By Emily Holobrook
Renewable energy infrastructure is becoming increasingly attractive to pension funds, as it can provide a steady, long-term income stream. Not only can renewable energy investments mitigate some of the market and geopolitical risks associated with more traditional investments, they can provide a hedge against inflation and can provide significant tax benefits to pension plans, allowing them to generate more income over the long term.
“These assets generate dependable, long-term contracted cashflows underpinned by real assets that are critical to the economy,” says Julian Thomas, managing director in the Brookfield Renewable Power & Transition group.
“These contracted cashflows neatly match investors who have long-term liabilities, particularly pension plans with long-term responsibilities for their members,” he adds. “As renewable energy and decarbonization solutions have become more mainstream, that has multiplied the number of opportunities to deploy capital in this way.”
Growth of Solar and Wind
According to Coen Weddepohl, managing director of Schroders Greencoat, installed renewable energy accounts for 70% of total electric capacity (78% if nuclear is included) in Canada, however there is still strong growth for wind and solar.
“Installed wind capacity is projected to grow about 149% over eight years, requiring approximately C$32 billion in capex; utility-scale solar installed has projected growth of 405% requiring another C$19 billion in capex,” he says. “Just between utility-scale solar and onshore wind, an estimated C$51 billion in capex will be required, which then also creates tremendous investment opportunities in the secondary market.”
The renewable energy sources with the highest return on investment (ROI) are solar and wind due to its low operating costs and low risk. Additionally, these renewable energy sources benefit from government incentives, subsidies, and renewable energy credits. Other renewable energy sources, such as biomass, energy storage, and geothermal, can also be viable investments for Canadian pension funds, depending on their specific needs and goals.
“We also see attractive investment opportunities, from an ROI perspective, in energy storage, and the build out of transmission capacity,” Weddepohl says. “Canadian investors can benefit from declining global storage and transmission build-out costs as a result of government incentives such as the IRA in the US. On a risk-adjusted basis, solar and onshore wind continue to offer attractive returns.”
According to Thomas, technologies like wind and solar have reduced in cost so much in the last decade that they are now the cheapest form of newbuild bulk electricity in the majority of economies worldwide.
“The value today is being an efficient developer of these assets, taking advantage of global scale in things like equipment procurement and power marketing strategy,” he says. “For example, we contract renewable power to some of the world’s largest corporate purchasers and we can service them across multiple continents using a range of utility-scale and on-site technology solutions.”
Beyond renewables, Thomas is also seeing promise in a range of other transition technologies, including carbon capture, renewable natural gas, waste recycling and nuclear.
Barriers for Pension Plans
Barriers — albeit sometimes small — remain for pension plans looking to invest in renewable energy infrastructure. One such barrier is keeping up with the pace and scale of deployment of renewables on a global scale.
“Whether it’s for energy security or decarbonization purposes, there is always a need to invest in, and construct, alternative energy sources faster than historical rates and we are seeing that sense of urgency in every market we operate in worldwide,” Thomas says.
“The good news is that we are also seeing numerous interventions to help speed up deployment, whether that’s the enhanced policy support for new technologies in the Inflation Reduction Act in the United States, or the renewed focus on accelerating planning of new projects in places like Europe. One thing that isn’t an issue is finding opportunities to invest.”
Weddepohl notes that the barriers to entry in terms of accessing deal flow are low overall, as many deals find their way to the market advised by investment banks with strong connectivity to a global buyer base. The barriers are higher, however, when it comes to paying the right price, which requires strong domain expertise and a thorough understanding of an asset’s risk profile.
“Many institutional investors outsource critical skillsets to external, specialist partners in order to overcome certain skills-based barriers to investment,” Weddepohl says. “Outsourced activities range from developing renewable energy infrastructure, to day-to-day operations, and asset management. Partnering with the right firms and structuring effective alignment between all parties are key to success.”
