According to a recent white paper from the Climate Policy Initiative, it’s difficult for institutional investors – which includes about $71 trillion in pension funds and insurance company coffers – to invest in major renewable energy projects even though they are good matches for each other in most cases.
Solar projects are long-term with steady cash flows, which is exactly what institutional investors need. And investment from investors, either in equity or debt, is significantly more affordable to project developers than bank money. If the two could match up, it would be a win for all involved, said David Nelson, CPI senior director.
But there are a few issues.
“In most cases the policy issues were put in place to address very real concerns about utility manipulation,” Nelson said.
In Europe, for example, investors can’t own majority shares in both transmission infrastructure and energy generation. The regulation makes sense, Nelson said. But it doesn’t really fit in the modern investment world where institutional investors would have little interest in or even ability to manipulate the system.
In the United States, one of the bigger policy issues is that a lot of institutional funds, particularly those that involve retirement money and pensions, are tax-exempt, which means they can’t take advantage of the 30 percent federal tax credit on solar installations without going through a costly third party.
Outside of policy hindrances, Nelson said a lack of liquidity in these infrastructure projects make them a riskier thing for institutional investors to sink large sums into. They have to be able to get out of a fair portion of their investments with some ease.
“From a policy perspective,” Nelson said, “we could make some adjustments. But they wouldn’t be enough to really move the market.”
The best solution, he said, is to facilitate the creation of investment pools that are managed by third parties that can take advantage of tax credits and buy and sell shares in projects so institutional investors can get in and out more easily.
Some such funds already exist, Nelson said. But they’re being run like hedge funds with big fees.
CPI will be working on helping to develop investment pools that work and has released this white paper to encourage the private industry to give institutional investors the paths they need in order to offer more affordable financing to renewable energy projects.