Focusing on the transition needs support from governments, including more policy certainty and transparency, and prioritisation of infrastructure investments

There is much discussion within governments, the press, asset managers as well as suppliers about the shape of the future energy mix. It is by no means a clear path to follow, innovations continue to come forward, but at the same time clearer government policy and support would go a long way to enabling greater investment.

Recent global events have impacted not only the cost of energy but also put energy security back as a high priority, both of which can go hand in hand with plans for the renewable energy transition.

Inflation is talked about in all sectors, but we have seen this starkly in the energy sector. So, as an insurer with long-term pensions to pay, we are thinking creatively about how to solve the many challenges to investing in renewables on a sustainable basis, as we seek to de-carbonise our portfolio and help de-carbonise the wider economy in the context of an orderly transition towards net zero.

Regulatory regimes previously put in place by the UK government in solar and offshore wind, created a secure framework that enabled PIC and other investors that need long-term investment cashflows, to invest into the sector.

However, as the market has become more established, investors seeking returns as well as environmental benefits have led to the market becoming awash with funds from banks and green investors, to the extent that we have seen loosening contractual protections. This increases risk to the point that it becomes challenging for us and our peers to invest, because we need certainty of cashflows. One could argue that more money into the sector, is a net positive, but as the majority of this money is not long-term in nature, this may lead to refinancing problems in the future, now that we’re in a higher interest rate environment.

As the market has matured, more renewable projects are exposed to fluctuating power prices rather than contractual fixed price “off-take” agreements. Whilst this is the natural next step for the market, the volatility of electricity prices has made it more difficult to structure an investment that provides the secure, long-term cashflows we need.

Anticipating regulatory change, via Solvency UK for example, we do hope that there may be some scope to invest in cashflows that are not entirely fixed and the renewable energy market is a great example of where we would then be able to deploy these funds.

Emerging technologies in the sector, especially in terms of storage or grid efficiency, are key to supporting renewable growth and this is an area we care about as long-term investors. These asset classes are in their infancy in terms of the ability to invest at a risk level that is suitable to pay our pension promises.

Governments could help resolve some of these problems, for example by underwriting severe risks which investors like PIC cannot take, in such unproven technologies. The one certainty in the sector is that large sums of money are required to build out the level of renewable energy that the world needs to enable the transition from fossil fuels. The Thames Tideway model, whereby government supported the construction phase and provided a strong regulatory framework during operations, is a good example of UK Government intervention which opened up this very difficult project to long-term investors for the common good. This structure could also be used for new nuclear projects, such as Sizewell C. Potentially it might also help accelerate the development of the carbon capture and battery storage sector. Both are vital to enabling long-term investors to support the energy transition.

The importance and resilience of the electricity grids across the world also needs special consideration, as more pressure is put on them through the conversion to electricity. We know that this is restricting not only new connections from renewable sources but also the building of new cleaner, energy efficient homes. No single organisation has the answers to these challenges, but as a growing business with a need for long-term investments, what we do have is an ability to invest at scale within a supportive sector for the mutual benefit of the industry, greater energy security and policyholders.

As an investor we have pledged to support the transition to net zero by 2050, we recognise the need to support businesses that we invest in both now and in the future on their journey. Part of this puzzle is also investing in clean assets which will give a boost on that journey as well as investing in transition assets.