I’ve long believed that most, if not all, renewable infrastructure trusts (ITs) are essentially cons. The problem? They rely on wasting assets rather than operating as traditional trading businesses.
I am now wondering if this recent performance is indicative of the entire “renewable” investment space. As time goes on, does the ongoing power generation performance & income continue to support the share price for the long term, or is capital simply being eaten away to provide what does on the face of it appear to be a good yield? Does it account for the declining capital value of the assets, and their future replacement?
Wasting Assets and Annuity-Like Structures
These ITs function like annuities. They raise a large sum of money, invest it in assets with a limited lifespan (like wind turbines or solar panels), and then pay you dividends over a set timeframe. But instead of giving you your original capital back, they pay dividends from the income generated by these wasting assets.
In the early days, when these ITs were trading at premium valuations, they could issue new shares and raise more capital to keep the fund going. However, there’s a ticking clock on this strategy because the assets they buy – solar panels, wind turbines, batteries—only have finite lives. The trusts don’t own the land they’re built on, just a lease. If they don’t continually reinvest, they may only last for 15 to 20 years.
The Finite Lifespan of Renewable Assets
The lifespan and efficiency of these renewable assets are critical issues. For instance, solar panels degrade at a rate of about 0.4% a year. If you own the land they’re on, the depreciation would be around 0.5% a year, factoring in the occasional need to replace inverters. Typically, the land is leased for about 25 to 35 years, but leases are already being extended, so the exact depreciation figures are tough to pin down.
Wind turbines are another story. While I don’t have a specific figure for their degradation, they deteriorate faster than solar panels. However, newer blades are more efficient than the old ones, even when they were brand new, which adds more complexity to the valuation of these assets.
Things like wind turbines, solar panels, batteries, have finite lives. They don’t own the land they’re sited on, only a lease over it. Unless they keep reinvesting, they may only have a 15 yr, 20 yr life.
Of course, it also depends on how the asset is managed. Solar panels degrade at 0.4% a year so if you stuck them in a field which you owned the depreciation would be say 0.5% if you allowed for the inverter to be replaced every so often. The issue is that the fields are rented for a period of around 25-35 years, but already we are seeing the periods extended so it’s hard to work out exactly what the depreciation is. Wind turbines are similar although I can’t give you a figure for the degradation. It’s higher than solar panels but more confusingly the new blades are more efficient than the ones that are being replaced (even when the blades were new) so make of that what you will.
Too Efficient for Its Own Good? The Risk of Power Price Collapses
The interesting thing about renewable energy technology, especially solar, is that it keeps getting cheaper and more efficient at a rapid pace.
If you have a lease with planning permission, cabling, and a grid connection (like NPI), your assets can keep generating more energy while maintenance and replacement costs decrease over time.
However, there are some potential downsides. One is the risk of governments getting greedy. Despite all their talk about green energy, they can’t seem to resist imposing taxes—Norway being a recent example of this.
Another widely discussed issue is the possibility that as technology becomes more efficient and cheaper, power prices could collapse. This concern impacted the prices of these renewable trusts a few years ago (about four years ago, if memory serves), but then prices went in the opposite direction for a while, so that theory hasn’t fully played out yet.
Reinvestment vs. Over-Distribution: Don’t Be Fooled by 8% Yields
Solar panels, inverter, blades, but – don’t they have to raise more money to afford those replacements if everything is getting returned to shareholders via dividends (or take on more debt, or sell something). Worked great when there could be regular share issues…
Some trusts, like TRIG (The Renewables Infrastructure Group Ltd), reinvest part of their cashflows—sometimes up to half—back into the business, which can extend the life of the fund. But many others pay out all their income, or even more, as dividends. This means that while you might enjoy an attractive 8% yield today, it’s not sustainable.
But then there’s ROOF, a company I will never invest in. I came across this information in their annual report, and although I can’t provide a page reference (I just copied and pasted it), it’s enough to keep me away from ROOF. To me, it looks like financial wizardry. Essentially, the PPA (Power Purchase Agreement) payments are used to pay off the lease, and at the end of the lease, the assets are handed over. It’s like an amortizing loan—by the time the PPA ends, the solar panels have zero value to ROOF.
Here’s the excerpt from the report:
“Asset life on the current portfolio is assumed to be the length of the PPA and lease term, as the assets are handed over to the off-taker at the end of the term, with no extension terms included in the contracts, except for the investments in front-of-the-meter assets where the asset life is expected to be 30-40 years.”
At some point, shareholders will realize the truth: their 8% yield is finite, and once the assets reach the end of their life, the payouts will stop. If your investment returns 8% a year for 20 years and then nothing, it’s not as great an investment as it seems.
The Bottom Line
Many renewable infrastructure trusts are built on wasting assets with limited lifespans. While they might offer attractive yields, unless they reinvest heavily into newer assets, the income stream will eventually dry up. High yields now may hide a fundamental problem: the long-term sustainability of these trusts is far from guaranteed.
But, then we have ROOF which I will never touch. I have this copied from the annual report. Sorry I can’t give a page reference but I just cut and pasted it and I’m never investing in ROOF given this. To me it looks like financial wizardry where the PPA payments pay off the lease and at the end of the lease the assets gets handed over. Basically an amortising loan. In other words at the end of the PPA the solar panels will have zero value to ROOF. (and as a consequence I’m loath to invest in SUPR as it’s run by the same fund manager and I worry what financial engineering they are getting up to there too).
“Asset life on the current portfolio is assumed to be the length of the PPA and lease term as the assets are handed over to the off-taker at the end of the term, with no extension terms included in the contracts, except for the investments in front-of-the-meter assets where the asset life is expected to be 30-40 years.”
Then it comes down to price of course, & I’d argue some are cheap enough. But I still say they’re wasting assets 🙂
