A new investment fund offers a 6% dividend with the benefit of state subsidies. Patrick Collinson looks at the pros and cons
A major new fund is promising to pay a yearly dividend of 6%, tax-free if held in an Isa, from investing in eight of the biggest solar power farms across the UK.
The days may be shortening after this year's long hot summer, but in the City of London interest in solar power has never been brighter. In the latest of a string of stock market funds investing in Britain's renewable power industry, asset manager Foresight is launching a £220m fund that says it will benefit from government subsidies and falling technology equipment costs.
Foresight says solar power offers more predictable returns than wind farms, and will be buying the UK's largest solar park, built on a disused airfield at Wymeswold in Leicestershire. Others are in an earlier stage of development, but the plan is to have a total of eight farms, with a generating capacity of 146MW, or enough to power nearly 50,000 households.
Around 40% of the revenue for the fund will come from the electricity produced by the solar panels and sold into the national grid, while the other 60% will come from payments linked to "Renewable Obligations Certificates" – green certificates used by electricity suppliers to demonstrate they have met their obligations to generate power from renewable resources. Britain's power companies have to meet a target of generating 15% of energy from renewable sources by 2020, and buy ROCs to meet that obligation. The price of the ROCs is fixed by the government and guaranteed for the next 20 years, rising in line with inflation.
Earlier this year Bluefield Partners attracted £130m into its Solar Income Fund, while Renewables Infrastructure Group raised £300m for wind and solar farms. One of the changes that has spurred the sector has been the government decision to lift the cap on the size of projects eligible for subsidies via the feed-in tariff. The arrival in recent years of low-cost solar panels from China has also helped make Photovoltaic technology more competitive.
The Foresight fund will float on the London Stock Exchange at 100p a share, and is targeting an initial dividend of 6p a share, which it then hopes to raise each year in line with the retail price index. Small investors can put as little as £1,000 into the fund, and can place their investment in a tax-free stock and shares Isa (maximum £11,520 in 2013-14) or a self-invested personal pension (SIPP). The dividend forecast is slightly lower than the Bluefield fund, which is targeting an initial 7p dividend per share.
But there are clouds on the horizon, in the form of growing opposition to coating swaths of the British countryside in panels. A planning application for a £20m solar farm on a 38-hectare (94-acre) site in Tattingstone, Suffolk, was turned down in June , following a high-profile campaign by local opponents including the actor and comedian Griff Rhys Jones.
There has been particular unease about new projects in Cornwall and the rest of the south-west. In August, Somerset MP and foreign minister Jeremy Browne described large-scale solar farms as a "monstrous desecration" of the countryside after plans for a 20-hectare site near Taunton were unveiled. But promoters of the funds say investors are protected because they are only buying existing schemes, or those that already have planning consent.
In Spain, solar investors were burned after the government withdrew generous subsidies, and in Britain, financial advisers warn that investing in solar remains a risky prospect. Brian Dennehy of Dennehy Weller says: "The solar industry has been through some big ups and downs over the years. The current flurry of offers is based on subsidies, improving margins, and better results from R&D. Don't bet the house on this one, there are a lot of variables which can quickly undermine the improving outlook. Hopefully widows and orphans won't be sucked in by the headline dividend promise. It is this high to reflect the high risks."
Justin Modray of Candid Money is also concerned about the withdrawal of subsidies. "The idea is certainly appealing, but it's important not to ignore the potential risks. Opposition to solar parks is growing as they blight the landscape, which may hinder development. Nevertheless, provided Foresight can get its fund up and running by investing in existing developments, this should prove less of an issue. Changing weather patterns could affect production for better or worse and overall energy demand and supply will obviously affect returns. Since this is also a relatively new investment area, longer term returns and management expertise are, as yet, unproven. Plus, of course, the government may decide to reduce the attractiveness of renewable energy incentives."
Foresight is not a name familiar to small investors, but it does have experience of running specialist investment funds, albeit with mixed success to date. The company launched a venture capital trust investing in solar energy in August 2010 at 100p per share, aiming to pay 5p of dividends a year after two years.
"So far it appears to meeting its goal, although the share price of around 103p is trading well below the net value of the fund's underlying assets of around 124p," says Modray.
But at advisers BestInvest, Jason Hollands likes the Foresight fund –)) and recommends the Bluefield fund as well. "From an investment perspective, what underpins the attractions of these vehicles is that they offer investors high dividend yields which typically have policies to rise in line with inflation and a proportion of their revenues are de facto guaranteed by subsidies.
"These should be seen as income investments which offer a high degree of predictability and some inflation proofing. Foresight is a well-respected venture capital house, which has established a strong presence in renewables. We feel this is an attractive launch."
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