Tuesday, 9 August 2022

Big News on Climate in the US

The US Senate have now approved the Inflation Reduction Act - a landmark piece of legislation which includes $369bn of tax credits and support, the largest in American history, for a range of measures which will reduce carbon emissions by up to 44% by 2030 and keep the US on track to achieve its goal of net zero emissions by 2050. This is less than the 50 - 52% reduction promised by Joe Biden last year but it has been a difficult 12 months trying to get everyone in his own party on board. 

However, there is no doubt this is a big deal for the climate as the US is responsible for around 15% of global CO2 emissions...second only to China with 28%.

The bill will transform how Americans generate and use their energy and should shape their climate change and industrial policy for decades into the future when formally passed by the House in the next few days.


The legislation will provide billions of dollars for the expansion of solar and wind power production adding an additional 550GW which will more than tripple clean energy production to power over 100m homes. Here’s a summary of the main provisions (pdf).

Of course, investment from the federal government on such a massive scale will give more confidence to attract much more investment from individual states and the private sector in green energy. Some commentators are suggesting this could be as much as $2 trillion.

INRG 3m Share Price

Obviously this will be a welcome boost for the renewable energy industry. The likes of iShares Global Clean Energy (March update) holds many of the US based companies - Plug Power, Enphase, Solaredge - that should benefit from this legislation over the coming years so that’s one I will be holding long term.


Monday, 1 August 2022

The Energy Crisis - A Few Thoughts

I’m no expert on energy but in recent months I have been concerned about my ever-increasing energy bills so I decided to take a look at what’s causing these increases...here’s a few observations.

So, we have an energy crisis which will cause real hardship to millions over the coming winter months. The latest forecast from BFY suggests that the average family could be paying close to £4,000 by January compared to a price cap of just £1,270 earlier this year. That would be around 40% of the average state pension.

Millions of people will be forced into fuel poverty - you would need a household income in excess of £40,000 to not be caught!

Why?

The government can throw billions at the problem to try and help the poorest households but it seems they are unable to offer a long term fix. That’s mainly because this is a global energy problem and the price of oil and more so gas has risen dramatically all around the world. Energy is a global commodity and although the markets are very complex, the bottom line is that it's basically a supply and demand equation and energy is sold to the highest bidder...and when its in short supply - partly because Russia controls a significant proportion of oil and gas - the price goes up.

Wholesale price of gas rises 5x

Of course the big beneficiaries are the countries and big oil companies that extract and supply oil and gas - so USA, Russia, Saudi Arabia and then the likes of Shell, Exxon, BP and Chevron with combined profits of $50bn in just the past 3 months on the back of the high oil and gas prices.

Unfortunately, here in the UK we import most of the oil and gas we require...for example last year we imported 60% of natural gas and with the huge increase in prices this year, it works out at around £70bn which is around 3% of our GDP and roughly equivalent to the amount we spend on education.

The Grid and our Bills

We have made good progress on expanding renewable energy such as wind and solar over recent years. It currently accounts for around 40% of our grid energy. However it is intermittent so we continue to rely heavily on gas and nuclear for baseload energy to ensure continuity and grid stability. We rely on gas for a further 40% of electricity generation with 85% of homes using a gas boiler for heating and hot water.

With our system, gas usually determines the price we pay for our electricity. We have just one market in the UK for electricity which is traded every half hour between suppliers and utility providers. The price will fluctuate according to demand and variable factors such as wind generation. Renewables are the cheapest so they will always be snapped up first followed by the next cheapest which is nuclear/biomass but then the balance of of our requirements at any particular period will have to be gas which is the most expensive. 

credit: Good Energy 

Under the current system, the price we end up paying in any half-hour period is determined by the marginal cost of the last generating unit to be turned off to meet demand...which is inevitably a gas-fired power plant with high marginal costs. Even if we double our renewables capacity to 80%, we would probably still end up paying high bills determined by gas under this system.

So What Can be Done?

Well, one solution would be for the government to bail out every household with continued support - say £3,000 for each household but with around 30m homes, that works out at £90bn per year which is not far off what is paid for state pensions! Maybe it could do this for one year but these high wholesale energy prices could well continue for several years.

We could speed up the roll out of cheaper renewable energy but we are realistically looking at a decade but the faster we become less reliant on imported fossil fuels the better and certainly this is what we should be doing anyway to tackle the climate crisis.

Insulating our homes will dramatically reduce energy use in the winter months - this is relatively cheap and quick so really is a no-brainer.

Heat pumps are around 3x more efficient than gas boilers so it makes sense to speed up the roll out of UK-made heat pumps.


Conclusion

Whoever becomes our new PM next month will be faced with some very urgent issues but the most pressing will be to provide more support this winter on top of the measures already in force to cope with surging bills. At the same time they will need to urgently look at the way our electricity is priced and find a system which more fairly reflects the lower costs associated with renewable energy. The government’s energy department have recently started to look at reforms to the electricity market that would stop volatile gas prices setting the price of our energy supply.(REMA)

Of course, the only long term fix is to move quickly to reduce our dependence on imported fossil fuels and to generate and store much more of the energy we need from renewables. This will take time so we should find ways to use less energy and certainly a public information and education campaign on the simple ways to immediately save on energy would be a good start.

The Boiler Upgrade Scheme was introduced in April giving us a £5,000 towards the cost of a heat pump but the take-up has been slow and the public are skeptical on the benefits. The scheme should be extended to cover the installation of solar PV and back-up storage which would be far more cost effective and certainly quicker than new nuclear power.

