Since the financial crisis in 2008, interest in matching the predictable long-term liabilities of institutional investors with the low-risk cashflows from infrastructure projects has been steadily growing.
In 2013, Climate Policy Initiative (CPI) published the results of a study into this issue (The Challenge of Institutional Investment in Renewable Energy), which identified the barriers holding back investors from direct investment in the renewable energy sector.
Our analysis showed that the combination of these factors was restricting the potential direct investment in renewable energy project debt and equity to less than 1% of total assets under management at institutions globally.
We found that financial innovation – the creation of new investment vehicles that could allocate risks more efficiently to those best placed to manage them – could address many of these barriers, and in so doing, help to lower the cost of wind and solar plants by 20%.
Since that report was published, we have seen some financial innovation in the renewable space, with the emergence of green bonds and the growth-focused US YieldCo. However, none of these innovations have succeeded in sustainably addressing the barriers to investment we identified at sufficient scale to bring down the cost of capital.
In Beyond YieldCos (June 2016), the first paper in our series on Mobilising Institutional Investment in Renewable Energy, we outlined a new financial vehicle – the Clean Energy Investment Trust (CEIT) – designed from the ground-up to address many of these barriers, building on recent experience with growth-focused US YieldCos.
While the liquidity and yield focus of the YieldCo was well aligned with investor needs, we found that the emphasis on growth – though providing an initial boost in value for developers – turned the low-risk cashflows of a portfolio of infrastructure assets into a high-risk bet on the growth of the renewables sector. To avoid this problem, the CEIT must shed some of the growth-linked risks of US YieldCos and focus instead on the needs of investors more interested in long-term cashflow stability (regardless of the point in the macroeconomic cycle) than return enhancement.
This means that the CEIT must be a yield-focused, low-fee, publicly tradeable, closed-end investment vehicle.
In this work, we develop the CEIT proposal further by updating our analysis of the barriers to institutional investment and assessing the potential for the CEIT to address them.
Our analysis has shown that a CEIT could increase the potential for institutional direct investment in renewable energy assets thirteen-fold from $305 billion to nearly $4 trillion.
This increase in investment supply should be sufficient to sustainably bring down the cost of capital for renewables to meet the needs of even a rapid transition to clean energy.
Beyond YieldCos, Mobilising Low-Cost Institutional Investment in Renewable Energy: Major barriers and the solutions to overcome them and Structuring the Clean Energy Investment Trust have been supported by the Rockefeller Foundation’s Zero Gap programme.