The Challenge of Institutional Investment in Renewable Energy

David Nelson and Brendan Pierpont, Climate Policy Initiative, March 2013

            Available via Creative Commons

A move toward renewable energy sources will require significant long-term, low-cost investment. Policymakers, faced with fiscal constraints and a still-recovering financial system, have begun to look to institutional investors – principally pension funds and insurance companies – to provide the long-term, low-cost capital needed to meet this challenge. At the same time, investors are looking to policy makers to create greater investment certainty and improve the risk-adjusted returns available in the sector.

With national budgets tight, policymakers look to private capital as a key source for funding energy and climate change related infrastructure. The big prize is institutional investors — pension funds, insurance companies, and other long-term investors — whose $71 trillion in assets form one of the largest pools of private capital in the world, leading policy makers to ask whether institutional investors could help meet the climate change funding challenge. This paper explored a particularly interesting component of that challenge, that of institutional investment in renewable energy.

The Climate Policy Initiative analysis shows that given enough attractive investment opportunities and reduced policy barriers, institutional investors could become a significant source of capital for renewable energy. However, research also suggests that, for the developed world, there is not a shortage of potential investment in renewable energy; rather there may only be a shortage of opportunities at the price — and level of risk — that governments and energy consumers are willing to pay. Institutional investors, with their distinctive risk/return requirements and longer-term objectives, might invest in renewable energy projects at lower returns (and thus prices) than other investors seeking shorter-term gains. Thus, the question becomes whether institutional investors have the potential to bridge the financing gap more cost effectively, and what would be needed to make this happen.

Read the report here.