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● Flows of institutional investor money into renewable energy projects are likely to be needed to enable European Union countries to meet their 2020 targets, because both banks and utilities are facing constraints on the amount of long-term capital they will be able to deploy.
● The bulk 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. This would free up bank and utility money to be recycled into new development- and construction-stage opportunities.
● Institutional money is increasingly moving into renewables, with 2013 seeing record flows into specialist, quoted project funds and also directly into European projects. However the total institutional commitment remains small compared to overall EU investment in renewables.
● Significant barriers still stand in the way of greater institutional investment in EU renewable power projects. There are 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.
● There are practical constraints. Renewable power projects may be of too small a ticket size to attract large funds; smaller funds lack knowledge and the resources to build specialist teams; some institutions may feel that they are other, less risky types of infrastructure they can invest in, and so it is not worth investing to build an expertise in clean energy; consultants, or “gatekeepers”, that advise pension funds on investments may not be familiar themselves with clean energy projects; and the new breed of quoted project funds may not be large enough ‒ yet ‒ to command the attention of a wide institutional audience.
● There are also 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.
● Financial experts at the Leadership Forum proposed many possible moves that could accelerate institutional flows. These included the packaging of project bank debt into something akin to collateralised debt obligations for on-sale to funds; and the return of securitisation to turn project debt into bonds that would fit into funds’ fixed-interest portfolios.