ENERGIZED: Investment Insights on Energy Transformation
Edition 9
Solar is an energy system gamechanger, but is it investable?
16 June 2025
Disclosure: an investment in NESF is part of the Energized portfolio.
Please note: This newsletter is for general informational purposes only and should not be construed as financial, legal or tax advice nor as an invitation or inducement to engage in any specific investment activity, nor to address the specific personal requirements of any readers. (Full disclaimer below).
Key Takeaways:
Solar PV continues to scale up very rapidly in terms of installed capacity, production capacity, generation output and global market share. It has continually exceeded expectations over the past decade and yet the real growth is still to come as costs continue to fall due to oversupply and the adoption curve remains steep.
Equally, such dynamic growth has made solar a very precarious sector for equity investment. Many European and American solar producers and installers have struggled badly or outright failed, while intense competition between Chinese manufacturers is financially unsustainable for them (albeit great news for consumers).
Three London-listed solar investment trusts, NESF, FSFL and BSIF, offer a steadier, income-focused way to invest, with 9-12% dividend yields underpinned by portfolios of mainly UK solar projects benefitting from a mix of inflation-linked, government-backed, long-term payment structures and medium-term commercial contracts. These trusts should benefit from continued UK government support for solar power.
However, such high yields inevitably carry several risks: low coverage ratios, limited financial flexibility, falling capture rates, the likelihood of structurally lower medium-term UK power prices, plus the potential for higher-for-longer inflation and interest rates as well as market design changes.
Solar: the energy gamechanger
Solar PV has become a world-beating disruptive technology, combining with batteries to bring firm, cheap power revolution around the globe. But is it an investible one?
Solar’s very steep adoption curve, thanks to consistent cost reductions and manufacturing oversupply, has created a breathless stream of eye-popping statistics. If you haven’t followed it closely, the key facts are:
Capacity installation: Installing the first TW of PV capacity, by early 2022, took 68 years. The second took around 2 years. Latest forecasts project 5-7 TW of total capacity by 2030. The 597 GW of solar PV installed in 2024 was one third more than 2023 and far exceeded the world’s total installed nuclear capacity (~400 GW).
Production capacity: nearly tripled from 2021 to 2023, from ~450 GW to 1200 GW, and heading for ~1600 GW by 2030 based on announced expansions.
Module costs: have declined by around 90% over the last decade alone and by 99.6% since 1976 (as per Wright’s Law, solar costs fell ~20% with every doubling of capacity). With supply still far ahead of demand, oversupply looks likely to continue for now, further reducing prices.
Generation: This spring, solar output reached 10% of global electricity demand, matching nuclear output. It is on track to pass annual generation from each of nuclear, wind and hydro well before 2030 and both gas and coal soon after 2030.
In short, we have definitively entered the solar age. It’s a mass consumer technology – perhaps as ubiquitous one day as TVs and smartphones. That’s because it offers a secure, cost-effective, independent way to generate your own power, reducing reliance on more expensive or polluting alternatives. At grid-scale, it can also be deployed considerably quicker than gas or nuclear power capacity, which has become a crucial distinction in meeting rising power demand.
This solar revolution has been primarily driven not by annual climate conferences but by Chinese industrial policy, which has fostered intense competition between rival manufacturers for the technological edge to dominate the supply chain, both in solar equipment and batteries.
Solar investing
So does that make investing in solar a wise move? Beyond installing your own panels and pairing them with a domestic battery, how best to align ourselves with this rapid growth?
The history of the solar industry is littered with high-profile company failures, valuation crashes and bankruptcies. Sunpower, Harness Power, Infinity Energy, ADT Solar, Vision Solar, etc etc – the list of US solar company failures is long, snared by a combination of interest rate rises, policy shifts and intense competition. As we write, US residential panel installer Sunnova Energy has been forced to restructure and lay off 55% of its workforce.
