Would you invest in renewable energy?

It sounds like the perfect investment. Equip your house with solar panels and look forward to dramatically reduced utility bills and the potential to earn a handsome return by selling any excess energy to the electricity grid.

Thousands of people across the country have already embraced this idea since the government introduced the Feed-in Tariffs (FIT) Scheme in April 2010 to encourage the uptake of small-scale renewable and low-carbon technologies.

Greg Shreeve, insight manager at the Energy Saving Trust, believes getting solar panels installed is a no- brainer for many people. The potential benefits to be enjoyed, he argues, more than make up for the upfront costs.

“The technology pays for itself within 11 years and will go on generating electricity for your home,” he says. “It’s a great way to actually start making money when energy prices are rising. It’s free electricity and low-carbon technology, so a winner all round.”

However, he warns that time is running out for consumers wanting to take advantage of this arrangement, as the government has been looking to significantly reduce the benefits of the FIT scheme. It launched a consultation into proposals to cut FITS incentives that concluded in October 2015, with a final decision expected in February.

“The announcement that they would consult might mean it’s best to act as quickly as possible,” Shreeve says. “We’d advise anyone looking to get solar panels installed do so sooner rather than later.”

Installing solar panels is clearly the most practical way of getting exposure to an area that has been increasing in prominence over the past few years, with campaigners having become far more vocal about the need to tackle energy issues.

A prime example came at the beginning of December 2015 when nearly 200 countries took part in the United Nations Climate Change Conference in Paris in a bid to thrash out a lasting agreement to put the world on track to a low-carbon, sustainable future.

Christiana Figueres, the executive secretary of the United Nations Framework Convention on Climate Change, told the world leaders in attendance that they were being given an opportunity to decide the best route to achieving national climate change goals that delivered the necessary support for the developing world.

“It is up to you to both capture this progress and chart an unequivocal path forward, with a clear destination, agreed milestones and a predictable timeline that responds to the demands of science and the urgency of the challenge,” she said.

The use of renewables is certainly on the rise in the UK, according to Adam Wentworth, spokesperson for RenewableUK, an industry trade association. In fact, renewables generated 25% of the UK’s electricity during the second quarter of this year, more than nuclear and coal.

“We have enough wind energy to power the equivalent of eight million homes,” he says “There is 8 gigawatts (GW) of onshore wind and 5GW of offshore at present – and by 2020 we expect there to be upwards of 12GW of onshore and 10GW of offshore.”

The forecasted growth levels for the industry also suggest there are attractive investment opportunities on offer for companies and individuals – both now and over the next few years, he suggests.

For example, if you install an electricity- generating technology from a renewable source such as solar photovoltaics (PV ) or a wind turbine, you can get paid for the electricity generated as well as any surplus that can be exported to the grid.

“The current Renewables Obligation (RO) incentivises the deployment of large-scale renewables,” he says.

“The Feed-In Tariff (FIT) also provides homeowners, farmers and small businesses an opportunity to benefit from small-scale renewable projects.” However, there are issues on the horizon. “The RO will end for onshore wind in 2016 and the government is planning to make significant cuts to the FIT,” he says. “This is having a severe effect on the industry and has already led to job losses.”

Collective funds

There are other ways to invest in the renewables story, with a number of investment funds having exposure to the sector. The fact it’s an area that is likely to grow over the next few years means its prospects look encouraging.

There are a number of investment funds and investment trusts that allow people to invest in renewable energy, as well as some corporate bond portfolios supporting various projects in this field, according to Patrick Connolly, a certified financial planner with Chase de Vere.

However, he believes they should be approached with extreme caution. “Investing in renewable energy is high risk, with most companies being in the early stages of their development, so this isn’t a suitable option for most mainstream investors,” he explains.

“Many renewable energy projects, while seemingly a good story, have not yet demonstrated that they make reliable investment opportunities, while the risks involved have increased because of lower energy costs, particularly the low oil price.”

The most reliable form of renewable energy is probably solar, believes Connolly, and this is where many investments have been focused as there isn’t a huge differential in the number of sunlight hours year on year, and solar investments benefit from low maintenance costs, consistent earnings and long-term project lives. “But we’ve recently seen solar firms going into administration due to cut backs in government subsidies, which probably demonstrates how much the renewable energy sector needs external support,” he says.

“While you could argue that green energy can provide diversification to a portfolio, we aren’t yet convinced that they are credible investments in their own right.” Justin Modray, founder of Candid Financial Advice, also has his doubts. While acknowledging that renewable energy investment funds are an option for some people, he warns that they are not suitable for everyone and that each portfolio must be examined on its own merits.

“Renewables may well offer good long-term prospects, but in the short term returns tend to be linked to energy prices, which can mean high volatility,” he says. “Funds that invest in solar projects backed by feed-in tariffs should be less correlated to energy prices, since the revenue is relatively fixed in advance, but there are still risks.”

He says the amount that people should have in this area will depend on their attitude to risk and existing investments. In fact, unless someone has a specific appetite for exposure to the sector, he worries about returns being highly correlated to energy prices. “We have a handful of clients that like this area and accept the risk of having high exposure to energy in the short term but they tend to be the exception,” he says. “Also, given clients may have a high exposure to energy in UK (active) funds or trackers, we don’t want to put too much into renewables.”

Mike Brooks, manager of Aberdeen Diversified Growth fund, invests in a number of portfolios that hold renewable assets, such as Greencoat UK Wind, The Renewables Infrastructure Group, and Bluefield Solar Income fund.

“The attractive characteristic is that once they are operational you have a pretty long-term stream of reliable cash flows,” he says. “Revenues come from a mixture of government subsidies and from selling power to the grid – two different streams.”

Greencoat, for example, mainly invests in UK wind farms, with the aim to provide investors with an annual dividend while preserving the capital value of its investment portfolio.

The Renewables Infrastructure Group, meanwhile, focuses on onshore wind and solar photovoltaic energy infrastructure projects in the UK and Northern Europe. The objective is to provide investors with long-term, stable, cash-covered dividends.

He believes that being able to gain access via the listed market – he cites investment trusts in particular – is pretty attractive for multi-asset investors who see the attractions of such revenue streams with dividend yields of around 6%.

“There’s a pretty solid story here because there’s clearly a need for investment in renewable energy for the government to meet its 2020 targets,” he explains. “Also, even if we had a 2008-type sell-off with markets down 50%, [renewables] would generally hold their value.”

Fund recommendations

According to Darius McDermott, managing director of Chelsea Financial Services, there are some investment funds that could be worth considering, with his first suggestion being Guinness Alternative Energy run by Ed Guinness.

He describes it as a pure alternative energy fund and points out that it has around 35% in solar, 34% in wind, 12% in ‘efficiency’, 10% hydro, 4% geothermal and 3% biofuels.
“These guys are energy specialists and really know their sector inside out, although it’s extremely volatile, as is the sector, so the fund tends to be either the best or worst in the global sector – never really in the middle!”

He also highlights Pictet Clean Energy. “Pictet has made a name for itself by specialising in such very niche sectors,” he says. “The fund invests in alternative energy and related alternative energy companies, such as semiconductor makers, so is much less volatile as a result.”

So what does the future hold? With a change in government direction seeming unlikely, many renewable energy firms face a very challenging business environment, points out Connolly at Chase de Vere.

“The ongoing support of this and future governments is likely to remain a big factor in whether many renewable energy initiatives will prosper and whether they represent a viable option for investors,” he adds.