A lack of certainty in renewable energy policy and expertise of renewable energy projects are holding institutional investors back according to a new EY survey released today. Of the 75 North American and European major pension and insurance funds surveyed as part of the Pension and insurance fund attitudes towards investment in renewable energy infrastructure report, 61% have no current investment in renewable energy infrastructure.
Ben Warren, EY’s Global Cleantech Transaction Services Leader comments: “Although renewable energy infrastructure projects will soon be economically viable in their own right, they are currently reliant on some form of subsidy to deliver returns. In the absence of stable policy and regulation, underlined by strong political support, long term investors will find it difficult to buy-in to this sector.
“In addition, as our survey shows, pension and insurance funds need greater levels of expertise in the asset class. In particular in understanding the risk and return profiles of renewable energy infrastructure projects to properly evaluate their potential.”
Despite these difficulties, 38% of respondents who had made investments said that they had met their expectations, with one in three anticipating their renewable energy allocations will increase in the next three years. Half of these anticipated an increase of over 10%.
When asked how investing in renewable energy aligns with their fund’s objectives, 48% of respondents mentioned diversification benefits, 37% a good match with their fund’s liquidity requirements, while a third stated “ethical objectives.”
Insurance funds selected project debt as their preferred form of investment, whereas this is the least favored form for pension funds, who invest mainly in the form of tradable corporate equity. This highlights that there is no “one size fits all” when it comes to creating financial vehicles that will drive greater institutional investment in renewable energy infrastructure.
On-shore wind turbines power perceived as most attractive technology
When looking at investment by type of renewable energy technology, on-shore wind power projects are the most popular with investors, with 43% stating that they have invested or are considering investing in these assets. Hydro-electric power projects ranked second at 38%, closely followed by solar photovoltaic (PV) projects, at 32%. The risks and returns of these mature technologies are better understood than other less mature technologies such as off-shore wind. Despite this, nearly 40% of insurance fund respondents state that they have invested in or are considering investment in this off-shore wind infrastructure.
Warren comments: “It is not particularly surprising that the more mature technologies are attracting the attention of institutional investors. However, access to sufficient deal volumes and limited deal size in these sub-sectors is beginning to divert the attention towards off-shore wind, which presents the opportunity for some very substantial cheques to be written.”
Renewable energy investor attracted to US
When it comes to allocating funds, 26% of investors have already made or are considering renewable energy infrastructure investment in the US market, closely followed by UK and Ireland (19%) and Continental Europe (17%).
Warren explains: “As more European investors begin to allocate capital towards infrastructure, we would expect renewable energy assets to hit the investment sweet spot. The US market has probably taken the lead as it does have the advantage of scale, with single wind farms or solar PV assets often hitting the multiple hundred million dollar mark.”
How do renewable energy developers attract investment?
In order to become more attractive to these funds, crafting financial vehicles to suit the investment requirements of institutional funds is critical. One structure that has recently emerged is that of the listed renewable energy infrastructure fund, such as Greencoat UK Wind. This provides investors with a steady income stream from a number of off-shore wind projects over the long term, and conveniently packages the investment in the form of listed equities, to which institutional funds allocate a significant proportion of their capital.
Warren comments: “Developers with a strong track record and robust pipeline of projects can approach pension and insurance funds directly with project development plans that are executed through tailored partnerships or joint ventures. Dong Energy has pursued this approach with PensionDanmark, for example, as well as with other corporate and financial players.”
Institutions can overcome the conundrum of lack of renewable expertise by forming consortia to pool money, share resources and centralize deal origination. A recent example of this approach is the UK Pensions Infrastructure Platform, a new infrastructure fund “for pension funds, by pension funds”, subscribed to by 10 major corporate and public sector pensions.
Gil Forer, EY’s Global Cleantech Leader, concludes: “Pension funds and insurance funds must be active participants in the capital value chain of renewable energy for the industry is to make a substantial expansion globally. The investment and business community, as well as policy makers, must focus on capital innovation action agenda to remove the investment barriers.
“The most important action the renewable sector must take is offer projects that are financially compelling on an unsubsidized basis and able to compete with other asset classes for institutional capital. Continuing to lower the price of renewable energy equipment as well as reducing installation costs and improving efficiencies are important aspects of increasing renewables appeal to pension and insurance funds.”
