Government policies and investment practices are limiting investment from insurance companies and pension funds in renewable energy projects, finds a new study released by the Climate Policy Initiative (CPI).
If all policy barriers were removed and investors were to optimize their renewable-energy-related investment practices, institutional investors could supply one-quarter to one-half of the investment needed to fund renewable energy projects through 2035, the study found. However, even at these levels, it is unclear whether institutional investment would be enough to lower the cost of financing renewable energy materially.
‘Policymakers and renewable energy project developers often look to institutional investment as a potential source of capital that can help reduce the cost of wind and solar projects,’ says David Nelson, senior director of CPI. ‘Our findings suggest that in the near future, this is unlikely to be the case without drastic shifts in government policy, regulation and investment practices.’
Increasing institutional investment beyond these levels will require creating new types of investment vehicles that are accessible to a wider range of institutions while meeting institutional constraints on liquidity and diversification, CPI says.
‘While institutional investors may not be the panacea for renewable energy investment, there may be opportunities for institutional investors to make renewable energy a part of their portfolios while going partway towards meeting policymaker goals,’ the report states.
CPI identifies five steps that could help unlock institutional investment capital for renewable energy projects:
1. Fix policy barriers that discourage institutional investors from contributing to renewable energy projects.
2. Improve investment practices, including the building of direct investment teams and improving evaluation of investor tolerance for illiquid investments. (However, such changes can run counter to the culture of the organization and require careful consideration.)
3. Identify and improve any regulatory constraints to renewable energy investment that can be modified without negatively impacting the financial security, solvency or operating costs of the pension funds or insurance companies.
4. Develop better-pooled investment vehicles that create liquidity, increase diversification, and reduce transaction costs while maintaining the link to underlying cashflows from renewable energy projects.
5. If the concern is raising enough finance, rather than its cost, regulators and policymakers could shift from a project finance model to a corporate model for building renewable energy. Institutional investors could then increase investment in renewable energy through investment in utility and corporate stocks and bonds.
The full CPI report can be downloaded here.