As ranked by Wood Mackenzie, the league table of top solar PV manufacturers is heavily dominated by China, with ~86% market share. Canadian Solar, QCells (Korea) and Adani (India) are among the few non-Chinese firms in the list:
Source: Wood Mackenzie, Power Technology
The top 5 firms all shipped between 80-90 GW worth of panels each in 2024. The quest for market leadership has resulted in a race to the bottom on price. That is now causing heavy financial losses and a severe impact on valuations, as this past-year performance chart shows:
Source: Google
Solar developers
If solar supply is an investment graveyard, what about solar developers, who should benefit from rising power demand and steep equipment cost declines? Across Europe, a range of utilities like Iberdrola, Neoen, Scatec, EDP Renovaveis, Engie, Voltalia, Enel and ERG build and operate solar assets. But these are broader renewables business rather than specifically solar portfolios - so they merit their own separate analysis. There are a few specialist developers like Solaria Energia and Soltec Power Holdings, both based in Spain, plus a couple of specialist suppliers, such as SMA Solar, the German solar PV and storage inverter company, and Meyer Burger Technology, the troubled Swiss solar module manufacturer. However, for this analysis we have focused on the three London-listed solar investment trusts, namely:
NextEnergy Solar Fund (LON: NESF)
Foresight Solar Fund Ltd (LON: FSFL)
Bluefield Solar Income Fund (LON: BSIF)
In the US, there are larger equivalents operating a similar income-focused model, such as NextEra Energy Partners (NYSE: XIFR), Clearway Energy (NYSE: CWEN.A) and Brookfield Renewable Partners (NYSE: BEP), but these also deserve their own separate analysis.
Solar-based income investing
The UK solar investment trusts (ITs) are essentially infrastructure income plays or “yieldcos”, with relatively limited scope for capital appreciation. Their primary purpose is to provide high dividend payouts funded by stable, long-term, inflation-linked revenues based on portfolios of long-term power supply contracts. That can offer steady income compounding potential for patient investors. Although they are equities, they can be considered more like bonds: what really matters is their ability to consistently generate the cash flow to cover their substantial dividend payouts.
These trusts’ portfolios, strategies and performance metrics have much in common, meaning there is relatively little to choose between them. Key similarities:
Dividend yields in the 9-12% range, 40-50% gearing and discounts to NAV around 25%
Stable, reliable, long-term portfolios – once built, solar assets are typically long-life (typically 25 years but can reach up to 40 years) and low-cost and simple to operate given lack of moving parts
Primarily UK asset base, but focused on increasing geographical diversification
Aiming to diversify into battery storage to complement existing solar assets
Mixture of long-term offtake contract types, as detailed below
Recycling capital by selling mature projects to fund new higher-return investments (cost declines can make new projects cheaper, albeit potentially offset by lower or less reliable prices)
Using any spare capital after dividends to buy back shares to support share prices and unwind NAV discounts.
It’s therefore no surprise that their share performance has been highly correlated. Market capitalisations all peaked in Q3 2022 at significant premia to NAV, before falling into wide discounts in the higher interest rate environment over 2023-24. That left relatively stable, predictable long-term revenue streams available at attractive prices, so with interest rates gradually being cut, those discounts have started to unwind since January 2025.
London-listed solar investment trusts, 5 year, 1 year and year to date performance to 12 June 2025. Source: Google
Key risks
Fundamentally, investing in these funds requires UK power prices to remain high over coming years and for solar assets to remain well positioned to capture them. If so, they will continue to pay out attractive dividends, making them solid additions to any long-term income-focused portfolio.
However, neither of those conditions are guaranteed. Such high dividends don’t come without strings attached. While short-term cash flow is fairly certain thanks to high (~85-95%) levels of contracted revenues, future dividend coverage gets progressively riskier (~50-60% contracted by 3-4 years out) as existing PPA contracts start to roll off.
There are four fundamental risks here:
Structurally lower UK power prices in the second half of the decade, driven in turn either by the likely slump in international gas prices and/or by UK electricity market reform, such as the increasingly likely switch to zonal UK pricing. Lower prices and revenues would curtail investment in longer-term NAV growth, with new equity issuance impossible when trading at discounts to NAV.
Falling solar capture rates: average realised prices have been declining relative to average wholesale market prices due to high variable solar and wind generation. Well supplied or oversupplied grids push prices down during peak midday hours, increasingly often into negative territory. This revenue cannibalisation is a growing headache for solar developers.
Interest rates: may fall more slowly or remain higher than the market expects, e.g. due to sticky inflation, which would suppress NAVs
Regulatory changes: for example to existing subsidy regimes or the tax treatment of investment trusts. A change of government could bring more radical regulatory overhaul, although the next election is not due until 2029.
