This is the first article in a new series from Good With Money: “How to Invest in Renewable Energy”, in collaboration with Mint Selection, a renewable energy finance and project development recruitment consultancy.
There are many reasons people might want to invest directly in renewable energy. Some want to support the growth of the industry for environmental reasons; while for others, the primary draw is the returns. As the now £17.9 billion industry has grown in recent years, so too has the range of investment options. From community energy share and bond offers to crowdfunded bonds and debentures to just plain old investment trusts – the choice is staggering. However, while each product has it different foibles – including levels of risk, minimum investments and levels of return – each has the same aim: to make the planet a cleaner, greener, more sustainable place.
Why renewables?
While we’ve already covered the doing good bit, investing in renewable energy can also provide steady and long-term returns. In part, this is thanks to the subsidies that the UK government provides to generators of renewable energy, which provide a financial boost to renewable energy generators that is passed on to the end investor. This support has helped to propel renewable generation in the UK, with the Renewable Energy Association stating that green energy generated close to 30 per cent of the UK’s electricity in 2017[1], significantly more than the 7 per cent generated by coal. Falling costs are also increasingly attracting large-scale private investment, with Aurora Energy Research predicting £20 billion of new flows into subsidy-free projects by 2030.[2]
But what are the risks?
Like any investment, renewable energy has its risks and returns are not guaranteed. For example, where investment returns are variable, the fluctuating price of electricity affects how much a generator is paid for selling its energy to networks and therefore how much can be paid back to investors. Other risks can include a company not meeting its revenue targets as well as any issues during the construction period if you have invested in a pre-construction project. Liquidity can also be an issue, as not all renewable energy investments are tradable on a secondary market. This means you will have to hold your investment until the end of its term (and some are very long term).
1. Community share and bond offers
Community share and bond offers are opportunities to invest in small-scale renewable energy generation. This will either be in the form of ‘shares’ – through which you hold a share of a wind or solar project, for example – or bonds, in which you act like a creditor to a project and receive a yield, or coupon, in return. The latter are fixed over a period of anything between two to 25 years. Fundraises tend to be in the pre-construction or pre-implementation phase, as the project needs the investment to become a reality.
Both returns and minimum investments on community projects vary widely, but typically you might expect a return of around 5 per cent a year (although some offer closer to 10 per cent) with a £250 to £1,000 minimum investment through websites like ethex.org.uk (again though, they can be as little as £50). Opportunities range from raising funds to install a wood fired heating system in a school, to installing living gardens across London’s transport network. You can also hold some community investments tax free through the Innovative Finance ISA.
2. Listed equities
Listed equities include any investment that provides equity – or shares – in a company that is publicly traded. Unlike most community share offers, this means your holding can be bought and sold independently of the project, making it (usually) lower risk. Investments can either be in an individual company or ‘stock’, or in a listed vehicle like an investment trust. The latter is often a good option for novice investors as trusts provide exposure to a range of different projects. Popular trusts include Foresight Solar and Greencoat Wind while the John Laing Environmental Fund (JLEN) and The Renewables Infrastructure Group (TRIG) are well-known funds.
Again, minimum investments for both individual companies and investment trusts vary widely, but are usually quite small – especially if you invest through an online trading platform like AJ Bell, Hargreaves Lansdown or Interactive Investor. Unlike community share offers, a specific annual return is very rarely targeted as both companies and trusts hope to trade for decades, although you can buy in and sell out whenever you want. You can also hold individual stocks or trusts tax-free in a regular stocks and shares ISA.
3. Crowdfunded bonds and debentures
One of the more innovative areas of the renewable energy market is crowdfunding, or peer-to-peer lending in which a (typically) small scale project or company seeks to raise a smaller amount of capital. Crowdfunded bonds and debentures are similar to community bond offerings, however they can be even less liquid (or transferable). This means it is unlikely you will be able to withdraw your investment until the end of the term – whether that be in two or twenty years.
A good place to look for opportunities is abundanceinvestment.co.uk, which has helped to channel £77 million into crowdfunded renewable projects since 2012. Holding periods do tend to be longer term – around the 20-year mark – although minimum investments can be as low as £5. Returns are often higher – sometimes as much as 15 per cent a year is targeted; however these may not begin coming through for a few years, if at all – reflecting the higher level of risk.
The renewable energy investment landscape is vast and growing, with ever more exciting opportunities opening up every day. While potentially being a little confusing, this does mean there is almost certainly an opportunity to match every eager investor. As with any investment, however, the most important thing is to do your research and, where appropriate, take advice.
This series had been sponsored by Mint Selection, a specialist renewable energy finance and project development recruitment consultancy.
[1] https://www.r-e-a.net/news/review-2018-concern-as-british-renewable-energy-sector-growth-begins-to-cool
[2] https://www.theguardian.com/business/2018/mar/20/uk-subsidy-free-renewable-energy-projects-set-soar-aurora-energy-research-analysts
