Monday, 2 January 2023

Portfolio Review - End 2022

Another year rolls by and this is now my 10th end-of-year review since starting my blog in February 2013. And what a year it’s been...Boris gone and replaced by Liz Truss who lasted 7 weeks before being replaced by Rishi Sunak. The passing of our longest serving monarch, Queen Elizabeth in September with many thousands queuing for up to 14 hours to pay their respects.

But above all a year dominated by the devastating decision by Putin to invade Ukraine in February. Hard to believe that the decision of one crazy person can bring about widespread deaths, misery and disruption to millions of ordinary people.

Food, energy and basic materials have all gone up significantly which has resulted in the cost of living crisis and rampant inflation on a level last seen in the 1970s. According to Bloomberg its the worst year for equities and bonds combined since 1926! Government bonds which are normally a safe haven in turbulent times have behaved like risky equites - especially during the brief tenure of Truss/Kwarteng and their proposals for unfunded tax cuts. In fact, the Vanguard Lifestrategy 20 (20% equities/80% bonds) most popular with the very cautious investors, was the worst performer in the LS range over the past year... -15% return.

So, maybe a good time to remember the oldest rule of investing...the value of investments can go down as well as up! Most investors will have had a bumpy ride this year but it’s worth remembering that we’ve mostly had a good run this past decade. Whether we make a gain in any one year is a bit of a lottery so we need at least a time frame of 5 to 7 years to provide a more reliable indicator of strategy.

The markets have taken quite a tumble and most investors will be looking for a reversal, however, I’m decidedly more circumspect on the ability of the global economy to bounce back any time soon and over the past year I have been selling off some equities and dusting off the old tin hat. I set out some thoughts on the risks back in July.

Vigil at Westminster Hall

Climate Change

Although the situation in Ukraine and now the cost of living crunch have dominated the news headlines, the climate crisis has continued to get worse and the world gets warmer each year... 2022 is no exception...the UKs warmest ever year... in July the Met Office issued a first-ever red alert for severe heat and our first-ever temperature of over 40C (previous 38.7C from July 2019) was confirmed in several locations on the same day that saw many wildfires around London. It was no surprise to learn that July was our driest month since 1911.

Further afield we saw devastating heatwaves across Europe with many wildfires and the worst drought for 500 years...that’s back to the time of Henry V111 and Anne Boleyn!

Also in the US where 100 million people faced danger to life warnings across more than 25 states... we also saw the devastating floods affecting a third of Pakistan with 30 million people made homeless also Bangladesh and also Sydney - hundreds killed and thousands made homeless. China experienced an unprecendented prolonged heatwave for over two months with record temparatures reaching 43C in several provinces. The drought and prolonged heat combined with continuous Covid lockdowns will have a significant impact on China’s economy. 

There are however some signs of some progress - the Inflation Reduction Act in the US will be a landmark piece of legislation aiming to reduce carbon emissions by up to 44% by 2030. In Europe there’s the REPowerEU plans to become independent of Russian gas and oil by 2027 and will speed up the transition to renewable energy.

Unfortunately, we are still waiting for governments to take these issues more seriously. The climate scientists have delivered warnings for many years on the threats from global warming so its really baffling to see the persistent reluctance of politicians to act with urgency and in co-operation around the world to tackle this huge existential problem. A recent report from the UN suggests that since COP26 last year, government plans for reducing emissions have been woefully inadequate and there is now no credible pathway to keep warming below the critical 1.5C.


Another concern is rising levels of debt...the monetary and fiscal response to the pandemic was 3.5x higher than the response to the 2008/09 financial crisis. Global debt is now at its highest since the end of WW2 and it will take at least the coming decade to bring this down to more sustainable levels. This high debt level would be more manageable if interest rates remain low but with surging inflation, the central banks have no option but to raise interest rates and we are seeing inflation starting to create instability in the markets and much higher interest repayments for borrowers.

As a result of the climate situation, I have been reevaluating my investment strategy and decided to make some changes (see below). 

