Infrastructure investors needed to meet renewables targets

London, 4 February: Pension funds and insurance companies must raise their investments in clean energy infrastructure if the EU is going to have a chance of meeting its targets for renewable energy capacity and carbon reduction, a panel of investors said this week.

Such financial institutions have traditionally invested in other types of infrastructure development. But they have shied away from major renewables projects, wary of participating in ‘big ticket’ projects and wanting to avoid taking on single asset, operational, and market risk, said panellists at the Infrastructure Investors Forum Europe conference in London on Tuesday.

Analysts estimate that around €300-400 billion ($410-550 billion) of investment is needed to meet the EU’s 2020 target of sourcing 20% of its energy from renewables – almost double the present share.

“We can’t do it on our own,” said Peter Sharman, finance director at RWE Innogy UK, a division of giant German utility RWE, which is spending about €1 billion a year to deliver 4.5GW of renewables capacity by 2012.

He said big utility companies feel unable to raise money from issuing new shares in the public markets and cannot debt-finance such large sums as “we have credit ratings to support… it’s a fundamentally challenging time.”

One way to bring financial institutions and utilities together is to set up the right legal structures, used previously in the oil and gas sector, “so you can leverage without detriment to the balance sheet,” Sharman said.

Tom Murley, managing director at London-based private equity investor Hg Capital, saw education as one way to address the problem, citing the success that general infrastructure developers have had in growing investment ten-fold in less than a decade.

“We have to educate institutional investors and we have to do that more quickly,” said Murley, who manages a renewable power fund with gross capital value of more than €1 billion.

“People with the most knowledge need to make the first step and educate infrastructure investors that [renewables] can meet their risk-reward profile,” said Rodolphe Brumm, a director at AXA Private Equity, which is investing about 20% of its €1 billion fund into renewables and has around 400MW of operating assets.

In the UK particularly, offshore wind generation is expected to make a major contribution to renewables targets, but this is a less proven, riskier technology than onshore wind or solar. Ronan O’Regan, a director at consultancy firm PricewaterhouseCoopers, saw a role for the European Investment Bank or other development bank, to sit between project developers and investors and take on some risks. “If there is a lead bank there, that can act as a pole for more traditional investors,” he said.

O’Regan added: “The UK government is giving serious consideration to this – I think we will hear about that more over the next few months.” He told Environmental Finance on the sidelines of the conference that an infrastructure group within the UK finance ministry is soliciting market views on this subject. One possible outcome is a government-backed infrastructure bank that could aggregate risk across many projects.

Governments can help lower risk profiles for renewables by providing appropriate incentives, but both HgCapital’s Murley and AXA’s Brumm warned that feed-in tariffs should not be seen as a panacea.

Murley said feed-in tariffs are not necessarily better at encouraging renewable energy installation than schemes based around trading renewable energy certificates. “It’s a suite of policies that makes it happen,” he said, involving good planning laws and ease of grid connection.

“Feed-in tariffs make the industry less smart,” said Brumm, saying that savvy investors should put their money where the natural resources are, not where the best tariffs are available.