Why major institutional capital is moving into renewable energy

European institutional capital is increasingly looking to the renewable energy sector

May 08, 2019

European institutional capital is increasingly looking to the renewable energy sector, boosting competition and maturity in the sector.

Institutional investors from across the continent have announced plans to invest across the energy infrastructure sector in recent months.

Last month, giant sovereign wealth fund, Norges Bank — which runs the NOK8.1 trillion (€842 billion) Government Pension Fund Global — announced a greater capital allocation to green energy infrastructure.

A recent survey by Octopus Investments found that over the next five years, institutional investment in renewable energy is set to rise by 10 percent.

“A combination of increased effort to allocate capital to sustainable strategies and stiff competition among investors across the wider real estate and infrastructure asset class continue to put renewable energy strategies in focus,” , says Dominic Szanto, Director, Energy and Infrastructure at JLL.

Both on and offshore wind, as well as photovoltaic energy, are capturing investors’ imagination.

The UK’s Pensions Infrastructure Platform recently bought a portfolio of onshore wind farms from Scottish Equity Partners in a £50 million deal, while Sweden’s large buffer AP funds are working together to collectively invest more in renewable power generation, energy storage, energy distribution and digital infrastructure.

Capital entering the sector is always a positive sign. But the timing may change market dynamics.

“There’s already a strong correlation of the evergreen needs of institutional capital and the long-term nature of renewable energy investment,” says Szanto. “That will of course remain the case, but new sources of capital could mean more transactions involving existing assets.”

Opportunities may be less prevalent, but development strategies and partnerships are a likely outcome for new sources capital.

“Some of that capital will go into new developments, but the sector’s growth in recent years means there’s a feasible chance that existing assets are more widely traded and rotated,” says Szanto. “That’s a sign that a market is truly established.”

Government moves further encourage investment

Government initiatives are further encouraging investors to enter the sector.  As part of the UK’s bid to lower carbon emissions to 80 percent of 1990 levels by 2050, the government has committed up to £557 million to the sector. While, the European Union announced last year that all 28 member states will need to source 20 percent of their energy from renewables by 2020.

“When investors see such targets and initiatives, investment decisions are easier to make,” Szanto says. “The renewable energy market has evolved and there’s now real momentum among investors and governments.”

The European Commission’s lifting of tariffs last year on Chinese-made solar panels could further drive momentum, with the price of panels set to drop by as much as 30 percent.

Conversely, the recent removal of incentives and subsidies has not resulted in any loss of appetite for renewable energy investment, says Szanto.

“The renewable energy sector’s move away from government subsidies will continue,” he says. “Markets where such support mechanisms as subsidies are still in place remain popular and subsidies naturally offer the investor security of revenue.

“But investor demand now means the market is less dependent on such mechanisms.”

The upcoming tender by the UK government of its Contract for Difference — a series of top-up mechanisms which underpin any loss of revenue from energy for 15 years — could attract several bidders. More than 6GW of offshore wind sites are chasing the security of the UK CFDs.

“Auctions such as these are even more appealing in what is an increasingly sought-after sector.”