Environment

Institutional investors weather the storm in renewables

Seeking stable returns, many pension plans and insurers have invested big in green energy. Will industry turmoil scare them off?
A lightning bolt strikes during a thunderstorm over the eastern German village of Schleiz./ Credits: Reuters
In the gray light of the European debt crisis, low interest rate environment, and weak economic growth even in previously powerhouse growth areas like Brazil and China, institutional investors such as pension funds and insurance companies must look for new areas of investment that provide relatively low-risk, inflation-adjusted, stable income.

One area that can deliver the desired results is renewable energies, which under the right conditions can offer stable and predictable cash flows. And institutional investors have seized the opportunity; insurer Allianz, for example, began investing in wind and solar parks in 2005, and will have invested 1.5 billion euros (1.9 billion dollars) by the end of 2012. The company has cited the advantages of investing in renewables over traditional stocks and bonds, and its investments in wind and solar energy have increased by nearly 25 percent in the past 12 months.

To the casual observer, this rush of investment may seem odd. The renewable energy sector has seen its share of turmoil.
In some respects, the last 18 months have been positive – a June 2012 report from the United Nations revealed that total investment in renewable power and fuels in 2011 increased by 17 percent over the previous year to a record 257 billion dollars.

Solar had a brilliant year, with investments of 147 billion dollars – a dramatic 52 percent increase from the previous year. Not far behind was wind energy, which also experienced exceptional growth: General Electric, the largest wind power supplier in the U.S., will set a company record for wind capacity installations as one of many companies benefiting from the main federal subsidy for wind, the production tax credit (PTC).

On the other hand, the renewables industry appears to be suffering from growing pains. Even as it announced its record-setting year, GE has said it expects revenues from the wind sector to fall 40 percent in 2013. Wind turbine manufacturers have been scaling back production; undercut by competition from China, industry leader Vestas announced major cost cuts in an effort to contain losses.

The solar industry faces similar woes, with technology giant Siemens announcing that it will sell its solar energy business due to continued underperformance. There’s also been the highly publicized failure of the Solyndra solar company in the U.S., which is facing bankruptcy proceedings despite a 528 million dollar federal loan. It’s all enough to make the casual observer start questioning whether renewables are such a safe bet.
“I think both wind and solar are becoming like normal manufacturing industries, so the years of steep growth are over for various reasons,” explains Jürgen Maier, responsible for renewable energy and infrastructure investments at Allianz Investment Management. “Manufacturing has its cycles and overcapacities. In the wind industry for example, I think many turbine manufacturers ramped up production capacity and now, as renewable energy policies sometimes fluctuate, despite grid parity approaching the industry is in a bit of crisis.”

In Europe, concern over the European debt crisis has led to a reduction in incentives and subsidies for renewables across the continent, which in turn has hurt investor confidence. And in the U.S., the PTC subsidy for wind energy is set to expire on December 31, 2012.

In the face of the upcoming November presidential election, it remains to be seen if Congress will renew the tax credit. Republican presidential candidate Mitt Romney has already stated that, if elected, he intends to let the subsidy expire, and has proposed ending all subsidies for renewable energy technology.

Nevertheless, it seems that institutional investors aren’t likely to be scared off renewables anytime soon. As David Jones, Head of Renewable Energy at Allianz Capital Partners explained to Reuters earlier this year, returns on wind and solar projects are now around seven percent, which is much higher than many other asset classes. And despite ups and downs with the industry’s manufacturers, the important point is that returns from renewables projects aren’t linked to the volatility of the financial markets.
“This is an industry where we invest in the products, and this has to be separated from investing in the manufacturers of these products,” explains Jürgen Maier. “The question is: what will be the end result of this industry turmoil? There may be some consolidation in the industry; there may be just five or ten integrated manufacturers. For those of us who invest in wind and solar farms, the important issue is to have good products and manufacturers who can stick to their long-term guarantees and service agreements.

“And when investing in wind, for example, we may be more inclined to really look at our portfolio of turbine manufacturers in order not to have big single risks in the portfolio. So we are more likely to diversify on manufacturers knowing that, if there is consolidation, hopefully the service commitments can and will be honored.”

In total, Allianz currently owns 34 wind farms with a total capacity of 658 megawatts and seven solar parks with a total capacity of 74 megawatts. Is there a potential for further investment? Maier believes it’s certainly possible, but with some conditions.

“As long as we find enough interesting opportunities in our core markets, I am confident we will continue to grow. However, the competition to buy these projects, especially in Germany, has increased as Germany is seen as a safe haven. We are seeking to further diversify the portfolio, so we will see where this leads.”


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