Renewable energy project developers often look to institutional investment as a source of capital to reduce the cost of wind and solar projects, but a new study from the non-profit Climate Policy Initiative (CPI) finds significant limits to increases in institutional investment.
The report, The Challenge of Institutional Investment in Renewable Energy, finds that for the developed world there is not a shortage of potential investment in renewable energy but rather a shortage of opportunities at the price and risk-level that entices institutional investors such as pension funds and insurance companies.
CPI identifies five steps that could help unlock institutional investment capital for renewable energy projects, some of which may be challenging to implement:
- Fix policy barriers that discourage institutional investors from contributing to renewable energy projects.
- 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.
- Identify and improve any regulatory constraints to renewable investment that can be modified without negatively impacting the financial security, solvency or operating costs of the pension funds or insurance companies.
- Develop better-pooled investment vehicles that create liquidity, increase diversification, and reduce transaction costs while maintaining the link to underlying cash flows from renewable energy projects.
- Encourage utilities and other corporate investors. If the concern is raising enough finance rather than its cost, policy may need to be reoriented away from project finance toward corporate finance.
So what renewable policy could discourage institutional investors? The report says: “The most obvious starting point involves tax policy. As tax-exempt investors, the use of tax credits as an incentive policy, such as US federal wind and solar tax incentives, can discourage pension funds. In the best case, renewable energy projects will need to find a partner to monetize the tax credits at a transaction cost that could represent as much as 30 percent of the total value of the incentive.”
The American Council for an Energy-Efficient Economy (ACEEE) is urging policymakers to consider the ramifications of federal tax incentives when devising energy policy, and the ACEEE has prepared a report “Tax Reforms To Advance Energy Efficiency.”