Review - Foresight Energy Infrastructure EIS

This offer is now closed

For investors looking to access the renewable energy sector through EIS have only a narrow window of opportunity remaining. The Chancellor's announcement, made in July last year, means that renewable energy will be excluded for new EIS investment as of April 6 2016. 

Whilst subsidised renewable energy is now totally excluded for new EIS investments, costs have fallen globally for many forms of renewable energy. Solar power for example can now compete with traditional forms of electricity generation without the need for stimulus, especially in many overseas countries. Don’t forget EIS rules allow overseas investment.

The offer

The Foresight Group has almost £1.5 billion of funds under management with infrastructure investment, including renewable energy, topping £1 billion. Foresight has been at the forefront of solar investing in the UK and has been quick to spot new opportunities.

This EIS intends to invest in energy infrastructure, including solar projects in Italy and the US and smart energy meters. The infrastructure team at Foresight is led by Jamie Richards.

Solar

The generation of electricity through the use of solar panels has been a staple EIS and VCT investment for the last five years. It has also been gaining ground globally, forcing the price of solar panels down to a level where government subsidies are no longer needed to enable solar to compete with traditional forms of electricity generation, especially overseas. Whilst the UK isn’t that attractive, due to its relative cloudiness, other countries are better positioned.

Foresight has been investing in Italian solar projects for a number of years through its Rome office and now manages over £300 million of solar projects in that country. Grid parity (i.e. the costs of generating solar energy is the same as with traditional forms of electricity generation) has been reached in Italy, so solar needs no further subsidies.

Foresight’s strategy in this market is to install solar panels on the roofs of factories and large buildings and enter into long-term purchasing power agreements with the building’s owner to sell them the electricity generated. Companies like it as they have certainty of price and guaranteed supply.

The US market is accessed through Foresight’s San Francisco office, where solar projects benefit from an upfront tax credit that helps with build costs. Energy generated in the US is sold into the power grid and long-term purchasing agreements will be put in place with utility companies. It is anticipated 75% of solar projects will be in Italy and 25% in the US.

Smart energy meters

The last Government legislated for the installation of smart energy meters across the UK in over 50 million households. These smart meters relay energy usage data back to the utility companies every 30 minutes. In theory this enables households to understand better how and when power is used, and helps utility companies find out when more power is needed.

Buying and installing meters costs around £200-£300. Unsurprisingly utility companies don’t want to foot the bill. The legislation states every household has to be offered one, but can decline. Assuming the full amount is raised and £10 million is invested in smart meters, this EIS would own approximately 40,000.

A third party meter provider installs them. Foresight takes over after installation and makes money by selling the data to providers. Once installed, utility providers have to use the data generated. Although new to household meters, Foresight has been investing in smart meters in the corporate sector for the last three years.

Funds raised will be split roughly 50/50 between solar and smart meters. However, Foresight has said that as solar investments provide a higher return than smart meters, if there are enough excellent opportunities they may invest slightly more than 50% in solar.

Target Return

This asset-backed EIS generates profits from predictable revenue streams and as such the target return is modest. A return of between £1.10-£1.20 per £1 invested is targeted.

Exit strategy

Foresight was one of the first groups to launch and also successfully exit a renewable energy EIS. The income stream from renewable energy is largely predictable and often inflation linked. This is an attractive feature for many, including insurance companies and pension funds. 

A further exit route is a sale to IHT investors as renewable energy is an allowable investment for Business Property Relief (BPR) purposes. The smart meter businesses will also provide an attractive investment with predictable revenue streams. The utility companies need them installed but don’t want to own them. However, there are many infrastructure investors who want a predictable, lower-risk (in their eyes) revenue stream and, in Foresight’s view, would be willing to purchase them.

Risks

There are three parts to this EIS each with different risks: US Solar, Italian Solar and Smart meters. With both the overseas portions, there is currency risk. Foresight is not intending to hedge this risk at the outset, but may do so later; this will incur additional costs. The US solar market is complicated and there is a risk the tax credits aren’t achieved. In addition, the electricity generated is being sold directly to utility companies, therefore if that company had financial problems there might be a risk to the revenue stream. In Italian solar, the electricity is being sold directly to utility companies. Again this involves credit risk.

In our view the biggest risks for smart meters are a a potential change in legislation and households refusing to have them installed. Currently it is legislated smart meters have to be offered and rolled out to all 50 million households in the UK, but this could change in future. Finally for all the underlying investments there is a risk Foresight cannot sell the assets after the minimum three-year qualifying period has been reached.

Fees

The fees on this EIS include initial charge, annual management and secretarial fees and a performance-related one.  The initial fee is 5.5% (before any Wealth Club discount). Annual Foresight charge 1.5%, however they also benefit from the 0.3% per annum secretarial fee. These fees are charged to the underlying companies and are fairly competitive. The performance fee is linked to investors receiving their initial investment back in full. For returns of £1-£1.10, Foresight receives 20%. So for example if the total return pre performance fee was £1.12, Foresight would receive 2p in performance fee and investors would receive £1.10. For returns above £1.10, Foresight receives 30% of the excess.

Summary

For those seeking to invest in the more stable end of EIS, the Foresight Energy Infrastructure EIS is worthy of consideration.  Foresight has been at the forefront of renewable energy investing in the UK, and crucially for this offer, overseas. In addition, they were one of the first to spot the opportunity with smart energy meters and have been investing in this market for the last three years.  This EIS is designed to return capital invested to investors after three to four years.