Institutional investors increasingly target solar assets

One of the key lessons to have emerged at the Large-Scale Solar UK event held in Bristol, England on 29 and 30 April is that institutional investors worldwide are now targeting renewable energy assets.

"Since the recent credit crunch, institutional investors have started searching for infrastructure projects, most notably power generation projects, with good returns,” remarked Louise Shaw, assistant director of energy corporate finance at Ernst and Young, to the large-scale solar UK audience yesterday. “Many of these institutions, such as pension funds, have hired bankers and have established teams looking at infrastructure investments.”

Institutional investors’ appetite for assets in infrastructure has increased as rates in other parts of the economy remain low. Solar PV and wind power projects prove attractive because they offer stability, while in the U.K. specifically the contracts for difference (CfDs) regime provides with stable returns, added Shaw.

The stability of the CfD regime, which went into effect in April 2015 paying utility-scale PV projects a variable top-up between the wholesale power market price and a fixed price level, is only one reason why institutional investors are now targeting renewable generation projects in the U.K., some event speakers argued. Other reasons include that financial deals are today made much easier and cheaper compared to the past (e.g. legal fees cost less) and a lot of knowledge has been accumulated through past experience.

The financial landscape has changed, noted Sue Milton, senior director of energy at the Royal Bank of Scotland (RBS): "Institutional investors are now competing with banks like us over the acquisition of renewable power projects post the construction time period." However, the landscape has changed in other aspects too, Milton said. “Eight or nine years ago, RBS would have definitely looked at markets beyond Europe. Today, though, we are focusing on the markets we know best.”

This is a general trend, other speakers agreed. Regulatory and transaction risks discourage institutions, either banks or institutional ones, to invest in markets with promising high investment returns, for example in Latin America or Asia.

Global market

The latter point rather appears to depend on whom one talks to. From one side, some institutional investors are small and do not have large management teams that can take risky decisions. On the other hand, there are institutional players acting across a global scale.

This was excellently depicted in the ‘Future of Utilities’ event organized in March by Marketforce in London. Cressida Hogg, managing director and head of infrastructure at the Canada Pension Plan Investment Board, told the event she currently has a portfolio of £9 to £10 million (depending on the exchange rates) and is looking to grow this over the next five years up to £15 million. So, we are playing on the "global market for money. This is a global business and a very competitive market," said Hogg.

“Of course,” Hogg added, "it is not only about the opportunities that come forward but also about the risks of these opportunities. We currently look for projects in Australia, in Northern America, in Colombia, in South America. So we are everywhere. But overall, we look for quality projects that will provide us with the necessary stability."

It appears that banks, like RBS, have recently grown wary of investing in several markets as opposed to their abundance of investment mistakes committed preceding the credit crunch. More cautious and risk averse institutional investors are now competing with them in both investments and knowledge.