There are three main ways that these trusts manage price and revenue volatility risks:
Contractual structures:
a. Renewable Obligation Certificates (ROCs): tradable certificates providing reliable, inflation-linked income to renewable generators under a government subsidy scheme which closed to new projects in 2017. ROCs still carry some market risk as prices fluctuate according to demand.
b. Feed in Tariffs (FiTs): guaranteed, inflation-linked payments for small-scale renewable generators, which were closed to new projects in 2019
c. Power Purchase Agreements (PPAs): sales and purchase contracts between generators and commercial offtakers (utilities, trading houses or companies), based on pre-agreed prices or price formulas, for certain volumes, over certain tenors (usually 3-5 years but can be anything from a year to 15 years or more), giving sellers and buyers a high level of forward visibility.
d. Contracts for Difference (CfDs): competitively auctioned 15-year guaranteed, inflation-linked pricing mechanism effectively hedging output at a set strike price, whereby the producer is paid the differen ce when the market is below it and pays the difference when the market price is above it. However, solar ITs have very few CfDs in their portfolios versus ROCs, FiTs and PPAs.
Commodity price hedging: solar ITs also actively hedge revenues to lock in prices above dividend cover levels, using forward fixes and fixed volume derivatives. Hedging can help to smooth out nearer-term revenue volatility fairly well, but is less cost-effective for protection against longer term market changes.
Battery co-location: integrating complementary battery storage to retain excess solar generation for use in evenings when prices rebound sharply helps to maximise utilisation and benefit from rising price volatility. This is fast becoming essential protection for new solar projects exposed to market prices. With ~16 GW of solar capacity and just over 5 GW of battery capacity, the UK is aiming to roughly quintuple the latter by 2030. The good news is battery costs are plummeting just as rapidly as solar, being also a modular technology with rapidly increasing manufacturing capacity. Paired solar-battery systems at all levels from domestic to grid-scale will be a key feature of the next stage of global energy system evolution. However, the solar ITs seem a bit late to the battery party – ideally they would already have much more already in place.
NextEnergy Solar Fund Limited (NESF): Brief Overview
Having recently reconfirmed its 8.43p/share target dividend payout, representing approximately a 12% yield at the time of writing, NESF has been added to the Energized portfolio (the purpose of which is to demonstrate the potential for consistent returns from investing in the future of energy). This is the highest yield of the three UK listed solar investment trusts, all of which have a projected dividend cover ratio of 1.1 - 1.3x.
NESF is managed by NextEnergy Capital, one of the world’s largest specialist solar investors with close to $4bn in assets under management (AUM), with a 1.1% ongoing charge. It owns just over 100 utility scale solar projects with a cumulative 937 MW of installed capacity. Of these, around 90 are in the relatively highly priced UK power market, where it has an ~11% share of grid-scale capacity. With other projects mainly in Italy, NESF plans to diversify further geographically as well as invest in energy storage projects to build a more balanced portfolio.
NESF is undertaking a Capital Recycling Programme to divest mature projects to help finance new higher-return ones. Of 246 MW capacity designated for sale, 146 MW has now been sold with a further 100 MW to go. In terms of reinvestment, it has a UK and international pipeline of >400 MW solar and >250 MW storage projects to choose from.
NESF’s current market value of just over £400 million versus a NAV of £547.4m or 95.1p/share reflects a discount to NAV of just over 25%. Its all-time share price high was 121.8p in back September 2022. It then halved over 2023-24 to a low of 60.8p in January 2025, while its NAV also declined from over 107.7p/share to 95.1p/share. The shares have since steadily recovered to just over 70p over 2025 to date. Cash raised from asset sales will help to fund a £20m share buyback programme to help unwind the discount. £11.5m worth has already been allocated, with a further £8.5m remaining.
Over the 11 years since listing, NESF has paid out £395m in aggregate dividends, almost as much as its current market capitalisation. At the current ~12% yield, reinvested income would fully recoup the initial investment in just over 6 years. In reality, of course, share price fluctuation will either enhance, reduce or even completely wipe out the dividend return in any given year. But if interest rates continue to gradually fall, the NAV discount may well unwind further.
