Taking a look outside of the window this week (if you’re in the UK) you might be sceptical of the potential performance of a solar electricity fund, given the deluge of rain we have had over the last seven days. However, the GBP630m Bluefield Solar Income Fund [LON:BSIF] is one of the best performers in the Association of Investment Companies’ Renewable Energy Infrastructure sector.
As of 2023, over 14.4 gigawatts (GW) of solar power had been installed in the UK, according to the Department for Energy and Net Zero. One third of this was rooftop solar, with annual generation of 14 terawatt hours (TWh) in 2022, or 4.3% of UK electricity consumption. This capacity had increased to 17GW as of end-September. Put into context, solar has seen an 18,000% increase in installed capacity since 2010, according to solar installer, Sunserve. With the cost of solar panelling falling every month, the capacity of installed solar is set to increase, especially driven by domestic installation.
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Bluefield Solar, launched in 2013, is a Guernsey-domiciled investment trust. It is managed by Bluefield Partners, a specialist solar energy investment management company founded in 2009. Bluefield Partners launched BSIF as its first investment fund and it now resides in the FTSE250 with over GBP1.4bn assets under management and more than 200 assets in its portfolio. BSIF also has exposure to wind and battery storage.
The fund is managed by James Armstrong, Bluefield Partners’ managing partner. He is assisted by Giovanni Terranova, a fellow founder and managing partner, and Neil Wood. Armstrong has been with the investment trust from the start, co-founding Bluefield Partners after a career in the renewable energy industry.
Diversified utility-scale UK portfolio
The fund owns a large, diversified portfolio of operational solar energy assets, each located within the UK, with a focus on utility-scale assets with high levels of regulated income. It aims to be primarily invested over the long term in UK solar energy infrastructure with a minority exposure to other renewable energy assets including other types of generation and energy storage. The fund will have at most 25% exposure to non-solar assets and the fund managers have a 25-year investment horizon.
The investment trust isn’t investing in shares, like many other investment trusts, but in assets. As such the assets, such as solar farms, are held in special purpose vehicles. The fund invests in these SPVs through equity or debt investment. The management team prefers to hold legal and operational control of its assets and can take up to 100% of the holdings, but also works with partners in joint venture and – dependent on the asset – will sometimes take a minority stake.
An example of this was Bluefield Solar’s completion of the first phase of its strategic partnership with GLIL Infrastructure, a partnership of pensions funds, in January to part-fund the acquisition of 247MW of UK solar assets. Bluefield Solar contributed GBP20m of equity to the deal, whilst GLIL stumped-up GBP200m.
The fund followed up this initial phase in July with the Phase Two sale of 112MW of UK solar assets for GBP70m to GLIL. It used the assets to part-repay the fund’s revolving credit facility (total debt was around GBP600m at the end of 1Q24) and kick-start the construction of 17MW of development assets which should be connected to the national grid by the middle of next year.
As a hedge, and as an opportunistic play, and to allow it access to mixed portfolios, the fund can invest outside of the UK, but this is mandated to less than 10% of local assets and is a short-term option. It is not the fund’s policy to be a long-term holder of non-UK assets.
Some exposure to greenfield developments
Although the managers prefer solar assets that are more mature, the fund has the mandate to invest up to 5% of total portfolio value in pre-construction, pre-planning approval project. But as a total the fund can only invest up to 30% of total assets by aggregate in non-UK and/or pre-construction projects. At least 70% of the fund has to be invested in mature UK solar assets.
The fund also has the flexibility to use short-term debt as well as longer-term structured debt and non-recourse financing to give it access to the projects it wants to invest in, but this cannot breach 50% of total assets. Bluefield Solar Income Fund also tries to be well-diversified, and no single investment can exceed 25% of total assets and there must be a minimum of ten standalone projects in the portfolio at all times.
The fund derives a significant portion of its targeted return through a combination of the sale of renewables obligation certificates, feed-in tariffs and contracts for difference. Such regimes are currently underwritten by the UK government, providing a level of fixed term, non-power market correlated revenues, typically for 20-years from the date of grid connection. Bluefield Partners also intends, where appropriate, to enter into power purchase agreements with appropriate counterparties, such as co-located industrial energy consumers or wholesale energy purchasers. In addition, the fund may store energy or convert it into other forms for future sale.
The AIC’s Renewable Energy Infrastructure sector has 21 funds. Over one-year BSIF has had middle-of-the-road performance (on a share price total return basis), returning -2.67%, against a sector average of -3.66% putting the fund in 10th position. Performance picked up over five years, returning 12.9% against a sector average of +8.44%.
However, over the period Greencoat UK Wind [LON:UKW] was top in class by quite some distance with a +29.25% return; sister to Greencoat Renewables [LON:GRP] [ISE:GREENCOAT], the AIM- and Irish-listed investment trust, which bookended BSIF with +10% return.
Over 10-years, Bluefield Solar Income Fund again took the silver medal place behind Greencoat UK Wind with a +94% return against a sector average of +82%, The fund trades at a discount to premium of -18.7%, has an ongoing charge of 1% and a dividend yield of 8.35%.
Bluefield Solar Income Fund well-positioned
With its focus on UK solar energy infrastructure and a diversified portfolio, Bluefield Solar Income Fund offers investors an attractive opportunity to participate in the growing renewable energy sector. While its performance has been solid, investors should consider the fund’s discount to premium and ongoing charges when making investment decisions. As the UK continues to transition towards a low-carbon economy, Bluefield Solar Income Fund remains well-positioned to capitalise on the growing demand for renewable energy and the increasingly lower cost of solar panelling.
