Stifel has issued a warning that the dividends of renewable infrastructure investment trusts could become more volatile as subsidies for clean energy are set to expire in the coming years.
Many renewable infrastructure projects will see their government-backed Contracts for Difference, which provide developers with a stable revenue stream, expire between 2032 and 2035, as reported by .
These subsidies are crucial for providing a strong 'fixed' revenue stream, allowing the trusts to back their dividends, typically accounting for around 60 per cent of a fund's income.
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Stifel analysts Iain Scouller and William Crighton stated: "We think the switch from the certainty of subsidy revenues to a higher degree of market revenues will increase the risk profile of the sector, reflecting volatile power prices," said Stifel analysts Iain Scouller and William Crighton.
While renewables trusts often make reference to the 'average asset life' of the portfolio, meaning the expected time until their infrastructure is no longer operational, less attention is paid to when subsidies are due to expire.
Some do provide the information, however, as The Renewable Infrastructure Group states that " While renewables trusts often refer to the 'average asset life' of the portfolio, less attention is given to when subsidies are due to expire."
However, some do provide this information, such as The Renewable Infrastructure Group stating that "the weighted average subsidy life remaining is nine years," while Octopus Renewables has provided a detailed breakdown.
Octopus Renewables revenue forecast
Scouller and Crighton added: "We suspect the boards would be prepared to pay dividends effectively out of capital, if necessary, given the importance of dividends for the sector."
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Trusts could gradually sell off their assets to cover the dividend, leading to a slow decrease in its underlying value.
However, the introduction of a new subsidy or price guarantee mechanism is being considered, with a consultation currently underway to determine if older projects should be eligible for further subsidies upon expiration, according to analysts.
Renewable energy trusts have seen a decline in performance in recent years, with a 9.3 per cent drop in stock price over the last year and a 3.4 per cent fall over the past five years, as per data from the Association of Investment Companies.
These trusts also trade at a significant 33.2 per cent discount to their underlying assets, indicating investor scepticism about the valuation process for the trusts.
Of the 19 renewable infrastructure trusts on the market, only Harmony Energy Income trades above a 28 per cent discount, and this is solely due to its ongoing takeover by a private equity group.