The government’s electricity generator levy knocked £188m off the Renewables Infrastructure Group (TRIG ) in the fourth quarter but that was not enough to stop the wind and solar energy fund enjoying a record year.

Such was the surge in power prices and inflation last year, that even after accounting for the windfall tax, TRIG generated an underlying 18.9% investment return from its £3.7bn portfolio of renewable energy assets in the UK and Europe, its highest since launch ten years ago.

With cash pouring into a business that generates 1.6% of UK electricity demand or the equivalent of 1.9m homes, earnings per share more than doubled to 21.5p from 10p in 2021, covering dividends of 6.84p by 1.5 times. 

According to annual results published yesterday, the investment company’s net asset value (NAV) rose 15.3p to 134.6p per share. Most of that growth was in the first half with NAV edging up just 0.2% in the last three months of the year as the levy and the impact of rising interest rates wiped out inflation and power-linked gains.

The chancellor’s 45% levy on exceptional UK electricity earnings was set above £75/MWh, around 50% higher than the average of the past 10 years. It is supposed to last five years, but TRIG reckons power prices will only be above that level for three years, limiting its impact.

Accounting for the levy, TRIG believes the average power price will fall from £100/MWh in the current five year-period to £41/MWh in 2028-2050.

Nevertheless, in the short term, power prices and inflation are expected to remain high, boosting revenues and giving TRIG’s board the confidence to lift the annual target for this year’s quarterly dividends by 5% to 7.18p per share. At yesterday’s close that puts the stock, which had recovered from the autumn selloff to trade close to par, on a 5.5% dividend yield. 

Richard Crawford, the closed-end fund’s manager at Infrared Capital, said: ‘TRIG has had a very strong financial result for the year, not only benefiting from high power prices, but also from strong correlation to inflation, limited cash exposure to interest rate increases and broad diversification.’

Stifel analyst Iain Scouller was ‘positive’ on the results. With the company £413m drawn on a debt facility it increased to £750m this month, Scouller thought it likely TRIG would launch a share issue to raise more funds if the price regained a premium over asset value. ‘However, we think it makes more sense to pick up the shares in the market at current prices on a discount to this latest NAV,’ he said.

That said, an equity issue may not be urgent. Even with £205m of commitments to invest in a Swedish wind farm and its UK battery storage projects, TRIG believes it can repay most of its borrowings from cash flowing from its assets. 

At 125.6p, down 3.4% today, the shares were trading on a 6.6% discount to the end-of-year NAV. JPMorgan Cazenove has a slightly lower’ live’ NAV estimate of 133.8p that reduces the discount to 6%. That could still be attractive for investors who think inflation isn’t going to go away soon as TRIG states 63% of its forecast revenues are directly linked to inflation over the next 10 years.

Last year its external inflation forecasters were way off with their predictiono as UK retail prices shot up over 13%. That was good news for the company, adding £234m to the valuation. With TRIG forecasting RPI of 5% this year, there is every chance of something similar happening again. It disclosed its sensitivity to inflation, saying an outcome that was 3% more or less than its forecast would add or subtract £87m from NAV, equivalent to 3.5p a share.

‘TRIG typically applies prudent valuation assumptions and this is visible in its UK RPI 2023 assumption of 5%. Inflation is likely to remain a strong catalyst through the year, as actual inflation rates are applied to cash flows,’ said Liberum’s Shonil Chande.

TRIG is a fairly concentrated fund with its top 10 holdings accounting for 49% of the portfolio, led by its purchase last year of a 10% stake in the Hornsea One offshore wind farm that accounts for 8% of assets.

Wind is its main focus, split 50% to onshore and 33% offshore, although it has diversified somewhat with 13% in solar and 4% to battery storage projects that have yet to start construction.

The UK is its main territory at 59%, followed by 13% in Sweden, 11% in Germany, 8% in Spain, 7% in France and 2% in the Republic of Ireland.