PLSA: Pension funds raise caution on renewables outlook

A sharp fall in the cost of renewable energy production has made wind and solar energy widely accessible to institutional investors, but many pension funds are now cautious about increasing their allocations, according to a poll amid asset owners attending the Pensions and Lifetime Savings Associations (PLSA’s) annual conference in Manchester.

Over the past five years, the leveraged cost of electricity for wind energy, photovoltaic and battery storage has fallen dramatically, while the cost of gas and coal production has grown moderately. Wind and solar energy prodcution has for the past two years been more cost effective than fossil fuels, said Baiju Devani UK investment director at Bluefield Partners during a session on ‘Investing into renewable infrastructure’.

This steep drop in costs has made renewable more widely available as an investment opportunity, with almost half of attendees in the session stating they had some exposure to renewable energy. 

At the same time, a clear majority of attendees said they would not commit further investments to the asset class, reflecting growing investor caution about the outlook for renewables. 

One reason for the growing caution was the changing macroeconomic outlook of rising interest rates and persistently high inflation. Dan Hobson, investment director at GLIL Infrastructure said that at GLIL, projects tended to have interest rates locked in for the long term and were therefore less exposed to refinancing risks. 

Government pressures

Speaking from a defined contribution perspective, Andrew Warwick-Thompson, chair of the Scottish Widows Master Trust said that there were multiple reasons why Scottish Widows was not currently invested in renewable energy. private markets strategies 

"First, until recently, there was no suitable private assets investment vehicle which could meet the permitted links regulations with which life companies like Scottish Widows must comply. The introduction of LTAF will help, but there are very few such products on the market now.

Warwick-Thompson also said that the government's focus on one sub-asset class was unhelpful. "The government seems keen to oblige us to invest in UK private equity, rather than private assets more generally. It is by no means obvious that there will be sufficient renewable energy private equity opportunities in which we can invest without fiscal and industrial policies to create such opportunities.

Added to that came the government's U-turn in net zero: "The government has rowed back on its net zero commitments making it less not more likely that pension funds will find suitable renewable private asset opportunities in the UK and will have to look overseas to build up their target allocations to such assets.

Investors require long term policy commitment and certainty to invest in projects which have a lifespan of decades. Government flip flopping on net zero and renewable energy is very unhelpful" he added. 

The case for not committing further capital to renewables was also suggested by DB pension funds, with a lot of schemes now being fully funded. 

“It’s not just renewables, but it is also in illiquid assets, where some schemes are finding that they are at full capacity and need to scale down [on illiquid assets]. It’s nothing against renewables themselves,” one attendee from a DB pension scheme said.

Another delegate responded: “For us, it is not an act of choice, we have a DB scheme which is coming up to being closed, so it is just not appropriate for our investment strategy”.

UK ‘looks less attractive’ to investors

The session was chaired by Mona Dohle, editor at Net Zero Investor, who asked panellists whether the UK government’s recent U-turn on its net zero strategy will impact investments into renewable energy further.

Hobson stated that within the global context, the US Inflation Reduction Act is aiming to spur green investment in the states. So, the government’s U-turn makes the UK look “less attractive for global investment”, which in turn could hinder commitments to renewable energy.

The other problem is that investors are making long term decisions, and they need some certainty on the economic environment in the future. So, the change in strategy is “not helpful”, Hobson added.

This point was also picked up by Devani who highlighted that climate change and investment into renewable energy were issues which extend over the long-term, but political cycles only last four years. Therefore, these changes in strategies can make calculating the costs in terms of the business case difficult for asset managers.

Also on the panel was James Armstrong, founder and managing partner at Bluefield, who suggested that the biggest problem with the UK government’s change in climate policy is “net zero becoming politicised”.

Wrapping up the debate, Devani also stressed that over the long-term, there was significant demand for cash to fund the energy transition and that institutional investors could play a key role in solving the energy crisis.