A barrage of regulatory reforms has dampened hopes that higher power prices might provide relief to struggling renewable energy trusts.
By mid-April, conflict in the Middle East had driven UK electricity spot prices up by more than 25 per cent year on year. Analysts had hoped this might boost renewable energy trusts’ net asset values (NAVs), and point towards a potential path to recovery.
However, a series of government policy updates over the past week, including plans to scrap Carbon Price Support (CPS) from April 2028, have changed the picture.
The CPS tax is levied on fossil fuel power generation and has historically helped set a floor for carbon prices in electricity markets. Its removal should therefore reduce UK wholesale electricity prices. While the move was largely anticipated by renewables generators, the earlier-than-expected timing is likely to weigh on NAVs, albeit to varying degrees across the sector.
Greencoat UK Wind’s (UKW) manager said its initial assessment is that NAV could fall by between 3p and 5p per share. Foresight Solar Fund (FSFL) said the impact could be more modest, estimating a hit of between 0.5p and 1p per share on its 31 December 2025 NAV.
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This is not the only policy change to befall the sector, however. On Tuesday, secretary of state for energy security and net zero Ed Miliband said the government planned to “break the influence of gas on energy prices” to ease affordability pressures faced by bill payers.
Consequently, the electricity generator levy will be raised from 45 per cent to 55 per cent. The tax, which targets exceptional revenues during price hikes, will channel a greater share of excess profits to support struggling businesses and households, and has been raised in a bid to encourage generators to decrease their exposure to wholesale prices and move on to long-term contracts for difference (CFDs).
The levy’s threshold level of £82.61/MWh will remain the same, though, which means the tax hike will not automatically impact all portfolio companies held by renewable trusts. The Renewables Infrastructure Group (TRIG) said the power price forecast used for its portfolio valuation as at 31 December was below the threshold level across all future periods.
New contracts to curb volatility
As a result of the policy changes, the government will offer fixed price CFDs to low-carbon generators. Although uptake is described as voluntary, analysts at Panmure Liberum said it is expected to be widespread, particularly as higher windfall taxes make fixed pricing more attractive.
The broker argued that funds such as TRIG are likely to participate, with no immediate impact on NAV or dividends.
“Funds that have leaned into merchant exposure, notably Greencoat UK Wind, or locked in premium power purchase agreements (PPAs) at favourable points in the cycle would see some upside capped, but, on balance, greater predictability is the right outcome,” said Panmure Liberum analyst Shonil Chande.
“We would expect dividends to be right-sized to reflect a rebasing that retains an attractive income component, but with appropriate cover to support reinvestment and de-leveraging.”
He added that more stable, contracted revenues could support lower discount rates and a reduced cost of capital over time, helping to offset some of the pressure on valuations.
In a positive for the sector, the government clarified that existing renewables obligation (RO) agreements will remain in place.
Most renewable energy trusts have limited exposure to market prices, given how these funds approach their sources of revenue. To reduce volatility, most trusts prefer to lock in prices for their energy generation in advance, suggesting they will be keen to take part in the new CFD system should its pricing (which has yet to be announced) prove attractive.
Around 80 per cent of trust revenues are typically locked in through PPAs or subsidies such as renewables obligation certificates (ROCs), according to Canaccord Genuity analyst Iain Scouller, leaving only 20 per cent exposed to market prices.
Renewable trusts may welcome the latest changes, given the importance of ROC revenues and following separate upheaval regarding contracts’ inflation indexation last November. However, the constant regulatory tinkering will undoubtedly have a negative impact.
“The result is likely to be that investors will demand higher risk premiums and discount rates for investing in UK renewables,” said Scouller. “There is a risk that investors [ . . .] will take the view that the sector is ‘uninvestable’ given the continual changes.”
He added that the roughly 30 per cent discounts at which many renewables trusts trade suggest this “may have already happened”.