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The Actuary The magazine of the Institute & Faculty of Actuaries

Soapbox: A lease of renewable life

David Casale comments on the rise in the number of pension funds investing in renewable technologies
David Casale

Investing people’s retirement savings is a mammoth responsibility for any pension fund. The ideal for such investors is something that offers a long-term, secure investment that will beat inflation. With this in mind, pension fund investors across the UK are increasingly realising that renewable energy projects can offer all of these qualities, as well as environmental benefits. 

Renewable energy projects, particularly solar photovoltaics, can offer a level of return that is unrivalled by most other interest-bearing products. For example, the average annual rate of interest amongst five of the top easy access savings accounts is 1.53% according to Savings Champion. When compared to the typical industry accepted annual return rate of 6-8% on renewable energy projects in the current market, it is clear why an increasing number of investors are being drawn to renewables. 

The stability of returns is also an important factor and this remains fairly constant in the case of investment in renewable projects. Despite common misconceptions that wind and sun-powered technologies are unreliable forms of energy, they are able to generate a reliable cash flow. Even in the UK, where the weather is particularly poor, the amount of sunlight and wind is generally predictable and any dips that occur are accounted for when assessing the initial feasibility of the project. Returns are kept stable and maintained by rising electricity prices and government subsidies.

Safe ground

Renewable technologies are also able to offer a relatively low risk and dependable solution to investment in the long term. Financiers are sometimes focused on short-term rewards, which by and large offer little stability. However, pension funds have a much longer-term investment horizon. Most projects, particularly those involving wind and solar, have minimum output levels guaranteed for up to 20 years by the equipment manufacturers, with the majority outlasting their warranty. Minimal running costs keep the risks low, with the installation being the largest expenditure. 

An innovative pension provider could supply an investor with a product where, rather than having to draw down on a pension or annuity to pay rising energy bills, they get a product that offers energy from the solar project (domestic or utility scale) at a reduced rate, providing a higher net return. Project risk can be handled if the pool of assets is correctly sized and governed. 

Renewable energy investments offer a return that is inflation-beating, in part due to the current feed-in-tariff (FiT), the government-backed subsidy that encourages the development of clean energy. As energy prices rise, developers receive more revenue from the electricity generated, with some of this money going back to investors. 

However, as with any investment, there are associated risks and a number of variables to consider. Renewable energy project investments are long-term, which can tie up capital for significant periods of time and are relatively illiquid. As a result, they are not suitable for those 

looking to make a short-term return. 

After the launch of the Electricity Market Reform delivery plan in December, there is also speculation as to the future of government subsidies for clean technologies and the possible impact on investor confidence this may have. The impact of the government’s contract-for-difference (CfD) on FiT may have a positive effect on clean technology finance. 

Nevertheless, there is now a greater degree of certainty surrounding the changes and the government cannot retrospectively pull the FiT or future CfD’s. The projects benefiting from subsidies will continue to do so for the duration of their developments. CfD contracts will also last for 15 years on renewable projects and, critically, payments will be indexed to inflation and have lower risk when considering intermittency issues.

Ultimately, renewable energy projects can offer a secure, long-term, and often inflation beating investment. Pension funds investing in renewable technology are placing their priority on a combination of returns, stability and sustainability. 

Sustainable investment has many positive benefits and the industry is constantly producing innovative technology that offers solutions to the UK’s energy needs. At the same time, investors are becoming increasingly astute at differentiating between the risks involved in different types of deals. There is room for expansion within the sector, as currently only a small part of UK energy consumption is produced by renewable technologies, and this will provide opportunities for new, informed investors to enter the arena.

David Casale is director at energy and environment merchant bank Turquoise International

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