Brexit cooling pension fund appetite for UK renewables

Bloomberg

Pension funds, a key emerging investor in renewable energy projects, are likely to lose interest in new deals in the U.K. if voters opt to leave the bloc, said the head of PensionDanmark A/S.
Uncertainty that would be caused by a U.K. decision to leave the EU following its June 23 referendum would increase the risk profile of British investments, TorbenMoeger Pedersen of Denmark’s largest pension fund said in an interview in Copenhagen.
The remark adds to the warnings about consequences of Britain exiting the EU, dubbed “brexit.” Bank of England Governor Mark Carney along with officials from Germany, France and Italy have said the U.K. economy would upend the trade deals and regulations that underpin membership in the 28-nation block. “If the U.K. leaves the European Union, of course it will have a very significant impact on the investor climate and the valuation of risk associated with being an investor in the U.K.,” Pedersen said.
PensionDanmark has directly invested €2.5 billion in infrastructure assets, mainly wind farms, biomass power and grid infrastructure. About half of the value went into U.K. projects, according to Pedersen. They’re attracted to the long term nature of renewables investments as well as the stable returns stemming from government subsidies and power-purchase agreements.

Key Investor
Pension funds are emerging as key investor in European clean energy projects accounting for $1.8 billion of financing for the industry between 2005 and 2015. They’re particularly interested the pipeline of large offshore wind farms being developed in the U.K. Germany and Denmark, investing in projects with an average ticket size of $115 million, according to the London-based researcher.
“It’s very uncertain what a U.K. outside of the EU would look like, and as you know, long-term investors don’t like uncertainty,” said Pedersen. “Uncertainty is transferred into higher risk premiums. So at least until things have become clear again, you will see weak interest from non-U.K. investors making direct investments into the U.K.”

Bank Concern
Bank of England officials said last week that the referendum may already be weighing on growth, and uncertainty surrounding the vote is creeping into indicators such as hiring intentions and investment.
The referendum debate hasn’t delayed any investment decisions in renewables projects, though it may have slowed policy making, said Christina Sorensen, a senior partner in Copenhagen Infrastructure Partners, which manages about €2.4 billion of clean energy assets and was set up by PensionDanmark three years ago.
Despite U.K. Energy and Climate Change Secretary Amber Rudd’s “very strong” messages supporting offshore wind energy last year, the next round of auctions for new projects will not be held until autumn, Sorensen said. “ The reason we have so many investments in the U.K. is that it has been a very good investor climate in the past five years.”

Offshore Wind
Copenhagen Infrastructure Partners holds a 35 percent stake in the planned Beatrice offshore wind farm project, which is “very close” to reaching financial close, according to Sorensen.
The Scottish wind farm, which is being developed with SSE Plc and Repsol SA, was expected to reach financial close at the end of March in order to meet the conditions of a government power purchase agreement won in an auction on April 2014.
Sorensen said the project backers had shown enough commitment by March to satisfy the government that they would build the project. The wind farm could require €2.5 billion.

Looking at Solar
Infrastructure assets with stable cash flows, such as renewables and real estate, account for as much as 20 percent of PensionDanmark’s portfolio. They help generate sufficient returns while yields on government bonds remain low. Solar power currently makes up less than 5 percent of the portfolio currently, and this could become “a big thing” during the next decade.