Between lower production costs, technological strides and a global push for a clean energy transition, solar energy is looking more attractive than ever to institutional investors.
By 2040, solar energy will account for 29% of the world's electric capacity, according to Bloomberg.
When it comes to the global energy transition, renewable energy — including wind and solar — is the largest investment sector. Investments committed to renewable infrastructure hit a record $366 billion in 2021, out of a total of $755 billion overall in energy transition-related investments, such as those more focused on carbon reduction, according to Bloomberg.
That $366 billion is up 27% from 2020 and 186% from 2011, data show.
"The idea of the climate transition and moving to more renewable energy sources is a key topic for institutional investors," said Jon Pliner, senior director, investments and head of portfolio management U.S. at Willis Towers Watson PLC in New York. As of June 30, WTW had worldwide institutional AUA of $4.7 trillion as of June 30, up 30.6% from June 30, 2021, P&I data show.
For institutional investors in renewable energy, which typically like a mix of technologies, solar offers geographic diversification, low technology risk and availability, said Rosheen McGuckian, CEO of renewable energy specialist NTR PLC in Dublin. NTR partners with Legal & General Investment Management Ltd. on energy transition investments.
"What they really like about it is it's long-term and stable. We diversify the stages of the lifecycle. That gets them the blended yield that they like," Ms. McGuckian said.
"I have never seen the level of drive and commitment as the last 18 months, from all sides."
The factors that make renewable energy attractive today include the push for energy independence heightened by the Ukraine war, a U.S. climate bill that unleashed record investment in domestic clean energy, and carbon transition efforts by governments around the world. These all bid up demand for solar energy, with the added benefits of reliability and dropping costs, industry sources said.
WTW's endowment and foundation clients often have the illiquidity budgets to be early movers into solar energy investments that are long-term by nature. For corporate sponsors of defined benefit and defined contribution plans, once the questions of fiduciary prudency are addressed through risk/return profiles and clients see higher returns, "we are seeing an interest," Mr. Pliner said. "There is certainly an opportunity here, therefore we should be analyzing those investments."
Rather than deciding between solar vs. wind, "it's where does the opportunity lie, and where in the portfolio is it going? Looking outside the obvious places sometimes provides more interesting opportunities," Mr. Pliner said.
Power generation is presenting more of those opportunities for solar and other renewables that "have never been as cost competitive, so that makes it easier for utilities to consider. It's just cost-effective power," said David Boyce, U.S. business head for Schroders Greencoat in Chicago. Formerly known as Greencoat Capital, the large European renewable infrastructure manager became part of Schroders' private markets division in April to grow its renewables and energy transition strength.
As of Dec. 31, 2021, it managed $9.2 billion.
In the U.S., with rising energy demand and 1% of existing power facilities scheduled to be retired annually, "that is a massive amount of new investment every year. There's fundamental demand," Mr. Boyce said.
"Investors are moving into the (solar) space," particularly as skepticism about high production costs fades, he said. He sees solar and wind as equally important in the renewable equation, but in the U.S., the infrastructure to transmit them "is the No. 1 issue facing renewables," particularly for wind, which "is extremely location specific," Mr. Boyce said.
Connecting power grids is a key challenge for solar energy, along with battery storage, said Ms. McGuckian of NTR. Still, with the EU "now saying we have to accelerate renewables, the fastest will be solar and wind," she said.
"When it comes to Europe, solar is core and central to the whole EU energy policy. It is one of the most cost-effective means of adding any energy option. The planning permission delays are much reduced. It's much quicker to build solar than any other" renewable source, although all suffer supply chain issues, she said.
NTR recently launched a European clean power fund in Europe classified under Article 9, the strictest designation under the EU's Sustainable Finance Disclosure Regulation. Its investors "really like Article 9 because they can actually touch the asset. There is no opportunity for greenwashing," Ms. McGuckian said. "In Europe, that is as important as the yields." For that reason, NTR and LGIM are focusing efforts on capital from Europe and Asia.
By contrast, she said, U.S. investors focus on yields, period, while Canadian pension funds " tend to go direct or co-invest."
That is true for the Canada Pension Plan Investment Board, Toronto, which manages the C$529 billion ($386.4 billion) assets of the Canada Pension Plan. One of its numerous renewable energy holdings is Cordelio Power LP, a renewable power producer managing over 1,000 MW of renewable generation assets across North America, including solar, wind and storage projects.
In the U.S., the $443.2 billion California Public Employees' Retirement System, Sacramento, has a 25% stake in Desert Sunlight Investment Holdings LLC, owner of two major solar photovoltaic power generation facilities near Palm Springs that sell to California power utilities under long-term contracts.
Rajesh Gathala, CEO of European solar developer and independent power producer AMPYR Solar Europe in Basel, Switzerland, expects to see more pension funds going into direct solar investments, typically through real assets portfolios.
"This asset class is becoming more and more recognized by the pension players as a stable, long-term asset class. These are contracted returns over the long term," Mr. Gathala said. As competition for solar investments increases, it is attracting "pension funds that typically would have stayed away," Mr. Gathala said.