So, more immediate financial support, change the structure of pricing, a speedy transition to renewables and a move to energy independence.

We have many of the solutions to these issues but currently lack the political will to implement them so I am not so optimistic for the next couple of years of any significant changes.

As always, if you have any thoughts on this subject, feel free to leave a comment below.

Tuesday, 26 July 2022

Gore St Energy Storage - Results

Last year, the government decided to up its ambition on climate change and pledged to reduce CO2 emissions by 78% by 2035 and totally decarbonise our electricity grid by the same date. This will basically mean less oil and gas and much more renewable energy. More wind - both offshore and onshore and more solar...however the drawback is intermittency so energy storage will be fundamental to the growth of renewables to facilitate this transition.

I’m sure the recent heat waves and wildfires throughout Europe combined with the energy security issues resulting from the Ukraine war will act as a wake-up call to push ahead with the transition from fossil fuels to renewable energy.

Here in the UK, renewables currently provide over 40% of our grid energy - up from just 5% a decade ago - and this will only increase as we move to electric vehicles and heat our homes and offices with heat pumps.

There are several ways of storing energy...battery, pumped hydro, flow and hydrogen. National Grid estimate that we will need 50GW of energy storage capacity if we are to achieve net zero emissions by 2050 so quite an increase from the current 1.6GW (link).

Surprisingly there are still only the three energy storage plays in the UK renewable infrastructure sector - Gresham House (GRID) which joined my portfolio two years ago, Gore St Energy Storage which was added last year and newcomer Harmony Energy Income (HEIT) launched last November.

The Set-Up

The fund invests in a portfolio of utility scale energy storage facilities located throughout the UK (296 MW) and Ireland (310 MW). The fund will have a combined stored capacity of 669MW when the latest acquisitions come on stream later this year. This is rapid growth compared to the 29 MW capacity at launch back in 2018. The majority of operations are in the UK/Ireland but the company has recently moved into Germany (22 MW) and the Texas, US (40 MW).

The biggest drawback of wind and solar is intermittency which is a big problem for the Grid which has to provide constant and predictable power output throughout the nation. These facilities provide energy storage for the National Grid and help to provide more stability and flexibility for the entire grid system. The majority of revenues are from frequency response services to the grid. This is mainly dynamic containment which is designed to give a rapid response to significant frequency deviations and then balancing mechanism which is the energy platform used by the grid to buy and sell electricity and manage the system in real time.

As we have witnessed this year following the war in Ukraine, wholesale energy prices have been volatile with gas increasing five-fold due to increased global demand and a reduction in supply from Russia which has weaponised energy in retaliation for sanctions imposed by Europe and the US. This volatility has resulted in a boost to normal revenues for the energy storage sector. This volatility is likely to continue for some time due to the conflict in Ukraine so it will be interesting to see the effect for the energy storage market. 

Results

The company have today released results for the full year to end March 2022 (link via Investegate).

Net assets have increased by 6% per share to 107.1p and share price total return is up 11% over the past year.


Alex O'Cinneide, CEO of Gore Street Capital, the Company's Investment Manager, commented:

"I am pleased to report that the Company continues to enjoy a sustained period of rapid growth, responding to the pressing and global increasing need to enable the energy transition to a low carbon society through energy storage solutions and in the process, further diversifying our portfolio for shareholders. We have achieved this through a mixture of financial and operational success, raising additional capital via highly successful, oversubscribed fundraises, from both institutional and retail investors; as well as delivering on our strategy, first laid out in our IPO of 2018 when we defined this category of investing, of building the industry-leading international portfolio of energy storage assets, now totalling 628.5 MW.

The global transition to clean and renewable energy generation continues to be a dominant priority for governments both domestically and internationally, and our assets play an important role in supporting energy security and the transition to a low-carbon society, as well as creating substantial value for shareholders”.


The company recently raised £74m from a share placing (107p) which will be used to expand the operation with an expected 1GW of capacity in the US and Western Europe.

GSF 3 Yr Chart

The trust is attractive to those seeking income and pays 7.0p  in annual dividends (paid quarterly) which gives a yield of 5.7% at the current price of 123p.

Conclusion

The global transition to clean energy is now becoming a priority for governments in the UK, Ireland and globally. This has become even more urgent following the invasion of Ukraine and the threats to European energy security with Putin weaponising the supply of oil and gas. Energy storage is likely to expand rapidly over the coming decade and will play a pivotal role in the green transition.

One of the factors to be aware of are charges which are relatively high - 1.7% last year (which included 0.4% performance fees) compared to 2.0% in 2021. I hope it will continue to become a lower percentage as the company grows. The share price currently trades at a premium to NAV of around 14% which seems to be par for the renewables sector.

The trust is not as sensitive to power prices compared to the likes of the wind/solar infrastructure trusts but benefit more from price volatility which is likely to increase as we continue to reduce our dependence on fossil fuels. The shares were purchased at 115p last year and I took advantage of the offer/placing in April to top up at 110p. They currently account for 5% of my green portfolio.

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!

Monday, 11 July 2022

The Market Risks are Growing...


The other day I was reading the weekend Monevator post and reflecting on the feelings of discomfort experienced by the author due to the current falling market. The Investor has become more mindful of wealth preservation during the current downturn and is trying to work out how to feel emotionally more secure about the assets he has built up so far. What crystallised my own thoughts around this post was the statement that he maintains the belief that the market will always bounce back...and I’m thinking, sure they always have in the past, but....


