Pension funds eye investment in renewable energy

Energy industry wants EU to make investments in renewable energy projects more attractive for pension funds

Private capital is needed for investment in renewable energy projects if Denmark and the EU is to fully finance their climate plans, according to a report released today by energy lobby group Dansk Energi.

Among the initiatives proposed by the organisation are investment in renewable energy sources such as wind and solar, in order to draw production away from fossil fuels, as well as the creation of smart energy grids that can more better integrate energy produced across Europe – sending surplus wind and hydro energy south and surplus solar power north.

The ambitions are not cheap, however, and if any progress is to be made, new sources of investment will need to be found.

“The new energy plans require that Europe invest an extra 6,000 billion to 8,000 billion kroner in new electricity production and infrastructure,” Anders Stouge, vice president of Dansk Energi told Jyllands-Posten.

With banks and government’s looking less likely as investors, pension funds' vast reserve is being eyed as the most likely source of the trillions of kroner required for the plans to become reality.

“One of the problems is lack of traditional financing from banks, who are less willing to lend, and want a repayment over a shorter period,” Julian Scola, spokesperson with the European Wind Energy Association, told Risk.Net, a financial news website. “And they’re generally much more risk averse. This has had an impact on both onshore and offshore wind and it’s certainly the case that as a result, the industry is looking elsewhere to fill the gap.”

Pension funds have already started to plug the gap in investment left by banks and governments. In May 2011, Dong, the nation’s largest energy company, sold half of its 400 megawatt share of the Anholt wind farm to the pension funds PensionDenmark and PKA for 6 billion kroner.

Speaking to, Torsten Lodberg Smed, Dong Energy’s senior vice-president, said this was in line with the investment strategy it has been following for the past several years.

“It would be wrong to say it’s been easy,” Smed said, “but we have managed to close all the processes we have had and we have managed to build relationships with a number of pension funds.”

While this may be the case, some pension funds are arguing that more needs to be done to make renewable energy projects more attractive investments.

“Over the next decade Denmark and Europe will witness enormous investment in renewable energy,” Torben Möger Pedersen, the managing director of PensionDanmark, told Jyllands-Posten. “It is happening at a time when the public debt crisis has limited the options for public sector investment, and when banks are less likely to lend. That’s why we need models that make it attractive for private investors both in Denmark and Europe to do the job.”

But some are arguing that European Union’s rules underestimate the security of the investments and prevent decent returns.

According to Anna Broeng, the managing director of PFA, a pension fund, the rules do not take into consideration the fact that governments often act as a guarantor for wind farms, making investments in them as secure as government bonds.

“It’s very strange that we have to set aside 40 to 50 percent of our invested capital as security on these types of investments,” Broeng told Jyllands-Posten.

As a result, Dansk Energi is calling on the government to push for changes to EU regulations that inhibit pension funds from investing in renewable energy projects.

“We recommend that EU legislation is changed so that pension funds become permitted to invest both in energy production and energy infrastructure,” Dansk Energi wrote in today’s report, which was released in conjunction with its annual conference.

This year representatives of pension firms will be present at the conference, as will the business and growth minister, Ole Sohn (Socialistisk Folkeparti), who Dansk Energi hopes will push for changes to EU regulations on green energy investment before the end of the Denmark’s stint as EU president in July.

Dansk Energi estimates that EU investment in renewable energy needs to increase to 500 billion kroner a year, from the current 200 billion kroner a year, in order to hit the EU’s climate targets for 2020.