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Renewables ‘increasingly’ attractive to long-term investors, says report

Out-Law News | 17 Sep 2014 | 10:35 am | 2 min. read

Long-term investors including pension funds and wealth managers are becoming increasingly involved in the equity and debt of wind and solar projects, according to a new report by professional services firm PwC.

Falling costs, especially in solar, have triggered a withdrawal of subsidies from governments, but “institutional investors have filled the space”, PwC’s 6th annual ‘Low Carbon Economy Index Report’ (20-page / 1.06 MB PDF) said.

In 2013, total renewable investment amounted to $214 billion worldwide, the report said. “This is slightly lower than in 2012, which is attributed to the falling cost of solar photovoltaic (PV) systems, and also concerns about policy support.”

The report said: “In 2013, several multilateral lenders, including the World Bank and the European Investment Bank, announced new rules intended to reduce lending for new coal-fired power plants. Divestment campaigns away from fossil fuel investments have also led to several high profile commitments to withdraw from fossil fuels by university endowments, professional and religious organisations, as well as public pension funds. Whether these materially affect future investments in coal-fired power plants remains to be seen. Ultimately unless there is a financial disincentive to coal investments, divested entities or projects are likely to find their way to new investors.”

According to the report, the US and China surpassed the 10-gigawatt “capacity milestone” for solar energy generation in 2013, along with Japan. “Nevertheless, solar generation remains the highest in Europe, with Germany, Italy and Spain accounting for more than half of global solar use (a total of 65 terawatt hours),” the report said. In Italy, the “high renewable energy supply is considered a contributor to falling margins at gas-fired plants, even as solar subsidies have been scaled down”.

In China, 72% of overall investment is expected to go to renewables, compared to 63% in India and almost 93% in Japan, the report said. “Europe is expected to spend nearly $1 trillion on renewable generation, much of which will go to small-scale solar and wind power.”

However, the report said while there are “grounds for optimism” on the transition to renewables, it warned that as renewables’ share of the generation mix grows, “the challenge of managing intermittency and storage costs increases”. Electricity is “only one part of the energy mix. Switching transport systems and industrial processes to zero carbon is likely to be even more challenging”, the report said.

Longer term trends “also appear to support the growth of renewables”, the report said. “Analysts such as the International Energy Agency (IEA) have suggested that, through falling costs, it would not be long before onshore wind and large solar PV plants can be competitive against fossil fuel generation, in particular if subsidies to fossil fuel are also taken into account.”

According to the IEA’s third annual ‘Medium-Term Renewable Energy Market Report’, published in August 2014, power generation from renewable sources such as wind, solar and hydro grew strongly in 2013, reaching almost 22% of global generation.

IEA executive director Maria van der Hoeven said: “Governments must distinguish more clearly between the past, present and future, as costs are falling over time. Many renewables no longer need high incentive levels. Rather, given their capital-intensive nature, renewables require a market context that assures a reasonable and predictable return for investors. This calls for a serious reflection on market design needed to achieve a more sustainable world energy mix.”

Recent research by Bloomberg New Energy Finance (19-page / 1.06 MB PDF) indicated that clean energy “might be the logical destination” for some investors divesting from fossil fuels, but the sector “does not yet approach the necessary scale as an investable asset class for institutions”. The research projected $5.5 trillion in clean energy investment from now to 2030, but said pension funds or institutional asset managers may not integrate clean energy into their portfolios “based on the risk-return and liquidity characteristics of projects”.