I’ve been at this investing game for three decades and along the way I’ve seen many ups and downs and had more than a little success with returns as well as a fair few failures. But on the whole, the past decade has been good with an average annualised return of around 9% each year. Last year saw the first negative return for my portdfolio -6% and the current YTD is -12% but could well end up lower. But prior to that there were two really good years... 22% in 2019 and 44% in 2020.

My basic philosophy has always been to buy and hold long term and also to take advantage of market falls to pick up bargains at knock-down prices. This was especially lucrative during the sell-off of 2008/09. We now have another bear market with the S&P falling back over 20% year-to-date...the worst half-year drop EVER (link) The Irrelevant Investor is convinced that the markets will bounce back.

However, this period feels different and I have not been tempted to dip in to pick up ‘bargains’. There are so many negative forces in play that I am not convinced the markets will be seeing a bounce back anytime soon.

Negative Forces

We have increaing geopolitical tensions - obviously the invasion of Ukraine which could play out for another year or more. How will Putin respond to Finland and Sweden joining NATO? But also the tensions between the US and China over trade and the situation over Taiwan. 

Then we have rapidly rising global inflation combined with record debt levels - highest since the end of WW2 - which will put a damper on economic activity and deter new investment.

The cost of living crisis is obviously a concern for millions of ordinary people woried about rising energy and food bills and the sudden reduction in disposable income. The UK energy cap is forecast to rise to over £3,300 by the end of the year...that’s a third of the state pension.

Last, but by far the biggest and most serious negative in my opinion, is the climate crisis and biodiversity loss. Governments seem unwilling or unable to get to grips with this issue and take co-ordinated global action to reduce carbon emissions. 

If governments were serious about addressing the climate crisis, they would eliminate subsidies to the fossil fuel industry and create a more level playing field for renewable energy. Unfortunately, according to the IEA report for 2021, we subsidised the fossil fuels to the tune of $440bn last year, almost back to 2018 levels. Fossil fuels account for 75% of the emissions which are responsible for global warming.

It’s almost a year since the IPCC published their ‘Code Red for Humanity’ report showing how close we are to a multi-faceted global catastrophe as a result of climate breakdown. Unfortunately there has been little progress over the past year and the warming continues...we are on the brink and the global economy will not be immune from the consequences. The UN Secretary General said “The climate crisis poses enormous financial risk to investment managers, asset owners and businesses”.



What Action to Take?

In the face of all these negatives, it would be easy to dismiss the emotional response and just keep doing what I’ve been doing for the past 30-odd years. We’re in a bear market, they come around every 10 or 12 years...ride out the storm and wait for the markets to bounce back...they always do - don’t they? 

This time though it does feel more serious and things could get much worse and I don’t hold a lot of confidence in a bounce back any time soon.

So, I believe the best course of action is to start to de-risk the portfolio and to reduce a large proportion of the more risky equities.

After all, what’s the point in analysing a situation but then taking no action to mitigate the fallout should that analysis prove to be accurate?

Conclusion

I like investing, it’s something I can do quite well and along the way I have been relatively successful. After so many years I’m reluctant to stop. But it’s not something I am addicted to...if I decide to move on to other things, I’m not going to experience withdrawal symptoms.

My fears may be overdone, but at the end of the day, the reality remains that I don’t actually need to carry on investing - I don’t need to generate more income or capital gains - I have my home, I have a guaranteed income from my pension and certainly enough for my modest needs.

The future risks of staying in the equity market seem to have increased significantly in recent months. So for me, in a very uncertain market, it makes perfect sense to move to cash, even though the returns will be eroded by high inflation.

I’ve had a good run over the years, but I’m not greedy for even more so now feels like the right time to lock in some of the gains. I’ve made a start in the past few days with the sale of some equity holdings but will probably hang on to the renewable energy trusts, government bonds and defensives for the time being.

As always, feel free to share any feedback or thoughts generally in the comments below.

Tuesday, 21 June 2022

SIPP Drawdown - Yr 10 Update

It's June, another 12 months have rolled by so it must be time to review my SIPP drawdown portfolio at the end of its 10th anniversary. Here’s a link to the previous update of June 2021.

The original plan when I started drawdown in 2012 was to generate a rising natural income from which I would withdraw 4% income. This would bridge the 10 year gap between early retirement at age 55 yrs and state pension.

In 2018 my state pension kicked in - currently £9,500 p.a. after a 3.1% uplift in April - so I am no longer so reliant on income from my SIPP which means I have more flexibility on investment choices. I am wondering if this government will honour their pledge to raise state pensions in line with inflation this year!

Portfolio Changes

My efforts to move towards a more climate-friendly portfolio are well documented and this includes my SIPP drawdown portfolio so there have been a quite few changes over the decade.

I have tried not to make too many changes this year - I have held TRIG and Bluefield Solar and added Greencoat UK Wind. I have my global clean energy ETF and my two technology trusts.

However, my main focus over the past 12 months has been to pull back a little on individual equity holdings, increase defensives and top up collectives - and therefore the sale of the likes of Vestas Wind, Plug Power, Enphase, Sunrun and Invinity... a reduction of individual holdings in ITM Power and Orsted, a reintroduction of the ‘steady Eddie’ Personal Assets Trust, the addition of iShares Gold and a top up of the iShares fossil-free global index ETF and also the index-linked gilts ETF.