The key risk is dividend sustainability. So far, NESF has a rock solid 11-year track record of delivering a steadily increasing dividend since its original listing. Forecast cash dividend cover is in the 1.1-1.3x range. Although revenues should be relatively stable, that is a fairly narrow margin of safety. NESF also has relatively little financial flexibility, with gearing of 48.4% versus a maximum threshold of 50%. This includes £147.1m of long-term debt, £144.9m of short-term debt (floating rate RCF with a low interest margin) and £198.5m of preference shares carrying a 4.75% fixed dividend. For the year ending 31 March 2024, NESF generated cash income of £80m, of which £17m went to opex and preference share dividends, leaving £48m for ordinary share dividends, implying a 1.3x cover. It is worth remembering that investment trusts cannot raise new equity when trading at discounts to NAV, so any unexpected liquidity problems would present a serious threat to dividends. Of course, management could decelerate or postpone the remaining share buybacks to free up more cash for dividends, if necessary.
The key risk mitigation is lack of exposure to merchant pricing to avoid being directly exposed to wholesale power price volatility. Income investors would expect to see a diversified range of long-term contracts providing clear line of sight to stable revenues. In NESF’s case, around half of revenues come from a range of ROCs and FiTs, underpinning stable, inflation-linked, government-backed income, while the remainder is mainly 3-year PPAs. As of mid-2024, over 90% of NESF’s 2024-25 revenues were contracted, falling to 75% for 2025-26 and 60% from 2026-27 onwards. Entering into further PPAs to replace expiring ones will keep the proportion of near-term contracted revenue as high as possible. The question is what prices can be achieved for new PPAs – ultimately this is where there is exposure to a medium to longer-term risk of structurally lower UK power prices.
Key Commodities & Indices
A new chapter in the ongoing Israel-Iran conflict erupted on 13 June with direct exchanges of missiles and drone strikes. After the political landscape of the Middle East changed significantly over the past year with Iran’s Lebanese ally Hezbollah severely weakened and Assad’s regime consigned to history in Syria, Israel was now strongly positioned to go directly after Iran. Targets have quickly expanded from the nuclear programme to include energy installations, apparently as part of efforts to further weaken the Iranian regime’s authority among its own people. This latest confrontation inevitably brings up the question of pricing geopolitical risks into commodity markets, which is at best an art rather than a science. It is notable that what impact there is can be fairly short lived. After jumping by 7% to just over $78/bbl on day one, Brent oil futures quickly started giving back those gains even though the conflict escalated over the weekend and may well drag out for weeks if not months (with civilians retreating from Tehran for their safety as we write). In times like this, speculation predictably arises about the potential closure of the Strait of Hormuz, which would arguably impact the LNG market as much as the oil market. However, this is the ultimate proverbial “nuclear option”. It always seems highly unlikely to ever actually happen in real life as it is not in any of the regional states’ interest. It would be effectively economic suicide for Iran. Brent futures remain 12% lower than they were a year ago and still face fundamental headwinds.
International gas prices also moved up as the first missiles landed, but did not experience any really notable shock, even though the South Pars (aka Qatar’s North Field, the largest gas field in the world) was directly hit. TTF has remained fairly flat over the past two months, after falling hard over February to April. At the time of writing it was trading just under €38, where it last traded in early April. This is also around the same level as a year ago, when they were on a steady uptrend, which still looks likely to unwind further this year. Without wishing to underestimate them, the Russia-Ukraine and Israel-Iran wars are part of a much bigger fundamental picture covered in Edition 8. In the US, Henry Hub prices are up 20% over the last month and are now back in positive territory year to date, perhaps anticipating a tighter market in future as the volume of LNG exports ramp up and compete with stronger domestic demand for gas to power.
Power and carbon prices across European markets have risen over the past month amid this slight gas market recovery, while clean energy indices continue their gradual recovery over 2025. The ERIX now nearly back at its March high of 1340 and, after bottoming out in early April, the S&P Global Clean Energy index has risen strongly amid the wider market rally and is back at levels last seen in November 2024.
Important Disclaimer: This newsletter is for general informational purposes only and should not be construed as financial, legal or tax advice nor as an invitation or inducement to engage in any specific investment activity, nor to address the specific personal requirements of any readers. Any investments referred to in this newsletter may not be suitable for all investors. In reading this newsletter you acknowledge that it is your responsibility to ensure that you fully understand those investments and to seek your own independent professional advice as to the suitability of any such investment and all the risks involved before you enter into any transaction. Strome Partners accepts no liability for any loss or adverse consequences arising directly or indirectly from reading or listening to the materials herein and on our website and make no representation regarding accuracy or completeness. We accept no responsibility for the content or use of any linked websites and third-party resources. Future events are inherently uncertain and there can be no certainty that any assessments, projections, opinions or forward-looking statements provided or referred to herein will prove to be accurate.