Investments

So, after a rollercoaster couple of years dominated firstly by Covid, and now all the uncertainties thrown up by the invasion of Ukraine, it’s not surprising that global markets have struggled to make progress this year.

At the halfway mark, I decided to de-risk my portfolio starting with a raft of equity sales - Microsoft, Google, AJ Bell, Orsted, Vestas, ITM Power and a reduction in various collectives - iShares World SRI and Allianz Global Technology.

However I have increased my renewable infrastructure - more Bluefield Solar, TRIG and Greencoat UK Wind as I was hoping they will benefit from the rise in power prices...well, that was before the government’s new tax on renewable energy!

I have also invested in a couple of unlisted opportunities... Ripple Energy community wind farm which is currently under construction and due to be completed in November 2023 and also invested in Thrive Renewables who launched a new share offer to raise £7m for new renewable energy projects.


However, I still have a large percentage in cash and will probably keep this on the sidelines for the coming year to see how things unfold.

Portfolio Returns

I have just put in the final figures for the spreadsheet of my investment portfolios - sipp flexi drawdown and ISA - for the full year to 31st December.

The FTSE 100 has done better than most markets this past year and has risen from 7,384 to 7,452 and taking dividends into account a total return of 4.6% for the full year. As a matter of interest, the FTSE 100 finished at 6,749 when I did my first annual review to the end of 2013. Not much progress over the past 9 years!

The US markets are down much more with the S&P500 falling 21%...Tesla down 70% and Meta (Facebook) down 65%.

The Vanguard Lifestrategy 60 fund is a diverse mix of global equities and bonds and although I disposed of my holding some years back, it provides a good benchmark for a balanced global portfolio. The fund is down -11.2% over the past year and the VLS 80 is down -8.8%

Technology - With returns of over 50% in the previous two years, I was half expecting some pull-back this year but maybe not quite as dramatic! My tech sector is down 20%. After the mid year sale of various shares, Tech now accounts for just under 10% of my portfolio.

Green - After triple digit gains for many of my green portfolio holdings in 2020, I think it was inevitable that there would be some pull back. Over the year I have taken profits on quite a few holdings - NIBE, Orsted and Vestas, sold Nel in August and also ITM Power. These now represents 55% of the total...down from 80% at the start of 2021 After a stellar year in 2020 and gains of 52%, my green sector has come back to earth with total returns down -13.9% ...exactly the same as 2021. The small hydrogen-focussed shares were the biggest casualties with Ceres down 60%, ITM Power down 65% and L&G Hydrogen ETF down 29%.

The positive returns have been provided by iShares Global Clean Energy +5.5%, Bluefield Solar and Greencoat Wind both +10%, SSE +17% (now sold) and Gresham House Energy Storage +29%.

Defensives - I thought it was a sensible move last year to bank some of the profits from equities and move into government bonds and gold. This has certainly helped to mitigate some of the falls from my technology and green sectors this past year. Whilst the gold ETF is up 11.5%, a big surprise however has been the decline in my index-linked government bonds...down 50% in September following the disasterous Truss/Kwarteng blip. The sector as a whole is down -7.9% on the year.

The Complete Basket

As a whole, the portfolio has delivered a total return of -12.8% over the past year which takes account of all dealing costs. Here's my portfolio returns covering the past 10 years. 

2013 13.3%, 

2014  5.4%, 

2015  2.7%  

2016 11.4%

2017 11.3%

2018  -2.7%

2019  21.9%

2020  43.8%

2021  -6.5%

2022 -12.8%

A sum of £1,000 at the start of 2013 has more than doubled to £2,100 and an average annualised return over the past 10 years of 7.8%.

Conclusion 

Obviously an average annualised return of just under 8% over the past decade is very acceptable. It could have been much better this year had I locked in returns from my green/tech sector earlier...investing is so much easier through the rear view mirror! Of course, patience and the ability to stick with the plan are key to successful investing but that has not worked out so well these past two years. The clean energy and hydrogen sectors have had a bumpy 12 months but with all the growing risks, I am not so confident they will provide a good return over the coming years. Return on my investments have been positive in 7 of the past 10 years.