(click to enlarge)

My portfolio currently consists of a mix of green investments, technology, gold and government bonds.

Performance

The big story over the past year has obviously been the invasion of Ukraine. It has been an inspiration to witness the strength and unity of the Ukrainian people to stand up to the huge Russian war machine against all the odds. Unfortunately this conflict has triggered a global food crisis, rising energy costs and of course inflation is rising and this has resulted in a lot of uncertaintainty and instability - especially around security of energy.

The conflict should speed up the efforts to transition to clean renewable energy and the EU have announced their plans to end its reliance on Russia’s oil and gas and speed up its roll out of alternatives. However in the short term we have sharply rising inflation - CPI hit a 40 year high of 9% in May - also the cost of living increases from the likes of transport, food and rising energy bills. Last week the Bank of England increased interest rates to 1.25% - the highest level since early 2009 and more hikes to come later this year. The cost of borrowing is rising sharply so inevitably people will be prioritising essentials and cutting back on the goods and services they consider they can manage without. This will impact the wider economy and many sectors of the market have seen quite a pull-back these past few months.

Interest Rate Rising Quickly

The oil and gas sector has benefited with huge profits declared from the likes of Shell and BP. In contrast the tech stocks are down 25% YTD, the popular Scottish Mortgage Trust is down 45% but also the traditional safe-haven of government index-linked gilts have also fallen back over 20% which is a bit baffling given the steep rise in inflation. I have a feeling we are now in bear territory which may play out for some time and I hope the larger allocation to defensive positions such as gold, government bonds and Personal Assets can help to preserve some of the gains made over previous years.

The situation in Ukraine combined with the global consequences is naturally dominating the news but the climate crisis continues to throw up more and more challenges every week - more flooding, more heatwaves and more wildfires. Unfortunately our political leaders and policy makers show little signs of acknowledging this crisis and acting decisively to address the issues. The momentum and promises made at COP 26 last year are soon forgotten. The UN Secretary-General says we are on the fast-track to climate disaster and an unlivable world. (link to video)

But getting back to the portfolio...I have had some excellent returns from some of my clean energy holdings. For the year to December 2020 my green portfolio returned over 50% but the green sector and techs have struggled this past year and the SIPP portfolio has failed to make progress. It’s been very mixed...Gresham House Energy Storage is up 30% and my iShares Gold ETF has gained 20%. I took some profits on ITM last year but the share price is currently down by 40% and my L&G Hydrogen holding is down 25%. Overall, with a small loss of just 6% since last June - in the current climate, not bad all things considered.

Here is the current portfolio

(click to enlarge)

Comparisons


In June 2012 when I started this series on my drawdown journey, the FTSE 100 was 5,500 and has risen to 7,120 - a gain of just 29.5%. If we add in average dividends of say 3.8% each year, this gives a rough total return of 68%

In June 2012, the Vanguard LS 60 (acc) price was £105 and today stands at £205.90 - down 7.9% over the past 12 months but a gain of 96% over the decade and CAGR annualised average of 7.2% p.a.

Taking account of the income withdrawn over the earlier years of £19,400, my self-managed SIPP total return including income is 160% which is very satisfactory and works out at an average annualised return of 10.2% p.a.

The past decade has been a relatively favourable one for investors and I am sure many will have generated some good returns...I’m not so confident the coming decade will be so kind so I need to give a little more thought to capital preservation rather than going for more growth. Obviously it helps that I no longer require income from my SIPP.

State Pension

I relied upon income from my SIPP to supplement my ISA income and bridge the 10 year gap between early retirement at age 55 yrs and state pension. This part of the journey became 'mission accomplished' in 2018.

My state pension has now been in payment for just over four years which is long enough for me to know that I do not need to continue with drawdown of income. As it is a flexi-drawdown arrangement, I can always dip in at any time for a lump sum withdrawal if required. I will therefore be less reliant on the income from my SIPP and it will very likely remain invested. When I took a look at inheritance tax last year, I realised it would be more tax efficient to take money from my ISA in future as the SIPP value does not currently count towards the £325,000 tax-free allowance for IHT.

Also, unlike an annuity which, once purchased means the capital lump sum is lost forever, any residue in my SIPP will pass on to my children and grandkids...tax free if I go before the age of 75 yrs and thereafter possibly 20% or tax free depending on circumstances. For those interested here's a link on the AJ Bell site.


Summer Solstice

Obviously I am really happy with a decade of self-managing a flexi-drawdown sipp portfolio. For the first few years, the dividend income predictably rolled in much as planned. During the next few years I withdrew significant lump sums tax free and placed the excess which I did not require for income in my ISA.

Since 2018 I have taken no income from my SIPP. The starting sum was £62,000 so the pot has more than doubled in value over the past 10 years but, as I say, I am not so confident that will be repeated over the coming decade. Maybe a little more growth but I think my main focus will be trying to maintain value in real terms after taking account of rising inflation. Hopefully the pot can be inherited by children and grandchildren possibly tax-free at some point in the future if not needed for care home fees!

For me, the big advantage of the SIPP is the flexibility it offers. I started off with a portfolio of income-generating investment trusts. I then introduced the multi-asset, globally diverse index funds such as Vanguard Lifestrategy and now I can focus on more climate-friendly options and do my bit for the planet. It certainly feels much better to have aligned my investments with my values and lifestyle and know I am no longer investing in fossil fuels which are continuing to add to global warming and undermine efforts to tackle the climate crisis.

