Monday, 25 May 2020

The Future of UK Energy

I have a keen interest in all things relating to climate and energy so I was really interested to see this landmark report "Powering the Future" from industry body Renewable UK suggesting a 6-fold increase in onshore and offshore wind by 2050.

Here are extracts of some of the main areas covered:

The UK has set a legally binding target to reach net zero emissions by 2050. Any residual carbon emissions will need to be offset by carbon capture or large scale tree planting. 

The bedrock of this transition over the next 30 years will be a transforming of our energy system from its current centralised form to a low carbon, smart system which will be far more flexible and of course dominated by renewable forms of energy.

The Transition

We have just 10 years to put in place the systems and investment to prevent global temperatures rising above 1.5C or we risk an exponential increase in climate-related disasters. If replicated around the world, the policies needed for the UK to reach its target would give a better than evens chance of limiting the global warming to 1.5C.

Just a decade ago, coal was the backbone of our power generation but over the last 10 years it has been replaced by renewable energy from wind and solar. We have currently gone almost 7 weeks without any coal generation - a record. Renewables accounted for 37% of the UK mix in 2019 and for the first time ever, surpassed fossil fuel generation in the final quarter of the year.

The government operates clean power auctions (CfDs) which provides a stable framework for investment in large projects such as offshore windfarms. Developers such as Orsted have a 15 year visibility on future revenues supplied to the National Grid. This has helped to drive down costs for renewables and the CfD model is now widely adopted around the world. Onshore wind and solar PV are now the cheapest source of new electricity generation worldwide.

National Grid ESO are working on plans to operate a zero carbon electricity network by 2025. Smart and sustainable new markets will be essential for operating a carbon-free electricity system.

The new system will become more decentralised and where renewable and low-carbon technology dominates how we generate electricity, the way we travel and how we heat our homes.  New technology will enable significant distributed and local generation, supported by energy storage and demand-side solutions.  

Consumers will produce, store and sell energy in response to market signals, based on cost and carbon-intensity, through peer-to-peer trading, smart homes, and participation in our balancing and ancillary service markets advanced data and analytics change the way market participants interact with us and each other, and enable them to make more informed choices.

In the UK we are planning to increase offshore wind from 10GW to 40GW by 2030 and there is potential to increase this to over 90GW by 2050.

In addition to offshore, the Committee on Climate Change (CCC) recommend a greater deployment of onshore wind from currently 10GW to 35GW by 2035.
The CCC also suggest an increase in solar PV will be needed - to 40GW by 2030 from currently 13GW.

A diverse mix of clean energy is preferred and the UKs wave energy and tidal stream sector could provide a significant proportion of energy that is predictable and not dependent upon weather which makes it a good additional source of clean energy to compliment wind/solar.

Tapping into the Power of the Tidal Streams

Energy Storage

As the renewable sector grows, the ability to store energy from wind and solar when there is an excess and then use it later when demand is higher will be crucial to the future functioning of our grid. Storage covers many technologies such as batteries including EVs, compressed air, pumped hydro reservoirs and clean hydrogen. It will cover periods of peak demand as well as help to smooth the flow of energy throughout the system.

We currently have a system that can ask renewable wind/solar to close down when there is an excess of energy and low demand...which seems a bit crazy to me and needs to be resolved. Combining renewable generation with storage such as battery or hydrogen will allow operators to divert supply from the grid and time-shift the power output release. Wind and solar farms which benefit from the ability to maximise returns during higher price periods.

Green hydrogen made from the electrolysis of water using power from wind or solar can contribute to the demand in winter for both heat and power. Currently there are trials underway to mix hydrogen with traditional gas and use the existing gas pipe infrastructure. Hydrogen could well be the key to unlocking the transition to net zero emissions.

Of course, smart charging in the smart homes of the future will be a big way of storing energy. With the increasing roll-out of electric vehicles, it will be possible to charge millions of EV batteries overnight with cheap renewable energy from wind and then use this aggregated stored energy to smooth supply across a local energy network the following day. Work is already underway to lay the foundations for this smart energy system. As the volume of EVs and renewable capacity increases, there is a wide range of emerging technologies to support low cost integration. 

Currently the majority of the storage pipeline is battery. There is around 10GW either built or planned. Most are located at gas plants to take advantage of existing grid connections but increasingly there are new solar+battery projects and a growing interest in onshore wind+battery now it is free to take part in CfD auctions. According to National Grid ESO, storage capacity could increase to 23GW by 2050

New Models

The current model is based on centralised generation and passive consumers. As we transition to the new model based on low carbon renewables, we will need a new system which is more flexible, more decentralised and a need for more active participation.

