Brexit seen cooling pension fund appetite for U.K. renewables 

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, Torben Moeger Pedersen of Denmark’s largest pension fund said in an interview the company’s office 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 euros ($2 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, according to Bloomberg New Energy Finance. 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 euros 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.

“Maybe it could have been earlier,” she said. “Everything is postponed a little bit. 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 euros, according to Bloomberg New Energy Finance.

“It’s going really well, and it has been communicated by the project that financial close will be in the first half of the year, so definitely it will need to be in this quarter,” she said.

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.

“This has become an increasingly interesting asset class for us,” said Pedersen. “The idea with this rock-solid part of the portfolio is to create stable cash flows. By this we are freeing up risk budget for the rest of the portfolio.”

Solar power currently makes up less than 5 percent of the portfolio currently, and this could become “a big thing” during the next decade, he said.

“Solar technology is under such rapid development right now, that it could become more attractive in the northern part of the globe,” said Sorensen. “That’s an example of something that could be of more interest in the future.”