If you are managing your SIPP (accumulation or drawdown) or you are planning to do this, or just want to comment generally - feel free to share your thoughts in the comments below.

Thursday, 9 June 2022

Personal Assets Trust - Full Year Results

This 'Steady Eddie' capital preservation investment trust was added to my portfolio back in 2013...sold a couple of years later but then re-purchased in 2020 as I was re-evaluating asset allocation following the Covid-19 shock to global markets. Given the unfolding situation in Ukraine this year, it’s looking like one of my better investment decisions.

It’s policy is to protect and increase the value of shareholders funds over the long term and the manager Seb Troy and his team aim to achieve this with a mix of diverse assets including global equities, government bonds, gold and cash.

Troy are committed to maintaining high standards of responsible investment and since 2019 have been members of several climate change associations including The Institutional Investor Group on Climate and Climate Action 100+.

In the past, I have also held Capital Gearing Trust but as it has a significant holding in fossil fuels, it is currently excluded from consideration.

Results

The trust has this week published results for the full year to end April 2022 (link via Investegate)

Over the past year, net assets have increased by 7.1% (total return) compared to 8.7% for the FTSE All Share index. Over the past 3 years the returns were 26.3% and 14.1% respectively. The trust's share price is maintained close to NAV and the price has increased by £20.00 to £491 since April 2021.

Commenting on the results, investment manager Seb Lyon said:

“How do we invest amid these febrile conditions? We have been warning for some time that the barbell 'balanced' portfolio strategy of putting nominal bonds alongside equities is long past its sell-by-date. The short-term negative correlation between the two asset classes has been of great value to asset allocators in diversifying portfolios and producing consistent returns. Bonds have thrived on the back of low inflation and low growth, whilst equities performed during periods of improved economic activity. Over the course of decades however, falling interest rates supported ever-higher valuations for equities and bonds alike.

Today, the short-term negative correlation between the two asset classes seems to have broken down. In a new regime of higher inflation, the risk is that bonds and equities fall together. For this reason we have long preferred index-linked bonds and gold bullion, over conventional bonds, and they have held up relatively well in the recent bond market sell off and should thrive in a negative real interest rate environment, also known as 'financial repression'.

Investors are warned that 'past performance is no guide to the future'. The biggest mistake investors can make is to extrapolate historic earnings, share prices, or valuations. Money illusion, the tendency for people to view their wealth and income in nominal terms rather than recognise the real value adjusted for inflation, is hard to resist. This is the mirage between the nominal and the real and will be the enemy of investors seeking returns ahead of inflation. We will endeavour to continue to preserve and grow shareholders' funds in real terms, but we are under no illusion as to the scale of the challenge ahead”.

The trust has paid a small dividend of £5.60 p.a. (paid quarterly) for several years and this year will pay out an additional £1.40 as a result of the higher than expected income from US inflation bonds. The forward yield is 1.1%.

Ongoing charges are 0.67%.

Holdings

 At the end of the period, asset allocation remained defensive with liquidity at 62% (cash, gold and bonds etc.). Currently equities make up 38% - down from 46% last year - and top portfolio holdings include Microsoft (5.0%), Google (4.7%), Unilever (3.2%), Nestle (3.1%), Visa (4.1%) and Diageo (2.8%). US index linked bonds make up 36% with cash and UK treasuries a further 17%. Gold Bullion accounts for around 9.5% of the portfolio.

The trust will make it much easier for investors to acquire shares via a 100:1 share split after which the purchase price will be nearer to £5.00 per share rather than £500!

The shares were re-purchased for my portfolio at £432 and have advanced to currently £491.

PNL v FTSE AS Index past 3 yrs

The decision by Putin to send troops into Ukraine in February has created huge global uncertainties. With rising debt levels resulting from Covid, global energy price increases, food and inflation on the rise, the invasion of Ukraine and the threats posed by climate change, I think in these uncertain times it's probably a sensible idea to think about the potential downside of the markets and with an eye on capital preservation. 

The shares are held in both my SIPP and ISA and make up around 12% of my portfolio.

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!

Friday, 27 May 2022

Greencoat UK Wind - Update

This renewable energy trust was added to my portfolio in late 2019 to sit alongside TRIG and Bluefield Solar.

UKW is one of the largest renewable infrastructure trust with a market value in excess of £3.2bn and a constituent of the FTSE 250. The trust operates a portfolio of 44 onshore and offshore wind farms throughout the UK. The trust was launched in 2013 and over this period, returns for investors including dividends have more than doubled making it one of the best performing trust in the renewables infrastructure sector.

The trust pays quarterly dividends and aims to maintain payments at least in line with RPI inflation. The company's target is for a total shareholder return including dividends of 8% to 9% per year which it has exceeded since launch.

Results

UKW has recently announced results for the full year 2021 (link via Investegate). 

Net assets increased by 40% to £3.1bn (£2.2 in 2020) and generating 2,933 GWh of clean electricity which was 20% below budget as a result of lower wind speeds. However power prices were much higher than anticipated as a result of the surge in gas prices in the second half of the year.

Total return for the year (dividend + net asset appreciation) was 15.4% which includes dividends of 7.18p paid quarterly.

Dividends should keep pace with inflation and the target for the coming year is increased by 7.5% to 7.72p (based on December RPI) which gives a forward yield of 5.1% based on the current share price of 150p.

