Institutional investors, such as pension funds and insurance companies, hold a vast share of society’s wealth, with over $71 trillion of assets under management. Despite being frequently cited as potential sources of large-scale investment for wind farms or solar plants, Climate Policy Initiative (CPI) recently found that barriers and management practices prevent all but a few institutional investors from actively engaging in renewable energy projects.
That’s why, when an institutional investor does engage in a renewable energy project, it is important to draw out lessons to understand what worked, what was needed to encourage their participation, and what potential exists to replicate and scale similar approaches.
In a new case study, CPI describes these insights from a wind farm with a unique financing arrangement: The Jädraås Onshore Wind Farm in Sweden.
The wind farm is the largest in Scandinavian Europe at 203 megawatts (MW), delivering power to 100,000 homes. Swedish project developer, Arise Windpower, and UK private equity investor, Platina Partners, share one-third of the €360 million project cost.
The remaining two-thirds are secured equally with debt from conventional commercial bank lenders, and innovative lending from an institutional investor, Danish pension fund, PensionDanmark. The latter’s position was guaranteed by the Danish state-backed export credit agency, EKF (Eksport Kredit Fonden).
As we describe in the case study, the unique financing arrangement essentially created a synthetic loan to slot in alongside commercial lending at commercial interest rates to expand existing lending capacity, and allow the pension fund to receive returns above those of AAA-rated government bonds, with no additional investment risks.
By successfully accounting for stakeholder interests, the Jädraås financing structure realises two overarching objectives. Firstly, in the context of limited long-term commercial bank lending capacity, to secure alternative funding and ultimately realise project financing needs.
Secondly, to bolster Danish economic interests by supporting wind industry exports by using Denmark-based Vestas turbine technology, and maintaining investments in renewable energy projects despite widespread economic recession.
The arrangement ultimately shows that public support can be used to encourage institutional investment in green technologies, provided they are offered risk coverage.
The potential for scaling up and replication is there, and the good news is that we find that the Jädraås financing structure is already being replicated in different geographies, with different technologies.
We hope the case study provides essential learnings and a better understanding of the role of public policy and financial incentives in assisting private investment, from institutional investors and beyond, for a clean, renewable energy future.
*Rodney Boyd is an analyst at Climate Policy Initiative (http://climatepolicyinitiative.org/). His work focuses on climate finance, especially finance tracking, effectiveness analysis, renewable energy, and European investment