Ian Cowie: a curveball arrives for these high-yielding trusts

There is no situation so bad that political intervention cannot make it worse, as our government reminded us again this week.

No, I am not talking about Tuesday’s shock disclosure that Rachel Reeves, the Chancellor of the Exchequer who promised before the general election not to raise taxes - and then did so immediately afterwards, before promising once again that tax rise would be a one-off - now hints she might have to hike taxes once again later this month.

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That can only come as a surprise to folk who might be amazed to learn of the Pope’s religious affiliations or the sanitary arrangements of bears in the woods.

What hit this small shareholder more immediately was Monday’s less well-publicised proposal to switch renewable energy subsidies from the retail prices index (RPI) to the consumer prices index (CPI).

Before your eyes glaze over, I had better explain that while the government’s preferred measure of inflation, CPI, increased by only 3.8% in the year to September, RPI is rising by 5.8%. That’s more than half as high again as CPI. No wonder politicians prefer CPI, but the multi-trillion pound bond market requires index-linked gilts to track RPI.

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Of course, it is easier for the government to bully a few starry-eyed renewable energy investors than to take on the bond market. This explains why Monday’s proposals are open for “consultation” until 28 November, for renewables obligation certificates (ROCs), and 12 December, for feed-in-tariffs (FiTs). Then, after careful consideration and due diligence, the Department of Energy will pull the plug on RPI-linked payments next April.

That’s bad news for anyone who invested in British renewable energy but not a problem for those who sent their money overseas. To be specific, Greencoat UK Wind (LSE:UKW), the largest investment trust in the Association of Investment Companies (AIC) Renewable Energy Infrastructure sector, with assets of more than £4.2 billion, saw its share price slip 4% lower on Monday. By contrast, shares in the self-descriptive US Solar Fund Ord (LSE:USF) saw the market price of its £349 million assets unchanged.

To be fair, USF has been battered by earlier political interventions from US President Donald Trump, who has repeatedly criticised renewable energy. Shareholders who are still onboard USF may feel there is no point in bailing out now. But I am glad I sold all my USF shares at 47p in July, 2023; they traded around 29p this week.

Closer to home, the switch from RPI to CPI will damage any hopes of the UK reducing pollution by increasing investment in renewable energy.

Iain Scouller, an analyst at the stockbroker Stifel, explained: “For a government that needs private capital to finance much of its infrastructure and renewables investment ambitions, this is not a good look.

“Investors are likely to be wary of allocating further capital to the sector and to demand a risk premium in case further changes come out of the blue, such as changes to subsidies.”

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He added that lower FiTs and ROCs will reduce dividend cover and valuations at other infrastructure funds, such as International Public Partnerships Ord (LSE:INPP).

This £2.8 billion fund’s UK assets include Thames Tideway, the super sewer that began operating this year, and Sizewell C, the nuclear plant planned for Suffolk. 

Fortunately, it was not all bad news for renewable infrastructure this week. Apollo, the American private equity firm with $513 billion (£392 billion) in assets under management, agreed terms with Orsted AS (XETRA:D2G), the Danish wind farm developer, for a $6.5 billion joint venture off the Norfolk and Yorkshire coast.

As a result, Apollo will take a 50% equity stake in the Hornsea 3 wind farm and fund half the project’s remaining construction costs. The 2.9 gigawatt project should be sufficient to heat three million homes and aims to be operational by the end of 2027.

Coming down from the clouds of macroeconomics, this small shareholder is not sure whether to draw comfort from UKW’s eye-stretching 10.2% dividend yield - or be alarmed by it. Shareholders’ income increased by an annual average of 7.6% over the last five years but that was when FiTs and ROCs were based on RPI, not CPI.

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Meanwhile, INPP pays 6.9%, with the dividend having grown by an annual average of 3.1% over five years. It is important to be aware, dividends are not guaranteed and can be cut or cancelled without notice. The lower yield looks like the safer one.

I hold both shares in my ISA for tax-free income but even this might change on Budget day, 26 November, which is much later than usual this year. That delay does not augur well for taxpayers. As City cynics say: bad numbers take longer to add up.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Greencoat UK Wind (UKW) and International Public Partnerships (INPP) as part of a globally diversified portfolio of investment trusts and other shares.