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A new type of investor

WORLDWIDE: When Copenhagen Infrastructure Partners (CIP) completed fundraising for a €2 billion investment fund last year, it built on a model its managers see as key to drawing in the large amounts of new capital needed to fund growth in the renewable-energy sector.

DolWin 3 HVDC link is part of CIP investments (pic: Alstom)
DolWin 3 HVDC link is part of CIP investments (pic: Alstom)

"We need to see a merging of the competencies from the energy sector and a lower cost of capital from the financial sector," says Christian Skakkebaek, a senior partner at CIP.

CIP's Copenhagen Infrastructure II K/S fund is backed by 19 European institutional investors, including some of the continent's largest pensions funds, that are looking to diversify risk away from the market exposure found in their stock portfolios.

"I think there were two criteria that were important to them," says Skakkebaek. "One was stable cash flows, and the other was the green profile. I think they want to have a greener profile, but only if they can make good money on it."

The fund's main focus is onshore and offshore wind, biomass projects and transmission infrastructure, held for the long term. Coal is off limits, and while investments in gas generation are possible, they may not be preferred. "The thing about gas is that you have market exposure to both fuel prices and power prices. So it is normally quite volatile," says Skakkebaek. The investors also want to avoid potential regulatory risk in emerging markets, so the fund has set its sights on North America and on western and northern Europe.

Risk approach

Skakkebaek says it will become increasingly important for the renewable-energy sector to understand and adapt to the more conservative risk-profile financial investors bring to the table. "The investments we make are, you could say, a little bit boring compared to the traditional private-equity style where you go out and find an asset, optimise it, and flip it," he says.

"We normally go into a project before financial close. We spend a lot of time structuring the supply agreement and other contracts, and modelling the capital structure, to make sure we get the cash flow profile and the protection that we want."

This is where the need for renewable-energy expertise comes in, says Skakkebaek, which is something many institutional investors lack. Although some pension funds and insurance companies have been active in the market for operating projects, there is an opportunity and a need to bring in money to move projects to construction.

"At that stage it is more difficult because you need many more resources and it takes longer. You are looking at a different game, and you need the right people and experience in place," he says.

All of CIP's investments are committed at the pre-construction stage, a strategy that leverages the backgrounds of the company's five partners. "We're not bankers in the traditional sense, but come from the energy sector, and we have experience with the development, construction and operation of assets," says Skakkebaek.

The five partners held top management positions at Dong Energy, and were part of the team that built the Danish utility's offshore wind business. They left in 2012 to form CIP, partly at the initiative of PensionDanmark, which had bought stakes in some operating Dong offshore projects, but wanted to expand and accelerate its investment in renewable-energy infrastructure.

PensionDanmark

PensionDanmark was the limited partner in CIP's first €970 million fund, sole investor in a special-purpose fund that has ploughed €382 million in DolWin3, a German transmission asset to bring power from three offshore wind projects to land, and is the largest player in the Copenhagen II K/S fund.

PensionDanmark was ahead of the curve in a trend that Skakkebaek believes will grow more pronounced. While European utilities in particular drove a lot of renewable energy growth in the past decade, many are now struggling in the face of falling prices for wholesale electricity and gas.

"To meet the investment needs of the renewable energy sector, you need to have other players coming in as well," he says. "I think you will see financial players coming in to a larger and larger degree in the coming years."

There's no doubt those investors are going to play a more active role," Warren adds.

But mobilising large amounts of capital from this investor group is not going to happen quickly, however. "I think it is going to take time for different conduits to open up that make the market more accessible to those investors," Warren says. "I don't think the current conduits, like listed yieldcos or bonds and equities being issued by current incumbent utilities, are necessarily the most effective route."

Strategy and tools needed

The onus is on the renewable-energy sector to create the right investment instruments, says Warren, who believes most of the transactions to date have come about more by default than design. "I think its been a bit hit-and-miss, to be honest.

Deals are still being done in kind of an ad hoc manner, where someone might sell 49% of a wind farm to raise some money, and five minutes later they'll go and sell 49% of another wind farm to raise more," he says. "It's still pretty clunky and not very strategic."

Shifts in the market for new wind and solar add further complexity. Mapping the Gap projects that two thirds of the anticipated investment in new renewable-power generation will go to emerging markets, requiring tools to manage risks that range from currency fluctuations to political and regulatory instability.

The Paris agreement targets $100 billion a year in climate finance for developing countries by 2020. Warren is not sure the multilateral banks and national organisations are equipped to manage that scale of investment. "That is a lot of money to flow from one place to another, and actually I think there are some real challenges around how that money is to be deployed," he says.

There are other potential hurdles as well. Fickle policy support for renewable energy creates uncertainty for investors. Low oil, gas and coal prices may tempt developing countries in particular to increase their reliance on thermal generation. Action also needs to catch up with ambition.

Both the UN and the IEA have said the national emissions reduction plans made in the run-up to Paris are not aggressive enough to meet the world's collective climate goal.

Despite the challenges, Reid believes the stage is set to draw in investors. "It's not going to happen on its own.

It requires a really concerted effort and breaking through old ways of thinking and old approaches," she says. "But the pieces are coming together to create powerful momentum and context for shifting investment to clean energy."

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