Institutional Investment Rescues Renewables

Pension funds are seeing wind, solar and other renewable energy projects as viable long-term investments.
Published: Wed 12 Mar 2014

Banks and utilities in Europe are shying away from new investments in clean energy since they are still suffering from accumulated bad loans and high debt levels.

As a result, investments from these institutions have dropped dramatically-41% to be exact. This decline since 2011 points to a number of factors including unfavorable changes in policy support for renewables in some countries, uncertainty over policy in others, and sharp reductions in renewable power costs.

This has put European Union countries under major pressure to achieve their 2020 renewables targets. However, there is hope since the European energy sector is attracting investment from institutional investors who are showing great interest in renewable energy projects.

Institutional investment in renewables

Institutional investors, such as pension funds and insurance companies, are increasingly investing directly in wind, solar and other renewable energy projects.

This is providing the capital needed to develop the clean energy sector. Examples of this include multinational insurer Munich Re’s which bought three UK wind farms with a combined 102-MW capacity, boosting the total amount it’s invested in renewable energy projects to more than €600 million (US$737 million). In addition, Swedish renewable energy project developer Arise Windpower AB is turning to pension funds and other institutional investors to help finance its new projects.

To free up bank and utility funds, it is predicted that the majority of the capital, deployed by institutions such as pension funds, insurance companies and wealth managers into renewable generation projects, is expected to go directly or indirectly (via specialist funds or bonds) into operating-stage assets. Bank and utility money can then be used to further new development and construction-stage opportunities.

An increasing amount of institutional money is being deposited into renewables development. Last year saw a record flow into specialist, quoted project funds and European projects. However the total institutional commitment remains small compared to overall EU investment in renewables.

What stands in the way of institutional investment?

Major barriers continue to challenge greater institutional investment in European Union renewable power projects. Bloomberg New Energy Finance lists these in its report, “How to attract new sources of capital to EU renewables”:

Regulatory issues ‒ Some countries do not allow their pension funds to invest in infrastructure. EU unbundling regulations obstruct funds from investing directly in generation if they are also doing so in transmission and distribution. Solvency II regulations may limit insurers’ appetite for illiquid investments and pension fund fiduciary rules do not include an obligation to consider climate change in asset allocation decisions.

Practical constraints- Some renewable power projects may be too insignificant to attract large funds and some institutions may feel that there are other, less risky types of infrastructure they can invest in. Also, pension fund consultants may not be familiar themselves with clean energy projects, and the new breed of quoted project funds may not be large enough as yet to command the attention of a wide institutional audience.

Policy and political issues- Long-term funds have become used to investing a percentage of their capital in infrastructure, but are hesitating about taking one step further into renewable power projects because of worries about the stability of subsidy support and what looks like a fracturing political consensus on future energy choices. This has the effect of reducing demand and raising the cost of what does get built.

But, what will accelerate institutional funds?

  • The packaging of project bank debt into something similar to collateralized debt obligations for on-sale to funds

  • The return of securitization to turn project debt into bonds that would fit into funds’ fixed-interest portfolios.

  • Institutions can co-invest in projects with specialist quoted funds, or with development banks or commercial lenders. Pooled structures such as the UK Pension Infrastructure could also play a role.

  • Insurance products, from variable power output to policy risk, can play a role in de-risking clean energy projects for institutions, as could the development of a specialist engineering, procurement and construction, or EPC, sector that would continue to carry project risks through the operational phase

  • The financial sector and policy-makers need to improve their understanding of each other. Lenders and institutions will have to accept that it is unrealistic to expect politicians to keep out of the energy policy debate through the electoral cycle. Energy policy-makers should talk regularly to treasury colleagues involved in setting financial regulations

Institutions are obliged to identify alternative investments and renewables is viewed as a viable long-term investments, offering a steady, reliable cash flow over long-term horizons.

Further Reading:

Bloomberg New Energy Finance-How to attract new sources of capital to EU renewables