Obviously as a grandfather to five, I am concerned about the climate situation and how badly it will impact the world over the coming years. The devastating images we have seen these past couple of years - wildfires over huge areas of the west coast states of the US and Siberia, devastating flooding and disappearing polar ice caps should  be a warning of what's coming down the line for the planet if we carry on with business as usual. Hopefully in the coming year we will get some real leadership but after COP 27 and a refusal to agree on a strategy to phase out fossil fuels, I am not very hopeful.


I am in no doubt that the risks to the global economy have increased this past 12 months which is why I have sold off a large proportion of my portfolio. However, if the climate continues to get worse, the global markets may well become more unstable and the better green companies could be dragged down with the rest. Maybe I should call it a day and sell off the rest of my portfolio...maybe cash/gold will be the place to be over the next decade?
 

How we tackle the climate crisis over the coming few years will be the defining story of our generation. I hope the global community can start to fully appreciate the risks and address some of the fundamental issues in 2023 and we can speed up the transition away from fossil fuels and avoid some of the dire consequences which lie in store with warming over 2.0C....as they say, it's going to be very interesting!

Finally, wishing all readers a happier New Year and thanks to all for dropping by during the past year... all best wishes for 2023

As always, if you keep track of portfolio returns, feel free to leave a comment and share with others how your investments have fared over the past year.

Thursday, 1 December 2022

A New Tax on Renewable Energy

In his recent autumn statement, the Chancellor introduced the Electricity Generator Levy - a 45% windfall tax on the renewable energy sector from January 2023 and set to last to 2028. It is forecast the tax will raise around £14bn over the 5 year period. The windfall tax for the oil & gas sector has been set at the lower rate of 35%. Perversely, the tax does not apply to the profits of our gas-fired and coal-fired power stations.

The new tax will apply to electricity sold above £75/MWh which is around one third of recent wholesale prices. The tax will not apply to revenues from the contract for difference (CfD) mechanism.

The move has been condemned by the renewable sector who say the tax will risk future investment into renewables and hamper the transition to net zero.

RenewableUK's CEO Dan Mc Grail said:"This windfall tax on low carbon power risks deterring investment, at a time when the Chancellor should be incentivising clean energy. Unlike in oil and gas, under this levy companies which are making significant investments in renewables will get no tax relief and will be hit by a higher windfall rate.

"Any new tax should have focussed on large, unexpected windfalls right across the energy sector, instead profits at fossil fuel plants are inexplicably exempted from the levy. Many renewable generators are on long-term, fixed price contracts and most sold their power for this winter over a year ago, so they haven't been making excess profits”.

The Energy Crisis

In August I was becoming concerned about increasing energy bills and took a brief look at some of the underlying causes.

It’s complicated but with sky-high wholesale gas prices and our dysfunctional electricity pricing market which links our bills to the price of gas under marginal pricing, we all end up paying far more because the low cost of renewable energy which accounts for around 40% of the mix is not reflected in the price we pay for electricity.

The government are supposed to be looking into this broken system under REMA but there does not seem to be any urgency. Instead of fixing the pricing system, they have borrowed billions to subsidise the nations energy bills with a pledge to cap average bills at £2,500 per household for 6 months which will then rise to £3,000 from next April.

Of course, we really need more cheap renewable energy capacity to reduce our dependence on gas so it seems very short-sighted to deter investment in new renewable energy just at the time when we should be building on what we have achieved over recent years.

Instead, the government are granting over 100 new licences to the oil and gas companies operating in the N Sea which is not consistent with our pledge to get to net zero carbon emissions by 2050.

My Investments

For several years I have been avoiding fossil fuels and tried to align my portfolio with a more climate-friendly investments. These have naturally included renewable energy as a part of my 'green' allocation.

