The future of wind-powered energy in the UK looks uncertain after the recent failure of the Government’s offshore wind auction to attract a single bidder and a rolling back of net zero targets.

However, as this author’s recent visit to the official opening of the Cumberhead wind farm in Scotland shows, there are still projects being developed onshore as the country looks to transition away from fossil fuels.

BOOTS ON THE GROUND

The 50-megawatt development encompasses 12 turbines which are located alongside existing assets on a larger site. These turbines are among the largest in the UK and must be seen to be believed – towering upwards of 150 metres above the South Lanarkshire hills on which they sit.

Stepping inside these devices, they have the cavernous air of a modern-day cathedral with a winch lift at the bottom and a ladder leading up as high as the eye can see.

This is the largest wind asset in the Octopus Renewables Infrastructure Trust (ORIT) portfolio. A power purchase agreement has been secured with personal care products firm Kimberly-Clark (KMB:NYSE) (the company behind brands like Huggies and Kleenex) to supply around 160,000 megawatt hours of renewable energy a year from the development.

As well as other onshore wind sites in the UK and Europe, Octopus Renewables Infrastructure Trust has an offshore wind farm off the Lincolnshire coast as well as solar assets and a battery storage project in development in Bedfordshire.

WHY HAS ITS SHARE PRICE BEEN WEAK?

Rising interest rates have led to higher discount rates on long duration assets like those owned by Octopus Renewables Infrastructure Trust. As a direct result, investment vehicles like this one have seen their share prices fall. Put simply, the higher the discount rate, the lower the present value of future cash flows.

Two key elements make up the discount rate – the risk-free rate, which is typically taken as the yield on government bonds, and the risk premium which reflects the risk associated with investing your money.

The risk-free rate has moved materially higher and Octopus Renewables Infrastructure Trust shares, which often traded at a premium to net asset value before rates started going up, are now trading at a 16% discount.

REASONS TO INVEST

Discussing the trust’s strategy on site on what was, ironically, an unseasonably still and sunny day for the west of Scotland, manager David Bird says: ‘Because we’re only a third in the UK we’ve been less affected as it is only really in the UK where the rate has gone up for longer and faster.

Bird argues that although the yields on bonds may now compare more favourably to the yield available from trusts like Octopus Renewables Infrastructure Trust (currently 6.4%), there are other reasons to invest.

‘The thing those bonds don’t have is the inflation linkage. We have a lot of inflation linkage in our revenues and by building projects like Cumberhead we’re crystallising capital growth and that’s not something you’re going to get from bonds.’

Bird says the company is looking at asset sales to help fund its pipeline of prospective investments given the difficult environment for raising cash in the market.

Running the rule over the trust, which has an ongoing charge of 1.12%, in the wake of its recent first half results (21 September) Liberum says it continues ‘to be encouraged by both the high growth and high cover of the dividend, diversified portfolio and attractive discount to net asset value’.

Liberum says the trust’s financial headroom means ‘the fund is well placed to continue accretive growth despite the difficult current environment for raising equity’.

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