UKW raised a total of £648m over the year from two oversubscribed placings which has been deployed in new acquisitions. The latest is a 12.5% stake in Hornsea 1 which is the world’s largest offshore wind farm located around 80 miles off the Yorkshire coast in the North Sea.

 

World's largest Offshore Wind Farm

The renewable infrastructure sector has held up reasonably well these past few months. In contrast, my technology shares have dropped around 20% year-to-date. The energy crisis is likely to prevail for some time subject to the situation in Ukraine, inflation will also remain higher than the 2% we have become accustomed to over the past decade...it's forecast to peak at 10% this year in the UK. Then there is always the climate crisis to address. I think on several fronts the likes of UKW have an advantage so I will continue to hold for the foreseeable future.

UKW - SP now close to net asset value...

Over the past couple of months, energy prices have risen by around 30% which will mean more cash coming down the line for UKW which should be a significant boost to net assets by the year end and into 2023. For this reason I have recently topped up my holding in UKW which currently accounts for around 8% of my green portfolio and is one of several renewable energy infrastructure trusts which make up just over one quarter of the portfolio.

Under the renewables obligation certificate (ROC) arrangements, around half of UKW revenues are effectively guaranteed until 2037 and going forward they will likely take advantage of long term contracts for difference which again fixes the prices of the electricity generated. More homes and businesses receive clean energy whilst more carbon dioxide from thermal fossil fuel generation is displaced and investors receive their relatively safe 5% inflation-proofed income...a win, win all around!

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!

Wednesday, 6 April 2022

Gresham House Energy Storage - FY Results

Since its launch in December 2018, Gresham House Energy Storage (GRID) has developed the largest energy storage portfolio in the country. It operates 16 utility-scale energy storage sytems with a total combined capacity of 425MW.

As we transition from fossil fuel generation to renewables such as wind and solar, we will increasingly need energy storage solutions due to the intermittent nature of renewable energy - the wind doesn't always blow and there's not much solar in the Winter months.

Currently we use gas fired generation to fill the gap but we have legislated for net zero carbon emissions by 2050 so the ability to store excess energy from an ever increasing capacity from renewables will be essential. As renewable capacity expands, gas-fired power stations will be required less frequently and so they become less profitable to run. This means that renewables are forcing fossil fuels off the grid.

As recently as 2014, coal was our main source of electricity generation. It is still used in the winter months but currently accounts for just 2% of  generation and is due to be completely retired by 2024.

GRID has several streams of revenue which include the wholesale market and National Grid balancing mechanism, Firm Frequency Response based on small-scale changes to the grid's electrical frequency, fixed fees for being on call to deliver power at times of extreme need and Triad payments from National Grid when there is peak demand.

Results

The company have today released results for the full year to end December 2021 (link via Investegate). Net Assets have increased by 13.5% per share over the year on a total return basis to 116.8p (last year 102.9p) and share price return is up 23.0% compared to FTSE All Share Index of 18.3%.

Operational revenues increased by 170% to £51.4m compared to £19m for the previous year. The company is forecasting growth of at least 15% in the coming year.

Over the year, the company has acquired three more storage projects with a total capacity of 141MW. This additional capacity has boosted annual revenues from £10m in 2019 to 19m. Over the past year, revenues have increased due to the introduction of National Grid's Dynamic Containment (DC) service in 2020. This aims to provide more resilience to the grid supply and reduce volatility to provide a better balancing mechanism.

Operational capacity increased from 315MW to 425MW by the end of the year with a further 375MW under construction. The total UK energy storage capacity has increased to 1.4GW and is expected to grow substantially over the coming 3 to 5 years. GRID continue to be the market leader with around a 30% share.

Looking forward, the management are looking to expand overseas and will seek authorisation to invest up to 30% of assets internationally.

Chair John Leggate "The Board and Investment Manager are closely following the global response to Russia's military intervention in Ukraine, and the ensuing humanitarian crisis, as well as considering the potential impact on financial markets, energy security considerations, power price volatility and the Company's business model. In terms of impact on the Company's longer-term outlook, for the moment, the indications are pointing towards a much faster rollout of renewable energy globally with an associated increasing demand for energy storage projects." 

GRID 3 yr share price/NAV

The company has paid a total dividend of 7.0p over the past year as promised and has maintained this target for 2022. This gives a forward yield of 4.9%.

I added this trust to my green portfolio in December 2019 at the price of 105p...its currently 143p and continues to trade at a 10% premium to net assets. The shares account for around 5% of my green portfolio with a further 4% invested in Gore St Energy Storage.

The focus so far has been batteries but they are now looking at the potential from solar PV and I am wondering whether they have considered other energy storage solutions such as flow batteries or green hydrogen as these also has lots of potential.

The reality is that fossil fuel generation will gradually be replaced by renewables as we move towards our net zero target by 2050. This means increasing intermittency which will require ways to store energy to bridge the gaps and provide a constant supply.

So, one to put back in the bottom drawer pending further developments.

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!

Monday, 21 March 2022

iShares Global Clean Energy - Update

This exchange traded fund, launched in 2007, gives investors an opportunity to invest in a range of globally diverse companies involved in renewable energy. The fund joined my portfolio in March 2019 at 433p and has been topped up on a couple of occasions.

It is an index fund and tracks the S&P Global Clean Energy Index which, until recently, held just 30 of the world’s leading companies in the clean energy sector. However, this concentrated portfolio was problematic and liable to significant imbalances. The index has now been expanded to allow up to 100 holdings and a new methodology provides a greater weighting to more liquid stocks.

