Are investors unrealistic when it comes to renewables?

A recent paper from advisory group bfinance on navigating the renewables investment landscape saw its private markets director Anish Butani describe renewables as still having “not entirely shaken off their ‘marmite’ image”.

Perhaps the use of the British idiom referring to its ‘love-it-or-hate-it’ slogan was lost in translation among the more international investor base after the sector was given a resounding thumbs-up, according to the results of a research survey by Octopus Group. Some 60 percent of 100 global institutional investors said they would increase their allocations to renewable energy over the next five years, with some responding with increases of up to 10 percent and others vowing to increase their allocations by more than 20 percent.

The primary driver for this potential move was diversification and renewables’ low correlation with financial markets, according to 66 percent of investors. The second biggest factor at 58 percent was ESG impact investing, although EMEA investors (95 percent) and Australian investors (0 percent) were at wildly contrasting ends of this pendulum.

It all sounds like a merry old world for LPs. Invest in renewables, avoid the volatility of equities and ensure your investments also have a positive impact.

However, the Octopus research also showed just why, as Butani suggested, the sector might still be fighting its “marmite image”. When asked which countries they see as a priority for their burgeoning appetite for renewables, 55 percent of respondents identified the UK as the destination, by far and away the most popular answer, with France and the Nordics both trailing at 37 percent. Globally, the survey showed investors’ preferences remain in grid-scale solar and onshore wind farms.

Granted, the UK still has a healthy secondaries market and assets are traded frequently, but many of the more attractive assets are held by a select few funds in long-term structures. Perhaps investors would consider heading up the risk spectrum with some greenfield strategies, then? It would appear unlikely, with the response that the most important driver for unlocking investment for 52 percent of the investors being better support and policies from the government.

That element of the market has largely been missing from the UK for nearly four years now, while projects in the Nordics are built on a subsidy-free basis too – unless, of course, investors mean “support” in the very broadest of senses.

Besides, the investors surveyed comfortably highlighted energy price uncertainties as the biggest challenge to investment, according to 56 out of the 100. The next biggest barrier – liquidity issues – was identified by 41 percent of the respondents.

“Clearly, the proliferation of renewables strategies in the market is a positive development,” Butani concluded in the bfinance report. “However, asset allocators will need to gain more comfort in merchant project economics as government incentives and subsidies are phased out.”

The growing trend – as we have documented – is to use corporate PPAs to mitigate both the subsidy and energy price risks. However, as Butani and other industry sources note, “big question marks” exist around whether the risks of PPAs are being priced appropriately, whether some deals could be renegotiated and whether some of the corporates engaged in such agreements will even exist in 30 years’ time.

The mismatch between what investors want and what managers and the market itself can offer leaves renewables opportunities few and far between. The reality is, investors need to diversify and broaden their risk and geographic spectrum to fill those burgeoning allocations. While reminiscing is fun, the market they seem to want to allocate to powered off in the late 2000s and early 2010s.

Write to the author at zak.b@peimedia.com