At this early stage, my renewable infrastructure investment trusts appear to be relatively unmoved by the levy :

The Renewables Infrastructure Group (TRIG) says its net asset value of 134.3p per share on 30 September was broadly unchanged from 30 June. Although the windfall tax knocked 8.1p off NAV per share, with a further 4.7p hit from higher discount valuation rates and currency movements, it said these were balanced by 13.3p of gains from power prices and higher inflation. 

Bluefield Solar Income (BSIF) says its NAV gain would have been 3% in the third quarter but had been reduced to 0.6% by the levy. NAV per share stood at 141.4p at 30 September up from 140.4p on 30 June. Without the levy it would have been 144.6p.


The levy does not apply to generation from battery storage so I assume the likes of Gore Street Energy (GSF) and Gresham House Energy Storage(GRID) will not be impacted by this new tax.

Thrive Renewables is my latest investment and they recently said (blog article)

“While the full details of the levy and how it will apply is still emerging, we are not concerned about Thrive’s ability to continue funding, building and operating clean energy projects. We can, however, see how it will frustrate growth across the renewables sector, especially when renewable energy generators are paying disproportionately more than all other types of electricity generation and oil and gas companies”.

Finally, it looks like small community energy groups will be exempt from the tax which is very good news for the likes of Ripple Energy. I look forward to the completion of Kirk Hill wind farm towards the end of 2023.

So, whilst it looks like some investments will not be impacted very much and others not at all, it is clear that this 45% tax will hamper investment in the renewable energy sector and this is not a great decision by the government. At this early stage it looks like any reductions to NAV of my renewable energy trusts will be offset by gains from higher power prices and inflation but the longer term outlook remains more uncertain and less attractive.

Maybe the best I can hope for is a general election in the next two years and these measures being scrapped by a new Labour government with their plans to make the UK a clean energy power by 2030 with a doubling of onshore wind, tripling of solar and harnessing tidal energy.

Feel free to have your say on this new tax or the energy crunch in general in the comments below.

Friday, 30 September 2022

Bluefield Solar - Full Yr Results

Bluefield Solar (BSIF) was added to my SIPP portfolio in March 2019. Its initial focus was purely on solar power in the UK but in 2020 the Company resolved to broaden its focus to include up to 25% in other forms of renewables such as wind and also energy storage and also expand overseas. They have recognised that storage of renewable energy will become a vital part of the transformation towards net zero emissions over the coming years and I certainly think this is a smart move.

In June, the company announced a deal to acquire 109 small-scale onshore wind turbines for £63 million located throughout the UK. 90% have government subsidies and the remainder will be exposed to fluctuating power prices.

Approximately 60% of solar assets are covered by the old subsidy scheme which provides a guaranteed return for 20 years from the date of connection to the grid. The other 40% have rolling power purchase agreements which generally last for 2 or 3 years and are then renewed.

Results

The company has today issued full year results to end June 2022 (link via Investegate). Underlying earnings per share increased by 4.1% to 9.54p and the share price total return including dividends rose by 14.5% due to a boost in the share price from 121p at the start of the period. Total returns over the past decade since launch have been 92%.

The company pays quarterly dividends and will pay out a total of 8.2p for the year which gives a yield of 6.1% based on the current share price of 133p. They have a target of 8.4p for the coming year however, it is worth noting that the board have now de-linked dividend increases from RPI.

BSIF 12m share price/NAV (click to enlarge)

Chairman 
John Rennocks said: 

"It is highly pleasing to report another set of excellent results for Bluefield Solar. With maiden investments into onshore wind and storage, as well as further acquisitions of solar, supported by two successful capital raises, the financial standing of the Company has never been stronger as it enters the FTSE 250. Furthermore, the growth of the Company's development pipeline to over 1.1GW, provides Bluefield Solar with a wonderful opportunity to play an increasing role in the transformation of the UK's energy map.