In the energy world of the future, the problems will arise not from too much renewable energy but from a lack of flexibility in the system to match supply and demand and provide the transparency to provide real benefits to consumers.

They Could Pay You...!
We therefore need the roll out of smart meters to be stepped up and more smart tariffs introduced along the lines of the trials offered by Octopus Agile where lower energy prices are available during periods of low wholesale prices. This resulted in consumers shifting consumption away from peak periods by 28% and for EV drivers by 47%. Time-of-use tariffs will help to unlock the decarbonisation of our economy and help to balance demand and supply and "flatten the curve" where have I heard that before!

The national roll-out of smart meters will facilitate the introduction of new flexible tariffs where consumers can use more cheap electricity at times when the wind is blowing or sun shining.


We are already building the energy systems for the future. Low-cost heat pumps, a charging network for electric vehicles, renewable green hydrogen. The UKs net zero target by 2050 will be renewables-led providing clean, cheap power to a wide range of consumers. Renewable electricity, both directly and indirectly through the production of green hydrogen, will meet up to 75% of our energy needs. What is needed now is a stable market with long-term incentives in place to support the companies and investors who will deliver it.

For some time now I have been thinking about the big changes taking place around our energy system - both here in the UK and more widely - and then backing up some of this by investing into those areas which are likely to benefit. Of course there are never any guarantees but I have been building my 'green' portfolio with a range of investments which are likely to benefit from the transition to clean energy. So, a mix of renewable energy infrastructure trusts such as TRIG and UK Wind, the big global players such as Orsted and Vestas Wind and some smaller green hydrogen plays such as ITM Power and Ceres.

I am mindful of the wisdom of Lars Kroijer and his persuasive argument in favour of index investing in his book "InvestingDemystified". It is based on the premise that the average investor does not have an edge or advantage that will help him/her to beat the market. 

As someone who has now rejected the global index to avoid fossil fuel companies and the big banks which finance them, it will be interesting to see whether this understanding of climate-related issues proves to be an advantage over the longer term.

As ever, this article is merely a record of my personal thoughts and how I see the future developing and should not be regarded as an endorsement - always DYOR!

Tuesday, 19 May 2020

Troy Trojan Ethical - Portfolio Addition

It's been a very bumpy ride for investors these past few months and in April I decided to move to a more defensive mode and replace some of the bonds I had lost when selling my multi-asset global index funds.

I recently added Personal Assets Trust to my portfolio with a view to preservation of capital during this uncertain period. Troy have been advisers to the Trust since 2009 and have now taken over the management following the recent retirement of long-term managers Robin Angus and Hamish Buchan.

One of the good things I really like about the set-up with PNL is that it is specifically run for it's investors and responsive to their feedback and contributions. I therefore emailed the company regarding my concerns about the tobacco holdings in the portfolio. From this exchange I was advised that Troy have recently established a more ethical fund which is run on very similar lines to PNL and has the same ethos of capital preservation but excludes tobacco whilst retaining most of the other equity holdings.

The Trojan Ethical fund is managed by Charlotte Yonge who has been at Troy since 2013 and is also assistant manager of their £4.6bn Troy Trojan fund. The fund exclusions are alcohol, arms, fossil fuels, gambling, high-interest loan companies, pornography and tobacco. The fund will only invest in securities issued by the G7 countries - UK, USA, Japan, Canada, France, Germany and Italy.

Whilst it's good to exclude these sectors, I think it would be a good idea if these ethical fund managers started to include - or at least add greater weighting - those companies which were making a positive contribution to society and the environment. Here I am thinking of the likes of renewable energy companies like Orsted and Vestas Wind or those operating in areas such as clean water or green hydrogen. I suspect that following the current pandemic, more investors will be thinking seriously about where their pensions and ISAs are invested. I suspect a lot of people, especially younger investors, would prefer their money to be invested in ways which create a more fair and positive society as well as a more sustainable environment.


Similar to the conservative style of Lyon's Trojan fund which has delivered a total return of 30.8% (average 5.5% p.a.) over the past 5 years - well ahead of the FTSE All Share 1.9% (average 0.4% p.a.) - this multi-asset fund is defensively positioned with an emphasis on preserving capital and low volatility which is just what I require in the current climate.

5 Yr Performance Troy Trojan v FTSE All Share Index

Trojan Ethical 3m Performance v FTSE All Share Index (blue line)
(click to enlarge)

According to the latest factsheet to end April, the total return has been 10.8% over the past 12 months compared to -16.7 for the FTSE All Share Index - it's early days for this fund but clearly off to a good start in these turbulent times! The current allocation is similar to PNL with 45% equities, 35% govt. bonds, 12% gold and 8% cash.

