may take some action over Taiwan, which I view to be unlikely. Perhaps of more pressing concern, is the political intervention in European power markets or windfall taxes, which has affected the Trust’s UK and European holdings, together around two thirds of the portfolio. While this risk has been known about for much of the year, the details have been lacking.

Over recent weeks, these risks have been quantified, with Governments announcing the new tax structures. On balance, these have been set at levels which allow renewable energy companies to capture (post tax) electricity prices substantially above the market prices that existed a few years ago. In any event, these details are now known, so we can safely assume that windfall taxes are now reflected in share prices.

Positive #1. Inflation

While inflation has been a definite negative for the Trust’s North American holdings, European renewable energy companies often have inflation linked tariffs or subsidy regimes. These include the UK’s renewable obligation certificates and the more recent contracts for difference scheme applying to offshore wind. The contracts for difference scheme is the UK government’s main mechanism for supporting low-carbon electricity generation. It incentivises investment in renewable energy by providing developers of projects with fixed inflation linked pricing, thus providing protection from wholesale price volatility, inflation linked tariffs can provide a boost to energy company revenue.

However, the costs of an operational renewable energy asset are mainly fixed, the two largest costs being depreciation of the original capital investment over the life of the asset, and finance costs on debt used to part fund the construction. As noted above, finance costs tend to be fixed rather than variable. The beneficial impact of inflation could therefore have a greater proportionate impact on net profitability than revenues.

Positive #2. Power prices

The rise in the wholesale price of electricity since Jan 2020

Source: Bloomberg, data from 27.12.2019 to 25.11.2022

In the US renewable generators tend to sell power on largely fixed long term prices. However, in Europe many generators retain substantial exposure to electricity prices. Given the sharp increase in the cost of gas, electricity prices have increased as gas generators tend to have relatively high marginal costs of production and as such have an outsized role in influencing power prices for the entire market.

For several years, forecasters have assumed that the falling cost of renewable energy will exert a downward pressure on the electricity price as renewables take an ever-larger share of the market. This remains a common view I hear among investors. However, I believe the factors pushing up electricity prices over the past two years, as show in the chart above, will likely to be with us for a few years yet. Indeed, I can see several reasons why power prices will stay high for several years, including:

  • The shift in European gas usage from Russian piped gas to international liquified natural gas (LNG) is a fundamental permanent shift in the market. New LNG infrastructure is expensive and will need to be recovered through the gas price. Further, Europe will be competing for LNG supply against Asian countries, particularly China.
  • New nuclear is cost prohibitive and takes many years to build. It is very unlikely to contribute meaningful new electricity supply over anything short of the very long term.
  • Europe’s existing nuclear reactors are aging. This is a particular issue for France, where I expect its fleet of aging reactors to generate less power and become more unreliable over time. France, which generates around 70% of its electricity from nuclear, is likely to continue to import power from neighbouring countries, helping to keep power prices elevated across Western Europe.
  • European carbon prices have increased over the past couple of years to a level that is now effective in discouraging carbon emissions. The carbon price is paid by coal and gas generators, pushing up the price of electricity, and effectively being a revenue stream for renewable generators. The sale of carbon permits is also a lucrative tax revenue for the EU and the UK authorities who therefore have little incentive to push for a lower carbon price.

The growth story is just getting started

These are fundamental shifts. Should power prices stay at current elevated levels, I believe there is the potential for increases in the share prices of European renewable electricity generators. Over the past decade, the growth of renewable energy has consistently and dramatically outperformed nearly all expectations.

But this growth story is just getting started. As countries aim to reach ambitious decarbonization targets, renewable energy—led by wind and solar—is poised to become the backbone of the world’s power supply.

Click on a star to rate it.

We are sorry that this post was not useful for you.

Write your comments here:

Tell us how we can improve this post?

Risks

The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount invested. The value of your investment might not keep up with any rise in the cost of living.

Past performance is not a reliable indicator of future returns.

Performance information concerning the fund and its comparator benchmark are estimated forecasts and are not a reliable indicator of future performance.

Higher inflation can lead to some investments falling in value, particularly those with a fixed level of interest, for example government bonds and corporate bonds. The value of an investment might not keep up with any rise in the cost of living.

Funds that invest in specific sectors or industries may carry a higher risk and display greater volatility than funds with a more diversified portfolio.

Government and corporate bonds generally offer a fixed level of interest to investors, so their value can be affected by changes in interest rates. When central bank interest rates fall, investors may be prepared to pay more for bonds and bond prices tend to rise. If interest rates rise, bonds may be less valuable to investors and their prices can fall.

Glossary

Assets: Different groups of investments such as company shares, bonds, commodities or property.

Capital: Describes financial assets, particularly cash, or other assets, such as shares, owned by a person or organisation.

Depreciation: Is an accounting method used to represent how much of an asset’s value has been used.

Fixed rate debt: Fixed-rate debt is a debt instrument with a level interest rate over its entire term, with regular interest payments known as coupons.

Floating rate debt: Debt which does not pay a fixed rate of interest.

IMPORTANT INFORMATION:

The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the content of this document or the suitability of the trust mentioned speak to a Financial Adviser.

The value of stock market investments will fluctuate, which will cause trust prices to fall as well as rise and you may not get back the original amount invested.

A free, English language copy of the trust’s full Prospectus, the Key Information Document and Pre-investment Disclosure Document are available on the Premier Miton website, or you can request copies by calling us on 0333 456 4560.

For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Issued by Premier Portfolio Managers Limited (registered in England no. 01235867), authorised and regulated by the Financial Conduct Authority, a member of the Premier Miton Investors marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

008428/161222

Stay up to date

Sign up to receive the latest articles straight to your inbox

Main Disclaimer

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

The content you are trying to access is intended for investment professionals only.

Please use the button below to return to the hompage.

Main Disclaimer

Disclaimer

This section of the website and the content it contains is for retail clients only and by persons who are resident in the United Kingdom [who are not US persons]. Professional advisers should refer to the Professional Advisers site.

The content of the pages of this website is for your general information only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell or purchase shares in the funds or portfolios or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >

Disclaimer

This section of the website and the content it contains is for professional financial advisers only and should not be relied upon, or circulated to, retail clients. Retail clients should refer to the Private Investor's site.

The content of the pages of this website is for your general information and use only. It, and the products and services described within it, are subject to change without notice. We shall not be liable to you, or any third party, for any amendment, modification, suspension or discontinuance of any product or service described on our website. Neither we, nor any third parties, provide any warranty or guarantee as to the accuracy, timeliness, performance, completeness or appropriateness of the information and materials made available on this website.

You acknowledge that such information may contain inaccuracies or errors and we expressly exclude liability for any such inaccuracies or errors to the fullest extent permitted by law. Your use of any information or materials is entirely at your own risk, for which we shall not be liable.

The information contained on this website does not constitute an offer or solicitation to sell shares in the funds or portfolio or to provide you with other products or services. Any application or investment must only be made on the basis of the relevant documentation of the investment, such as, for example, terms and conditions. The information on this website does not constitute any investment, tax, legal or other advice. Persons who do not have professional experience in matters relating to investments should always consult with an independent financial adviser before making an investment decision. Any opinion expressed on individual funds, services or products, represent the views of the individual at the time of preparation and should not be interpreted as a personal recommendation to buy or sell or otherwise trade all or any of the investments that may be referred to.

Website terms of use: Please ensure you have read and accept the full 'website terms of use' before continuing.

Read the full 'website terms of use' >