Investments in Triodos Renewables Europe Fund are subject to several risks, which are described in detail in the particulars relating to the sub-fund included in the prospectus of Triodos SICAV II. Some of the relevant risks are highlighted below.
Country & regulatory risk
Many of the contracts relating to project companies, such as Power Purchase Agreements, subsidy agreements, green and/or renewable energy certificates, carbon offset arrangements, etc., are subject to government regulation and may change over time. Price developments for energy and oil, which differ per country, may influence the Power Purchase Agreements (PPA) and project revenues. The value of the investments may also be affected by other uncertainties, in the form of abrupt changes in domestic tax policies and other legislation and regulations.
This risk is partly mitigated by diversification across countries, technologies (see charts in chapter ) and vintages of the portfolio projects. In each country, the price of electricity is influenced by the types of power generating assets (e.g. renewables, coal, gas etc.) and the regulatory environment. By investing in multiple countries, the fund reduces its exposure to events and developments in specific countries. In 2016, the downward trend of the European power price forecast was the main risk in this category. Downward adjustments of the price forecast had a limited negative impact on the fund’s net assets.
Triodos Renewables Europe Fund invests in assets that are not listed on a stock exchange or traded on any other regulated market. The investments are relatively illiquid. In view of the fund’s semi open-end structure (enabling subscription and redemption of shares on a weekly basis), this could potentially lead to a situation in which the fund needs to temporarily close for redemptions. There is also a risk that the fund may be unable to obtain sufficient liquidity to meet its financial obligations.
To monitor and potentially mitigate this risk, the fund performs quarterly stress tests. On December 31, 2016, the fund held 22.7% of its net assets in cash and cash equivalents (2015: 14.0%). Additionally, the fund is allowed to borrow up to 20% of its net assets and has a EUR 2.5 million stand-by credit facility. Including this stand-by facility, the available cash and cash equivalents add up to 24.4% of the net assets (2015: 17.9%). In 2016, liquidity was considered more than adequate for the fund to meet its short- and medium-term payment obligations and facilitate weekly subscriptions to and redemptions of its shares.
A long-term risk is constituted by the fact that the amount of electricity produced is determined by various uncertain factors, such as wind speed, rainfall and sunlight, which depend on the location of each project. In addition, technology risk (e.g. the actual performance of wind turbines and solar panels) can affect the amount of electricity produced. Where the fund invests in projects that are not yet operational, it is also exposed to a construction risk at the project level.
In order to minimise the project risk, the fund works with experienced counterparties. Before the fund invests in a project, the technical design and the yield estimate are verified by an independent technical advisor. In the operational phase, the fund works with experienced commercial managers who manage and report on the performance of the project. This risk is further mitigated by geographically diversifying the portfolio, by working with multiple developers and by varying the key technology suppliers (turbines, modules, inverters). In 2016, the fund upgraded several maintenance contracts in the Netherlands and Germany. However, the electricity production was lower than expected due to lower wind speeds.
The investments of Triodos Renewables Europe Fund are mainly denominated in euros. The fund may also invest in non-euro denominated assets in European countries. Currency exchange rates may fluctuate over time, which may, among other things, cause the value of the fund’s total assets to fluctuate as well. Where possible, feasible and economically viable, the fund may take measures to reduce such currency risks by means of hedging. At this time, the fund does not apply a hedging policy for its long-term equity investments. The currency risk related to these investments is partly mitigated by limiting the exposure to any single non-euro currency to a maximum of 20% of its total assets. As at December 31, 2016, the non-euro currency exposure (British pound) is 3.3% of the fund’s total assets (2015: 4.0%). The Brexit decision and weakening of the British pound over 2016 had no material impact on the fund’s performance, as its exposure to non-euro currency denominated countries is only 3.3%.