Usually considered a safe haven from market turbulence, several U.K.-based investment funds focused on operating wind and solar parks have lowered their asset valuations in recent weeks, illustrating how even largely regulated renewable energy portfolios are not spared by the coronavirus pandemic.

London-listed funds including The Renewables Infrastructure Group Ltd., or TRIG, and Foresight Solar Fund Ltd., both constituents of the FTSE 250 stock market index, have lowered their net asset value in recent weeks to reflect forecasts of depressed power prices for the rest of the year and beyond.

That is shining a spotlight on a slice of the stock market that has so far been relatively safe from the coronavirus pandemic. Lower energy demand and a global gas glut have caused electricity prices to plummet, hammering thermal power producers in particular.

By contrast, the renewables funds have bounced back strongly from a wider equity slump because their assets are mostly supported by fixed long-term subsidies. Although some of the funds lost as much as a quarter of their precrisis value at the depths of the slump in mid-March, they are now back to single-digit losses on a six-month comparison.

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But managers' cuts to asset valuations still expose the risk tied to portfolios with a growing share of merchant power price exposure, including projects under specific subsidy mechanisms as well as unsubsidized renewables, which are increasingly becoming the norm from Spain to Norway. TRIG now owns more than 1,600 MW of assets across the U.K., Ireland and mainland Europe, for example, and like other funds has been acquiring projects without subsidies.

"It's not like they're totally immune to everything, especially if they have some merchant exposure," Deepa Venkateswaran, an analyst at Bernstein, said in an April 22 interview on the coronavirus resilience of pure-play renewable companies in general. "I feel like the market is maybe being very sanguine about all of that stuff."

TRIG said on April 22 that its net asset value per share, or NAV per share, a key stock price driver, would likely be 5 pence lower after taking into account updated forecasts for wholesale power prices, which it said have reduced by 17% on average over the next five years in its core markets, including Britain, France and Germany. The updated NAV per share is about 4% below the last update at the end of December.

Others have followed suit since then, with Foresight and Bluefield Solar Income Fund Ltd. cutting their NAV per share by about 5% and 6.5%, respectively, or roughly £30 million in outright value in both cases. Both funds said the revised values were as of March 31, when coronavirus lockdowns had only been in effect for about two weeks.

Elchin Mammadov, an analyst at Bloomberg Intelligence, said he now expects that eight of the largest U.K.-listed funds could see their asset values drop by as much as £500 million in total and, as a result, see a temporary reversal in their significant outperformance against the broader stock market. The funds usually trade in a roughly 10% range to their reported NAV.

"Green funds are likely to temporarily underperform later this year, given we expect many such funds to mark down the net asset value per share," Mammadov said in an April 29 note, adding that power prices will need to recover to return the funds to their status quo. Aurora Energy Research, a consultancy, projects that power demand and prices will remain "significantly lower" during 2020 and could rebound by 2022.

"Beyond 2020 there could be a resumption of outperformance, as long as bond yields remain subdued and if investors — particularly those focused on [environmental, social and governance issues] — keep investing in green infrastructure," Mammadov added.

Aside from TRIG, Bluefield and Foresight, his analysis also included Greencoat UK Wind PLC, NextEnergy Solar Fund Ltd., JLEN Environmental Assets Group Ltd., Aquila European Renewables Income PLC and Greencoat Renewables PLC. It did not include Octopus Renewables Infrastructure Trust PLC, which only started trading in December 2019, but Mammadov said the fund will be similarly impacted.

Range of impacts

Even unsubsidized projects usually have short-term hedging strategies and a large share of the funds' revenues is still tied to government subsidies, limiting the impact of power price fluctuations. TRIG said about three-quarters of its revenues through 2024 are fixed, including over 80% over the next two years, while Bluefield said it has 88% contracted this year and 77% until mid-2021.

But some subsidy regimes still leave generators somewhat exposed: Revenues under the renewables obligation mechanism, an older subsidy regime in Britain that covers more than 25 GW of wind and solar parks, pays generators a top-up on the wholesale power price, which has roughly halved due to the pandemic. As a result, about a quarter of total revenue for some of those assets will have been "shaved off in a relatively quick period of time," Tim Dixon, an analyst at consultancy Cornwall Insight, said in an interview.

In addition, the value of the tradable certificates which generators receive under the mechanism is also likely to have dropped amid lower power demand. Generators with those kinds of assets, which include several of the renewables funds, will simply "have to weather this out," Dixon said.

On top of weaker power markets, slower inflation will also lower the growth of power prices guaranteed under the U.K.'s contracts for difference mechanism, affecting even more assets, Mammadov said. On the other hand, a weaker pound could boost profits for funds with plants abroad, including TRIG, Octopus, NextEnergy and Foresight.

Despite the current headwinds, Mammadov expects many green funds will continue buying projects with merchant exposure. Greencoat UK Wind announced on April 27 that it will buy a 240-MW wind farm under construction in Scotland, which is unsubsidized but has a 15-year route-to-market power purchase agreement in place, for instance.

Richard Crawford, director of infrastructure at Infrared Capital Partners Ltd., the investment manager for TRIG, said in an April 23 interview that developers could have a harder time building such assets in the current environment. But he insisted that the broader investment case for renewable generation would persist amid growing awareness of the need for sustainable development.

"There's no reason to think that that is going to change at all in the long term," Crawford said.