Hopefully these changes should help to reduce the volatility.

Why Clean Energy?

Last August, the IPCC delivered their ‘Code Red’ warning pointing out how close we are to an irreversible global meltdown caused by the climate crisis.

The IEA have ruled out all new coal, gas and oil exploration/developments if we are to stay on track to limit global warming to 1.5C and get to net zero carbon emissions by 2050. The use of fossil fuels account for three-quarters of greenhouse gas emissions so we need to transition to alternative, cleaner forms of energy asap.

It is estimated that at least 50% of the world's energy will come from renewables such as solar and wind by 2050. This compares to around 7% in 2015. In order to implement the Paris Agreement and limit global warming to well below 2C, governments around the world will need to invest huge amounts of capital - estimated over $3 trillion - over the coming decade and this obviously provides significant opportunities for the renewables industries.

The ETF fund holdings include :

Plug Power (4.6%) a leading provider of fuel-cell engines and green hydrogen-based solutions in the US. Some high profile customers include Amazon, BMW, IKEA, Walmart and Carrefour.

Enphase (8.4%) a global energy technology company and the world’s leading supplier of solar microinverters. these connect solar generation, storage and management on one intelligent platform.


Solaredge Technologies
(5.7%) another Nasdaq-listed US company providing inverter solutions across all segments of the solar PV market.

Vestas Wind (8.3%) and Orsted (5.9%) both of which I also hold as a stand-alone investments in my portfolio

SSE (3.8%) the UK-based renewable energy company and listed on FTSE 100. It aims to deliver a five-fold increase in renewable energy output and reduce carbon emissions by 80% by 2030.

Returns

The fund had an amazing run...a couple of years back it moved from under £4.00 in March 2020 to reach a high point of £14.00 in mid February 2021 but there has been a significant pull-back over the past year with the share price falling to a low point of 740p last month. At the current price of 925p my total return has been -5.0% for the past year including a dividend yield of 0.8% and subject to exchange fluctuations. Total returns over the three years since purchase is 115%.

INRG 3 Yr Share Price

Ukraine Invasion

Clearly the decision by Putin to invade Ukraine on 24th February has sent shock waves around the world. It highlights how dependent the West has become on Russia’s oil and gas. We know we need to move away from fossil fuels to address the climate crisis and this just adds more urgency to the need to move to alternative forms of clean energy.

I am hoping the pick up in recent weeks is a sign of some consolidated upward momentum after such a good run but this is an emerging sector and I am prepared for some further volatility. However, over the longer term, my view is that the global renewable energy sector is likely to see continued growth as the world attempts to address the climate crisis and move to curb carbon emissions. We are weaning our economies off fossil fuels and the transition to clean energy such as wind, solar and wave power is well underway and likely to accelerate.

I have taken a punt on a few individual companies such as Orsted, Ceres Power and Vestas Wind for example but a diversified approach with the likes of this ETF probably makes more sense so I am very happy to continue holding these shares which currently make up the largest element of my green portfolio currently around 12%.

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!

Friday, 18 March 2022

Ceres Power - Full Year Results

Ceres is currently an AIM-listed company but has plans to move to the main market later this year. It is a world leader in low cost, next generation fuel cell technology which can facilitate the transition to zero-carbon emissions. The technology can be used in a variety of applications - transport, industry, data centres and home heating.

Fuel cell technology is already a core component of energy strategies in Japan, Korea, Germany and the US. Ceres are working with global leaders such as Bosch to embed their technology in mass market products. The stationary global fuel-cell market is estimated to be worth over $40bn by 2030

Ceres Power joined my green portfolio at 427p in February 2020...just before the pandemic.

German engineering giant Bosch hold an 18% stake in Ceres and believe their steel fuel cell technology as potentially the best in the business. Bosch say the market for the fuel-cell power station could be worth €20bn by 2030. They plan to invest €400m in its solid oxide fuel cell business by 2024. Other partners include China's engines giant Weichai Power who hold a 20% equity stake.

The company has licence agreements signed up with four of the world's largest engineering and power companies including Japan's Miura and Doosan of S. Korea who are a global leader in the stationary fuel-cell market. Doosan are preparing the launch of their 10KW SOFC system using Ceres’ technology later this year.

Results

The company has this week released results for the full year to end 2021 (link via Investegate).

Ceres is growing quickly. From just under £1m in 2015, they have increased revenues significantly in the past few years. Over the past 12 months revenues increased by 44% to £31.7m (2020 £21.9m). Just over half of this came from licence fee income which has doubled over the past year. Strong revenue growth is expected for the coming year subject to the timing of a new joint venture with Weichai and Bosch to establish manufacturing facilities in China.

Gross profits increased to £20.3m on a margin of 66% whilst cash has increased to £250m following a successful fundraising of 179m to push ahead with electrolysis for the production of green hydrogen.


Commenting on expanding the business, CEO Phil Caldwell said:

“Globally, industry accounts for 24% of carbon dioxide emissions and electrification is not a credible route to decarbonise many processes. For steel (accounting for 7% of global carbon emissions), ammonia and cement (2% each), hydrogen provides an economic solution to address parts of the energy system that cannot be directly electrified, where we rely on fossil fuels today.  We need to start working on these hard-to-abate areas now as they are significant problems with major infrastructure challenges.  