Over the past year inflation has surged, reflecting higher commodity and energy prices following a recovery in demand from pandemic lows. Since March 2022, Russia's invasion of Ukraine and the continuing conflict there have helped push inflation to levels not seen since the 1980s. The result is current UK inflation, on an RPI basis, close to 12% (CPI 9.4%).

Prevailing opinion among economic forecasters remains that inflation will abate during 2023, but it is possible that price pressures will endure. Since our income grows with inflation, resulting from the indexation provisions in our regulated revenues, increases in RPI boost both our earnings and the valuation of our assets.''


Storage

The ability to store excess renewable energy will be the key to a full transition on the UKs path towards net zero by 2050. The government have recently relaxed the rules to encourage far more storage capacity which should be good for the likes of Bluefield. They have excess capacity and spare land which could lead to productive partnerships with storage providers subject to planning considerations.

Over the past year, good progress has been made on the Company's strategy of investing in the future build out of the UK's renewable mix through receipt of planning consent on two ready to build PV plants totalling 80MW and investments into ready to build co-located solar and storage (45MW and 25MW, respectively), as well as standalone battery storage of over 100MW.

Energy Pricing

Increasing electricity demand, as the world emerged from the Covid 19 pandemic, had seen power prices rising steadily but Russia's invasion of Ukraine sent shockwaves through European energy markets, with concerns around the supply of Russian gas to Europe driving a 45.5% increase in gas prices and sending UK day-ahead power prices surging from c.£78/MWh to highs of c.£593/MWh in August 2022.

Navigating such turbulent times requires care, and the Company's PPA strategy of fixing power for between one and three years has allowed it to fix power contracts throughout the period of rising prices. This not only insulates the portfolio from market volatility, as successfully demonstrated during the Covid pandemic, but also enables it to create pricing certainty at increasing levels for up to three years ahead. Evidence of this is seen in the average fixed price achieved for fixed contracts from January 2022 onwards. As at June 2022 the average weighted price for these contracts were £190.1/MWh, £303/MWh for January 2023 and £230/MWh for June 2023. This provides the expectation of over 2 x dividend cover (post and ex-carried forward earnings) in the financial years ending June 2023 and June 2024.

Conclusion

The energy crisis has resulted in power prices reaching unsustainably high levels, putting pressure on every section of the economy. The government is engaging with renewable energy generators to see how the industry can be part of the solution, recognising that the renewable energy sector is well placed to play a major role in creating a long term solution to this crisis. Solar and wind are today the lowest cost generators in the market, their technologies are relatively quick to deploy and they provide indigenous, clean and secure supplies of energy.

In contrast to many of my other holdings... including government bonds, it's been a good year for this fund and the renewables sector generally due to rising energy prices and the knock-on effect of increased inflation. The share price has increased by 10% over the past year from 121p to currently 133p which reflects a discount to the net asset value of 140p. Hopefully it can move to a premium again when the current market volatility settles.

Earlier in the year I added this fund to my ISA and the combined holdings now account for around 6% of my green portfolio.

I believe the longer term prospects remain bright however we have to contend with the uncertainties around new Truss government over the short term. The markets have been in turmoil since the hapless mini-budget last week and I suspect this new regime will not be around for much longer. After 12 years of an increasingly dysfunctional Tory government, the country is ready for a change. Longer term, the renewable energy sector would benefit from a Labour government which has recently pledged to decarbonise our electricity grid by 2030...very ambitious.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation - always DYOR!

Thursday, 15 September 2022

ITM Power - Full Yr Results...Disappointing!

ITM Power (ITM.L) designs and manufactures electrolysers which split water to generate clean hydrogen based on Proton Exchange Membrane technology. Last year it opened its new Gigafactory in Sheffield with the prospect of producing 1GW of clean hydrogen each year. It is estimated that the new factory will cut the costs of electrolysers by 40% due to increased automation and economies of scale.

ITM was one of the first additions to my green portfolio back in August 2019.


Results

It has this week announced results for the year to end April 2022 (link via Investegate).

