There is an abundance of renewable energy trusts on the UK market, so many in fact that JP Morgan Cazenove put out a broker's note last year suggesting that this over-supply would lead to a cannibalisation of the sector.
However, this theory, based on forecasts from Bloomberg, has been widely debunked due to reasons such as the irrationality of building assets that aren’t economically viable. This coupled with the political will to decarbonise the planet might be part of the reason why Octopus’s Renewable Infrastructure Trust (ORIT) produced such a solid state of full year results recently in what has been unarguably a difficult market.
One hallmark of ORIT compared to many other renewable trusts is that it’s multi-jurisdictional, taking in large parts of Europe as well as the UK. For some, this may represent currency challenges that the cost of hedging out is too much of a headache but for David Bird, investment director on the trust, it’s not an issue.
“There is some exposure to foreign exchange but it’s relatively low given that we are currently 60 or 70 percent invested into Euro, rather than Sterling assets, which account for 10 percent,” said Mr Bird. This means at a portfolio level a massive change in the value of sterling would only impact the NAV by 1.8 percent.
The trust also employs some natural hedges as well as the usual plain vanilla futures and swaps widely used in currency hedging. For instance, when financing the purchase of a French solar farm, it borrowed in the same currency it would use to refinance the deal which given the ultra-low interest rates on the continent seems a prudent move.
Considering this trust floated at the end of 2019, smashing its original target £250 million it then entered the Covid 19 nightmare. Despite that, it has produced a total shareholder return of nigh-on 16 percent, an increase in NAV of 2.4 percent and has already used all of the proceeds from its IPO.
The trust is also trading at a 15.2 percent premium to NAV which in these market conditions is rare. The fund likes to buy assets that are still under construction, so it can add value as well as stripping out costs. One of its latest projects, a wind farm in Ljungbyholm, Sweden is instructive of where this vehicle is moving.
Unlike similar funds on the market, it’s not beholden to whether an asset is covered by a subsidy or not, it seems the team at Octopus are equipped to go which way the wind blows. While sone similar funds are hunting corporate PPA deals, in which a large company will lock in power prices for up to 25 years, ORIT is happy to work with state providers like EDF in France although open to private deals.
For a fund that is delivering a healthy yield of around 4.4 percent in an increasingly competitive market, ORIT seems well placed. When jokingly asked if there is any complications between Octopus Energy, part of the parent company and ORIT, the reply is very serious.
“We can't give any favourable treatment to any party, and you can probably see in the results that we have signed some agreements with Octopus Energy but it's a separate company from the trust and so those need to be done on an alternative basis,” said Mr Bird.