Top equities include Microsoft, Google, Nestle, Medtronic, Visa, Unilever, Colgate Palmolive and Warren Buffett's Berkshire Hathaway. Unfortunately I have not been able to locate a full list of holdings for this fund.

I have compared the holdings with Personal Assets:

I have purchased the 'X' version which has slightly lower charges of 0.87% compared to the 'O' version. The fund was added to my portfolio earlier this week at the price of 105p.

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!

Tuesday, 5 May 2020

Personal Assets Trust - Portfolio Addition

The markets have been kind to the small investor these past few years. I have been lucky and managed an average return from my portfolio of 8% per year for the past decade. However, the mood has suddenly turned darker and I am looking to lock in some of those gains. I have now added a few government bonds to my portfolio but I recently had another look at an old favourite Personal Assets Trust (PNL).

This is one of the trusts designed to preserve capital and so is loaded with defensive assets such as government bonds and large, globally diverse equities. The trust joined my portfolio back in 2013 at a purchase price £343 but was sold the following year as I needed a higher income yield during the period between taking early retirement and state pension.

It is listed in the 'Flexible' sector on the AIC website and other similar trusts include RIT Capital, Ruffer and one of my former holdings, Capital Gearing.

Its stated aim is to protect and increase (in that order) the value of shareholders' funds over the long term.

In 2009 PNL engaged Sebastian Lyon as its adviser. He runs Troy Asset Management which he established in 2000 primarily to manage the affairs of the late Lord Weinstock and from whom he inherited his conservative style of investing and focus on wealth preservation. Troy have now been appointed as manager from this month.


Personal Assets Trust is unique with its commitment to the protection of shareholder wealth combined with its definition of ‘risk’ - PNLs definition is focussed on the ‘risk of losing money’ as opposed to most other trusts where risk is defined as volatility of returns relative to a benchmark index.

Personal Assets v FTSE A/S Index YTD
(click to enlarge)
Personal Assets' investment style tends to outperform in falling markets and lag in sharply rising ones. This is certainly the case for the current market turmoil.
Over the past 10 years the trust's share price total return has been 5.7% p.a compared to around 5% p.a for the FTSE All-Share index.
Commenting on the current crisis Seb Lyon says
"...the pandemic has exposed inherent fragilities in our economic system. Our view is that this crisis will be a prolonged and drawn out process. We consider the suspension of economic activity across the globe will result in the deepest downturn since the 1930s with few businesses unaffected."

According to the latest quarterly report, equities make up around 44% of the portfolio - largely USA and UK. The manager favours large, well-financed companies which have stable demand and low debt... preferably net cash. UK-listed holdings include Unilever, Diageo and BATS. In the US there are Coca-Cola, Microsoft, Google, Procter & Gamble and Berkshire Hathaway. Gold accounts 10% of the portfolio and the remainder consists of assorted government bonds - mainly US TIPS -  so fairly defensive!

Over the past year the manager has sold GlaxoSmithKline and Imperial Oil and reduced Coca Cola. Additions include Alphabet (Google), Visa and Medtronic.

Many of the directors as well as the manager Lyon have significant share holdings in the trust which is always a good sign as they obviously have an interest in ensuring the success of their investment.
5 Yr Performance v FTSE A/S Index
(click to enlarge)

I am no longer interested in income but the trust has paid dividends of £5.60 p.a. in each of the past 7 years - a current yield of 1.3% which is probably better than interest on most building society cash savings at present.

Fortunately they have recently sold the only oil & gas holding so the portfolio is fossil-free and therefore eligible for my portfolio as a replacement for Capital Gearing which holds the iShares FTSE ETF with its high exposure to the likes of Shell and BP - and hence the reason for that trust being sold last year. Likewise with my multi-index funds like Vanguard Lifestrategy and HSBC Global Strategy which had to be set free last year.

I would be happier if the trust did not hold the shares in the tobacco companies and also I would prefer the more traditional gilts to short dated index-linked TIPS but I can account for this via my other portfolio holdings. The main consideration for the next year or two (...five?) is stability and preservation and I hope this will help on both counts.

I like the look of this trust for its conservative/defensive qualities - and the fact it is different to most other investment trusts. I also like the concept of preserving capital in these uncertain times.

The shares were added to my portfolio this week at the price of £432. The trust is due to publish results for the full year to end April next month.

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!