In early 2021, we took the decision to broaden the addressable market of the Company, moving into the production of green hydrogen using Ceres' technology through electrolysis. To do that we are committing £100 million to develop megawatt-scale, high-efficiency Ceres electrolysers.  Importantly, solid oxide electrolysers such as Ceres' aim to produce hydrogen at efficiencies around 20% greater than other technologies, in the range from mid-80s to 90% efficiency, where it is possible to make use of waste heat in industrial processes to drive this high efficiency.  We believe we have a pathway to produce green hydrogen at $1.5/kg, which is  the point at which electrolysis becomes competitive with blue and grey hydrogen produced using fossil fuels, at a price point that is key to making green hydrogen commercially viable.

Estimates suggest hydrogen could eventually account for 18% of primary energy. That is a big opportunity - according to McKinsey it is a $2.5 trillion opportunity. In March last year, we raised £179m in the public markets to support our growth. I am seeing a change in the capital markets, certainly from when I took over as Chief Executive of Ceres in 2013, with recognition that greater investment is needed to scale companies like Ceres, and others, to meet the climate challenge.  I believe we have a very strong investment case”. 

Huge Potential

The invasion of Ukraine has brought into sharp focus the dangers of the West’s dependence on Russian oil and gas. This crisis has reminded every country that we need to move quickly to build our self-reliance on more sustainable forms of energy and this will mean far more energy sourced from renewables and hydrogen.

Earlier this month, the EU announced its revised energy strategy to reduce reliance on Russian gas by two-thirds by the end of 2022. The EU Commission will be looking at alternative sources for fossil fuels in the short term but medium and longer term will significantly ramp up the roll-out of renewable and aim for a quadrupling of the use of hydrogen by 2030.

Commission President Ursula von der Leyen said: “We must become independent from Russian oil, coal and gas. We simply cannot rely on a supplier who explicitly threatens us. We need to act now to mitigate the impact of rising energy prices, diversify our gas supply for next winter and accelerate the clean energy transition. The quicker we switch to renewables and hydrogen, combined with more energy efficiency, the quicker we will be truly independent and master our energy system. I will be discussing the Commission's ideas with European leaders at Versailles later this week, and then working to swiftly implement them with my team.”

The company doesn't want to focus on fuel cell manufacturing but rather a technology licensing company working closely with a range of partners who are looking to adapt their business' and address the huge challenges posed by climate change.

CWR - 1 Yr Share Price

The share price has been volatile over the past year but I believe the longer term prospects are very positive and I will continue to hold on through the ups and downs. The shares currently make up around 8% of my green portfolio.

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 smaller companies can be rewarding but is higher risk - always DYOR!

Thursday, 10 March 2022

I'm Hedging My Future Energy Costs

In 2019, I flagged up a new project from Ripple Energy which offered an opportunity to buy into a new wind farm co-operative. I looked into it at the time but it went on the back burner and then along came the Covid pandemic and everything was placed on hold.

However, with the current energy crunch, the cost of my electricity almost doubling and the prospect of more to come later in the year, I decided to take another look.

Next month the energy price cap will rise by 54% to £1,971 and some are speculating that it could rise to £3,000 by October. Buying into a wind farm is a way for everyone to protect themselves from rising energy costs.

The Offer

The UK’s first consumer owned wind farm at Graig Fatha in Wales is now fully sold out and now generating clean green electricity for its members. A typical household will save around £275 on their bills in the first full year due to the current high price of wholesale energy.

The next project is the Kirk Hill site in SW Scotland. Planning permission was granted in October 2020 and should become operational in late 2023. In less than 10 minutes, the site will generate enough electricity to power the average home for a whole year.

So basically, you buy shares in the wind farm based on your average annual electricity consumption. When the wind farm starts generating power, your electricity provider – eg Octopus – buys your share from the wind farm and pays the operator a low amount to cover operating costs and passes on the rest to you via a reduction in your bill.


The initial purchase (min £25) is a one-off payment...typically £1,700 which would buy enough electricity for the average house. This can be spread over 12 months. At current high prices, this would mean a saving of around £300 per year and therefore a payback period of under 6 years. Of course, energy prices could go higher which would mean even more saving but could go lower but then energy bills should come down.

Of course only a proportion of our bills are for the actual energy consumed and you still have to pay the daily standing charges, VAT, green levies etc. which can account for over 50% of the average bill.

Environment and Climate Change

In addition to the savings on our energy bills, there are significant benefits to the climate. These are new wind farms which would not otherwise have been built. So the more consumers who join up means Ripple have more confidence they have a good model and can plan ahead with new wind farms in the future.

Onshore wind is one of the lowest CO2 source of power in the UK. The model is much cheaper than individuals installing their own rooftop solar PV. (Reference material)

The Kirk Hill site is estimated to save 12 million Kg of CO2 every year which is equivalent to taking 8,200 petrol/diesel cars off the road.

But also, the invasion of Ukraine has brought into sharp focus the need to reduce our dependence on Russian oil and gas and become far more self reliant.

Conclusion

So, I have taken the plunge and signed up for my small share of the Kirk Hill wind farm (the offer officially closes end March but this could be extended) and will pay by monthly instalments over the coming year. I am already with Co-op Energy via Octopus so will not have to change supplier.

I look forward to getting my regular monthly discount off my bills next year and also following progress of the construction which is due to begin this Summer. It would be good to visit the site when operational...hopefully they will have regular open days for co-op members.

Here's a link to the Ripple website for those interested in this model.

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!