Keeping the lights on

Pension funds can benefit from projects to supply and enable renewable electricity. Matt Ritchie looks at the opportunities and barriers to funds taking advantage of the electricity infrastructure landscape

Accessing capital from conventional energy providers has become more difficult since the global financial crisis. But as electricity supply moves towards a lower carbon future, capital intensive projects like wind farms, solar installations, and the infrastructure required to deliver this power to homes and businesses need funding.

The long-term, stable and inflation-linked returns that energy assets can offer certainly have a role in most pension fund portfolios, but there remains a widely-held view that institutional investors are under-allocating to energy infrastructure projects.

Indeed, the OECD’s latest annual survey of large pension funds and public reserve funds found evidence of “serious barriers” to institutional investments in infrastructure.

“This year’s survey yet again reveals a low level of investment in infrastructure on average among the surveyed funds, despite evidence of a growing interest by pension fund managers,” the OECD said. “This seems to confirm the importance of barriers and disincentives which limit such investments and the relevance and need for policymakers to address them.”

These “barriers and disincentives” are not putting all funds off however. Renewable energy specialist Quercus Investment Partners is seeing increasing interest in the sector from European pension funds, which are catching up on their counterparts from other jurisdictions.

“We probably have more than 70 per cent of funds coming from European pension funds, and we are still seeing a lot of interest and subscriptions are in very good shape,” managing partner Diego Biasi says. “I think most of it is due to the success we’ve had so far, but part of this interest is driven by the real straight interest in the sector itself.”

Denmark’s fourth largest pension company has made direct energy investing a key plank in its future growth plans.

PensionDanmark responded to the ongoing depression in government bond yields by drastically reducing its exposure to the assets, instead seeking to invest 20 per cent of its funds in real estate and infrastructure.

Chief executive Torben Möger Pedersen says the organisation is focused on accessing long-term risk adjusted returns for the benefit of its more than 630,000 members. The energy investments it has been able to make over the past few years are helping it achieve this goal.

“We have a preference for energy-related infrastructure assets as they are in a regulatory environment regime where you have some kind of government guarantees or subsidies substantially reducing market price fluctuation in, for example, power,” he says.

“These assets have a very long time horizon, typically between 20 and 30 years, which fits very well with our obligations as a long term investor.”

Recent investments include large stakes in a number of UK wind farms, an offshore gas pipeline servicing the Netherlands, and a new-build biomass plant set for construction in Lincolnshire, UK.

PensionDanmark prefers to make direct investments alongside industrial partners. Möger Pedersen says there is no shortage of projects in which to invest.

“We have limited our universe to North Western Europe and North America. We don’t feel comfortable with making direct investments in Southern Europe or emerging markets, at least not yet, as there are so many opportunities in North Western Europe and North America we don’t feel the need to divest into other regions for the moment.”

PensionsDanmark is not alone in seeing the appeal of energy, particularly renewable energy projects.

The UK this year notched up its highest ever share offer for a clean power company, when The Renewables Infrastructure Group (TRIG) raised £300 million. TRIG’s offer broke the record set just months earlier when Greencoat UK Wind raised £260 million with its own IPO.

Mainstream Renewable Power is keen to capitalise on investor demand for clean electricity generation assets, launching a new vehicle to attract institutional investors to participate in its global investment drive.

The company has a global pipeline of generation capacity which will require around €30 billion of capital to complete.

Mainstream Capital has been launched to attract pension funds and other institutional investors to participate in the Dublin headquartered company’s expansion plans. Chief executive of Mainstream’s capital arm, and the group’s head of corporate finance, Manus O’Donnell says the firm has noticed a change in the way institutions choose to invest in energy projects.

“Traditionally pension funds have invested through fund structures, there are many different fund structures out there to enable them to access renewable energy projects,” O’Donnell says. “What we’ve seen recently is pension funds looking to invest directly in assets, in joint venture arrangements. We saw this first over in the US about 10 years ago and that’s spread out more as the larger pension funds invest their own resources internally to enable them to make direct investments.”

The UK government has been vocal in its desire for institutional investors to provide capital for the country’s infrastructure plans, and the Netherlands Investment Institute has the backing of several of the country’s largest pension funds. The OECD’s survey of pension funds is part of a wider initiative to encourage long-term financing for infrastructure by institutional investors.

Most recently the European Commission has taken big steps towards lowering the barriers for energy investments.

European Commission policy officer in the energy department Sebastian Gras says there is an energy infrastructure investment need in Europe of around €200 billion out to 2020. Gras says older infrastructure needs replacing, and the proliferation of renewable plant and the push to create an interconnected European electricity market are also key drivers. Creating a secure system through diversifying the supply of gas and power into countries is another important goal.

While around half of this is expected to be met by the market as it stands, there was a risk identified that the other half may not be delivered. One of the aims of the commission’s Projects of Common Interest (PCI) initiative is to attract investment from institutions like pension funds.

The PCIs are 248 predominantly transmission and distribution assets, named by the commission in October, that are deemed to have significant benefits for at least two member states; contribute to market integration and further competition; enhance security of supply, and reduce CO2 emissions.

PCIs benefit from a streamlined permit approval process, and cross-border cost allocation which sees countries bear the cost of projects in relation to the benefits they receive. PCIs can also benefit from funding via the €5.85 billion Connecting Europe Facility.

“We are preparing an investors’ dialogue, where we will showcase those projects that we already have in place. We’ve just started with this regulation, so there’s not much to showcase yet,” Gras says.

While electricity demand has been flat since the GFC, a drive to reduce the carbon emissions from electricity production across the UK and Europe will likely see old thermal generation assets replaced with renewable plant.

Furthermore, O’Donnell says it is unlikely demand will stay flat forever. As the requirement for electricity increases so will the number of investment opportunities for investors.

“Demand has stagnated as the economies have stagnated. There was some fall back, but as economic activity picks up the energy required will pick up correspondingly – it is very much linked to economic outcome and performance,” O’Donnell says.

Biasi from Quercus agrees. But concerns have also surrounded the potential for governments to retract incentives and subsidies offered for renewable generation, changing the investment cases of projects.

Biasi says the renewable power sector is entering a new, mature phase, where government incentives will no longer be needed. Projects like wind farms are approaching ‘grid parity’ where the cost of generating electricity is met by the market price for the output, without extra funds from government or elsewhere.

“I look forward to having a grid parity marketplace,” Biasi says. “It’s not possible now, all of a sudden, in a very short period, because everything has to follow up smoothly. All the actors in the market need time to properly adapt to the new scenario. But I like the idea that the trend is going to a grid parity environment. I hope we will see that in the next five years or so.”

Matt Ritchie is news editor, European Pensions

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