There’s money to be made waiting for the regulator to fix its problems

Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.

Last week, Questor tipped an infrastructure trust and the next day there was a bid from a Canadian fund for a competing trust at a 21pc premium to the prevailing share price. Remarkably, despite the obvious potential upside for investors if this turns out to be the first of many such deals, share prices of UK-listed infrastructure trusts barely moved. Share price discounts to net asset value (Nav) in the renewable energy sector, which shares many similar characteristics, actually widened.

Questor believes this irrational behaviour demonstrated by investors is symptomatic of a problem created by the Financial Conduct Authority on cost disclosures, whereby wealth managers and financial advisers are actively discouraged from buying trusts for their clients. There is considerable anger within the industry over this failing, but while we wait for it to be addressed, there are bargains to be had.

In the renewable energy sector, one simple example that illustrates this opportunity is Bluefield Solar Income Fund. It is not the cheapest of these trusts, yet it does trade on a discount that implies a greater than 50pc upside if it reverted to trading at Nav, as it did for almost all of its life up until May 2023. It offers a double-digit yield on a dividend that is well covered by earnings and cash flow. It operates in a growing sector, where conditions are moving in its favour. It is also focused solely on the UK, so does not come with currency risk.

Predominantly, as its name implies, this is an owner and developer of ground-mounted solar farms. At the end of September 2024, the portfolio consisted of 824MW (megawatts) of solar and 58MW of onshore wind, all of which was operational. Over the year to the end of June 2024, the portfolio generated enough power for about 300,000 homes.

Over its life, Bluefield Solar has weathered substantial change in the solar sector. In the UK, the cost of producing electricity from solar has plunged by around 60pc since 2013. Subsidies for new large-scale solar farms were withdrawn by David Cameron in 2015, and, for a while, the pace of new installations slowed significantly, although Bluefield Solar was able to grow its portfolio through acquisition. By 2020 it was developing a number of subsidy-free projects. Then, in 2021, mindful of its commitments to achieving net zero greenhouse gas emissions, the government under Boris Johnson reintroduced support for developers of solar power.

The new mechanism, technically a contract for difference or CfD, offers a fixed (inflation-adjusted) price for power. Each year, solar developers bid a minimum price at which they are prepared to sell the power that their new plants will produce. They must then sell power at the agreed price, even if market prices rise beyond this level. The arrangement lasts for 15 years, by which time the developer should have recovered the costs of constructing the plant plus a margin.

Bluefield Solar’s subsidy and CfD income accounts for about two thirds of its forecast revenues over the next decade. The balance comes from sales of power. The investment adviser seeks to minimise the impact of fluctuating prices by selling power in the forward market, giving it almost 100pc visibility of near-term revenues. That predictability means it feels comfortable using debt financing within its capital structure. It helps that around 70pc of its debt is long-term and fixed-rate, with an average cost of 3.5pc at the end of June 2024.

UK power prices are set with reference to the price demanded by the marginal producer, which tends to be gas-fired plants in practice. As we know, gas and power prices soared in the wake of the outbreak of war between Russia and Ukraine. Jeremy Hunt’s Energy Profits Levy clawed back some of the supernormal profits earned by renewable generators over this period. Prices are more stable now.

Solar power may be relatively attractive, but it needs to be accompanied by energy storage. In recognition of this, Bluefield Solar is developing battery storage projects as well as new solar ones.

Bluefield Solar’s substantial (over 1.5GW) development pipeline could help drive Nav growth in the coming years, but its wide discount means it cannot issue new shares to finance this. However, in a model that deserves to be replicated elsewhere in the sector, it has managed to secure funding from a consortium of UK pension funds. Bluefield Solar has also co-invested with it in a portfolio of solar assets and sold it a 50pc stake in another portfolio.

As was the case with much of the investment trust sector, Bluefield Solar’s discount widening was triggered by rising interest rates. These have fed through into a modest reduction in its Nav and probably were the impetus behind its decision to use some of its sale proceeds to reduce the balance on its floating rate debt. However, while UK interest rates have now been cut three times from their peak, the trust’s share price has continued to slide. Questor believes that Bluefield Solar is oversold.

Questor says: buy
Ticker: BSIF
Share price: 84.1p

Read the latest Questor column on telegraph.co.uk every weekday at 5am. Read Questor’s rules of investment before you follow our tips.