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Pension funds and insurers could accelerate energy transition by lowering cost of clean electricity 17%

August 8, 2017

  • Clean Energy Investment Trust (CEIT) has potential to remove barriers to direct
    investment in wind and solar assets by institutional investors, analysis shows
  • Investment-grade design launched today with support of Rockefeller Foundation
    could attract up to $4trn in patient capital into the renewable energy sector

London & San Francisco, Tuesday 8 August 2017: CPI Energy Finance today launches its design for a new type of investment that would transform the way solar and wind projects are financed, attracting cheaper capital with long-term investment horizons and thereby reducing the cost of clean energy by 15%-17%.

The suitability of wind and solar assets for pension funds and insurance companies has been a popular preoccupation of policymakers, regulatory and commentators for many years. Twenty-year fixed-price contracts such as power purchase agreements (PPA) and feed-in tariffs (FiT) provide exactly the sort of predictable cashflows that these institutions need to cover pension payouts, insurance claims and annuity payments over the long-term, while offering a higher return than the corporate bonds whose yields have collapsed in recent years.

Despite this, much of this long-term “patient capital” has remained on the sidelines. In 2013, CPI-EF estimated that barriers, such as liquidity and institutional size, limited the maximum potential institutional investment to $259bn (less than 1%) of the $70trn total OECD institutional assets that could be available for direct investments in renewable energy. By 2016, CPI-EF analysis showed that just $305bn of $80trn was potentially available.

The position had barely changed in that time because those barriers – including restrictions on illiquid investments and the costs of building an investment team that put direct investment in renewable projects beyond the reach of all but the largest institutions – remain in place. As a consequence, asset managers who have been among the biggest beneficiaries of increased institutional interest in infrastructure, have designed infrastructure investment products around their pre-existing business models, rather than models that match institutional investor needs and would lead to the lowest cost of capital for projects.

CPI-EF’s design for the Clean Energy Investment Trust (CEIT) overcomes many of the major barriers faced by institutional investors by offering an investment-grade vehicle to hedge long-term liabilities, while offering a higher return than bonds and requiring lower management fees than most asset managers. In fact, our analysis shows that a CEIT market could increase the potential institutional investment in renewable energy assets 13-fold from $305bn to nearly $4trn.

David Nelson, executive director of CPI Energy Finance, said: “The CEIT mechanism breaks apart the traditional utility model of financing which is no longer fit for purpose in a high-renewables scenario. By unbundling this model and splitting it into three distinct but interdependent cashflows, we can drive capital more efficiently towards a future energy system that is not only low-carbon, but also low-cost – that’s the prize.

“Institutional investors should find that the CEIT overcomes many of their barriers, plus other investors seeking higher returns will have a major opportunity to finance more of the riskier, longer-term capital that will enable us to achieve full decarbonisation. The CEIT has the potential to open up a new major class of investment that can help catalyse finance in a way that accelerates the low-carbon transition.”

The launch of today’s papers, Mobilising low-cost institutional investment in renewable energy: Major barriers and solutions to overcome them and Structuring the Clean Energy Investment Trust is a major milestone in the development of financial innovations to accelerate the energy transition.

CPI-EF has been supported in this work by the Rockefeller Foundation’s Zero Gap Initiative. Lorenzo Bernasconi, senior associate director at the Rockefeller Foundation, said: “CPI-EF’s analysis breaks new ground in the financial innovation required to disrupt the financing mechanisms for renewable assets for the benefit of investors and the climate.

“Our Zero Gap programme seeks to unblock the barriers to private finance in tackling climate change, and the CEIT is a significant step towards creating new flows of efficient capital from institutional investors who have been prevented from putting their capital to work in this asset class.”

By restoring wind and solar investments to the category of low-risk/low-return, a successful CEIT market would accelerate the low-carbon transition in two important ways. Firstly, it would directly reduce the cost of electricity from wind and solar by 15-17% – developers would then be willing to bid less for contracts for new assets, knowing they have greater certainty than in the past of a higher price by selling to a CEIT. Secondly, this could free up capital seeking higher risks and higher-reward for investment in the new technologies that will help accelerate the low-carbon transition.

For press queries, or requests to speak to David Nelson or Lorenzo Bernasconi, please contact:
Felicity Carus, felicity.carus@cpilondon.org

Notes for editors
About CPI Energy Finance:
CPI Energy Finance is a team of analysts that evaluates policy with the aim of accelerating the energy transition. We work with investors, policymakers and corporations on four main areas: using finance as a catalyst; smoothing the transition away from fossil fuels; encouraging market reform; and developing new models in emerging markets.