The share price tumbled by 20% on the unexpected announcement that long-standing CEO Graham Cooley was to step down as soon as a replacement could be found. It looks like the rapid growth over the past couple of years has brought a number of challenges that the CEO feels is now beyond his abilities.

Pre tax losses almost doubled to £46.7m (£27.6m 2021) with revenues of just £5.6m following delays to delivery of its new technology to the Linde Leuna factory. Revenues from this project could not be included for the current year and will therefore roll forward to 2023.

Last October the company raised £250m to build two further factories - one in the UK with a capacity of 1.5GW and the other in Germany with a larger capacity of 2.5GW. However, these plans are currently under review and the likely course will be scrap the 2nd UK factory and to expand the exisiting factory from 1GW to 1.5GW.

The company had net cash of £365m at the end of April and is pushing ahead with expansion plans with an anticipated cash-burn of around £120m over the coming year.

Graham Cooley, outgoing CEO, commented :  "There is only one net zero energy gas that can replace methane to help the world address climate change. Green hydrogen can also help to deliver energy security and contribute to food security through the production of green ammonia for fertilisers. 

These abilities have become very powerful drivers for our business as governments seek to accelerate the share of intermittent renewables in their countries' energy mix to address dependence on weaponised gas supply from Russia. Over the last nine months, as the prices of methane and fertiliser have increased, green hydrogen has achieved first parity and then become cheaper in many cases than producing these commodities from gas feedstocks".

"In and since our last financial year, ITM Power has completed a transformational fund raise, won our first project for green ammonia, further developed our technology and production systems and set out a path that will enable us to remain a world leader in electrolyser manufacture. I believe the next twelve months will see the benefits of our position becoming even clearer as governments urgently address their dependence on methane."

“We are on the verge of a major energy and industrial step-change. I describe it as the fourth industrial revolution, one of interconnectivity and automation, powered by Net Zero, and ITM Power is playing a key role in supporting this revolution.

It has been a privilege to lead ITM Power through its transition from an R&D business to a world leading electrolyser manufacturing company. No CEO can remain in place indefinitely and now, as we seek to become a global manufacturing powerhouse, is a good time for me to step aside and hand over to someone with more experience in this area”.

Following the invasion of Ukraine and the reduction in the supply of gas which is being used as a weapon by Putin, the European Commission announced its EU Hydrogen Strategy and its Energy Systems Integration Strategy. The announcement prioritised the development of renewable hydrogen, produced using mainly wind and solar energy. From 2020 to 2024, they will support the installation of at least 6GW of renewable hydrogen electrolysers in the EU, and they have now doubled earlier longer term plans and aim for 160GW of green hydrogen capacity by 2030. ITM with its partners Linde and Snam should be well positioned to benefit from these opportunities.

Conclusion

Hydrogen is the most commonly occurring element in nature and is set to play a defining role in the 'green' industrial revolution as the world moves to replace fossil fuels. It can be stored and used to power long-distant transport such as cars, lorries, trains and ships. It can be used to generate electricity. It can be stored and transported for use at a later date. Green hydrogen made from renewable energy such as wind and solar is a clean source of energy and when used the only emissions are water and heat.

The potential for green hydrogen worldwide is huge but for investors in the individual companies, it remains risky as nobody really knows who will come out on top. The company still has plenty of cash to maintain operations for the next couple of years but needs to find a new CEO to steady the ship and get plans back on track. The share price reached a high point of over £7 in January 2021 but since then has been in steady decline to currently 117p.

ITM 3 Yr Share Price  (click to enlarge)

If the new management can get to grips with the underlying issues of contract delays and strategy planning then we could see a turn around but for now the shares are no more than a weak hold...fingers crossed for a recovery.

In the past few months I have started to take some of the profits from my green equity investments as I move to a more defensive position.

As ever, this article is merely a record of my personal investment decisions and should not be regarded as an endorsement or recommendation... investing in individual companies listed on AIM can be rewarding but is higher risk compared to collective investments - always DYOR!