The energy transition – 3 investment trust ideas that could benefit

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We’re facing a cost-of-living crisis.

More than one in ten low-income households have taken on credit in order to pay their bills. And more industries are striking for pay increases in order to meet rising costs.

The turmoil in the energy market is a key driving factor, and it’s not predicted to subside anytime soon. Futures markets are pricing European gas at twice or three times their 2021 levels for at least the next three years.

What’s driving the energy crisis?

The ongoing conflict in Ukraine is a major disruptor in the global supply and demand of oil & gas. The energy trade has been a major battlefield in the confrontation between Russia and Europe because it’s Russia’s largest source of revenue.

But widespread dependence on Russian oil & gas means it’s not easy to simply switch off Russian supplies. Nine European countries source more than 50% of their natural gas from Russia. For Moldova and North Macedonia, Russia is the sole supplier.

Russia has cut gas supplies to Europe in response to sanctions, and this has driven up demand, and subsequently prices, as affected countries are forced to source energy elsewhere.

Europe’s reliance on Russia and need to diversify its energy sources has magnified the focus on clean energy. Yet this rush for renewables is driving further instability in the energy market as we don’t yet have the infrastructure to support this demand.

The inconsistency that comes with renewables creates further challenges. Last year, the UK had one of its least windy summers since the 1960s, causing a reduction in wind power production.

How to invest in the energy transition?

The UK needs greater energy independence, with a diversified supply that’s as clean as possible.

Here are three investment trusts aiming to play a part in this transition.

They invest in quite a niche area of the market though, so we expect them to perform differently. An investment in a specialist area adds risk. We think any investment should usually only form a small part of a well-diversified portfolio. Only investing your portfolio in one sector, for example renewable energy, could leave you at risk if that sector falls out of favour. Investors should only invest in them if they have the time and knowledge to carefully select and monitor them.

Fund managers typically take a long-term view of the market in their investment strategies. That means investment trusts are generally suited to investors who have a long-term time horizon – that’s at least five years.

This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. All investments can rise and fall in value, so you could get back less than you invest.

Greencoat UK Wind

Wind is currently the UK’s largest source of renewable electricity. UK wind farms produce power and sell it under long-term agreements to utility companies who are obliged to produce a certain percentage of power from green sources. Greencoat UK Wind lets you invest directly into these wind farms.

The trust invests in over 40 operating wind farms that produce enough clean energy to power over 1.5 million homes. Recent investments include the Windy Rig windfarm located in Dumfries & Galloway, Scotland. Windy Rig consists of 12 turbines and is 100% owned by the trust.

Revenues depend on the ongoing attractiveness of wind-farms investments in general, as well as wind conditions, which the fund has no control over. Investors should be aware that it can be harder to sell your shares as there might be limited buyers for the underlying investments.

However, the team’s encouraged by what they believe is an attractive pipeline of projects, both onshore and offshore. In 2021, Greencoat had approximately 5% market share of operating UK wind farms.

More about Greencoat UK Wind plc, including charges

Greencoat UK Wind plc Key Information Document

SDCL Energy Efficiency Income

SDCL Energy Efficiency Income trust invests in projects that contribute to a greener future. It’s dedicated to accelerating the transition to a net-zero carbon economy. The managers only invest in proven, operational projects that deliver energy for commercial, industrial, and public sector buildings.

They achieve this through on-site generation, like combined heat and power units and roof-top solar installations. Or, through energy demand reduction measures, such as efficient lighting, heating and cooling solutions, and also through effective use of energy storage solutions.

Current investment projects include the provision of electricity, heating, cooling, and hot water to St Bartholomew’s Hospital in London. The trust’s investment generated £500,000 of energy cost savings a year, enough for the hospital to employ an additional 15 nurses.

Other projects include providing on-site power for Citigroup’s London data centre and waste-gas recycling for US steel mills. What links them all is that they should deliver a stable and predictable income stream for the trust. Although remember any income is variable and not guaranteed.

More about SDCL Energy Efficiency Income Trust plc, including charges

SDCL Energy Efficiency Income Trust plc Key Information Document

Gresham House Energy Storage Fund

The Gresham House Energy Storage Fund trust invests in a portfolio of utility-scale operational battery energy storage systems across the UK. The systems help address supply-demand imbalances in the national grid.

When the national grid is at capacity, windfarm owners collect ‘constraint payments’ to switch their turbines off. In 2020 alone, the UK paid £274 million to switch off wind turbines due to excess supply. Battery energy storage provides the capacity to stockpile excess energy, that might otherwise be wasted, and release it when needed to keep supply consistent.

Another source of income for the fund is the UK government’s capacity market mechanism. This is when generators (including batteries) are paid a fixed fee for being on call to deliver power during times of extreme need, known as ‘stress events’.

Battery energy storage systems provide a cost-effective solution to the intermittency of renewable energy. They will likely play a vital role in the rolling out of renewables.

More about Gresham House Energy Storage Fund plc, including charges

Gresham House Energy Storage Fund plc Key Information Document

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