How to profit from the energy supply crunch

DIY investors can offset higher bills by picking funds that will thrive in the crisis, says Lauren Almeida

Households are facing soaring bills as power prices surge, but savvy DIY investors could soften the blow by seeking to profit from the energy supply crunch.

Last week’s fire at a National Grid substation in Ashford, coupled with Britain’s meagre gas reserves, has left the UK economy exceptionally vulnerable to an extreme global supply squeeze that has sent the price of power surging.

UK gas prices have risen nearly fivefold over the past year. Futures contracts for natural gas, to be delivered next month, rose to 189.7p per therm this week, up from 38p a year ago. That has led to a surge in the price of wholesale energy in Britain, which last week spiked to 29 times its average in 2021.

Russia’s cut to its energy supply to Europe has heaped on further pressure, while abnormally calm weather has sapped power production from wind farms just at the point when they are most needed.

Jonathan Waghorn, of Guinness Asset Management, a veteran investor in energy, warned: “This is a serious near-term spike but it could get worse before it gets better. The weather is still very unpredictable.”

Investors looking to profit directly from the surge in gas prices could buy the WisdomTree Natural Gas exchange- traded commodity fund, which has risen 70pc in the year to date. Tom Bailey, of Interactive Investor, a fund shop, highlighted the fund, together with its riskier “leveraged” versions, which multiply potential gains and losses. The ETC mimics the performance of a basket of natural gas futures contracts.

Mr Bailey said the WisdomTree Enhanced Commodity exchangetraded fund was another option. “It offers broader exposure to commodities, as it includes gas, oil, gold and industrial metals,” he said. The fund tracks the performance of commodity prices and has made investors 28pc over the past year.

Mick Gilligan, of Killik, a wealth manager, suggested BlackRock Energy & Resources Income Trust, which buys shares in energy and mining companies. He said the £ 102m investment trust allowed investors to benefit from rising gas prices.

“The trust has some exposure through integrated energy companies like Chevron, which produce both oil and gas. But it also holds Canada’s TC

‘The gas crisis could get worse before it gets better’

Energy Corporation, which is purely a gas distribution business,” he added.

Mr Gilligan also highlighted Gore Street Energy Storage Fund and Gresham House Energy Storage Fund, two investment trusts that own giant lithium-ion power preserves, and can make money by selling power to the National Grid.

“They are already capturing some of the excess demand, and are benefiting from stronger trading power,” he said. Shares in the trusts have risen by 13pc and 18pc over the past year.

Andrew Rees, of the broker Numis, said that another option for investors was to buy shares in one of the London stock market’s 10 investment trusts backing renewable energy projects. The trusts’ revenues from the sale of electricity would rise, Mr Rees said, though he warned that not all of them would benefit equally.

He highlighted the trusts’ reliance on power purchase agreements, which contract them to provide energy for a fixed price. The greater the proportion of their revenues that fell under these contracts, the less they would benefit from the energy price rise, he said.

Greencoat UK Wind, a £2.8bn investor in wind farms, has the smallest proportion of contracted revenues, at 48pc this year, according to Numis. US Solar, a £342m solar energy investor, has the most, at 100pc of its revenues.

Mr Rees said that although Greencoat UK Wind stood to gain the most from rising power prices, production could pose a challenge, as for other trusts that invest in wind farms.

“This supportive pricing environment is against the backdrop of weaker wind speeds across the UK,” he said. “Although the summer months are not the most significant for wind generators, the average daily speeds have been markedly below historical levels and it is therefore likely that generation will be below budget.”

Mr Rees said that Bluefield Solar Income was the best renewable energy trust for long-term investors, given its low risk, high 6.5pc yield and strongperforming assets.

For investors looking for a cheaper way to invest in renewable energy alongside other commodities, Mr Bailey suggested the VanEck Vectors Global Mining ETF.

The fund, which tracks a basket of shares in the world’s biggest mining companies, also holds companies which extract lithium, used to build the batteries that power electric vehicles and everyday electrical appliances.

“If you are buying commodities, try not to get fixated on one small part of the market,” he said.

Gas reserves are low, exacerbated by Russia cutting its supply