At its core, developing a utility-scale wind farm or PV solar park is a financial business. Compartmentalizing risks through every development stage and ensuring long-term profitability is the name of the game. To do so, part of the effort focuses on raising capital and sources abound, from a company’s own financial lung to multilateral institutions and development banks, as well as private equity firms. Even our grandparents’ pension funds want in on the financial equation.
Based on an analysis of 1,994 investors inclined toward energy investment, Preqin found private and public pension funds account for more than 30 percent in both conventional and renewable energy projects.
Pension Funds and Renewable Energy in Mexico
In Mexico, the National Commission of Pension Funds System’s (CONSAR) latest report on Pension Fund Investments showed that as of December 2017, investments in productive activities by pension funds surpassed US$53 billion. Financing of infrastructure projects neared US$17 billion, of which US$6 billion served to finance debt issued by the country’s productive enterprises: PEMEX and CFE. On Feb. 12, 2018, CONSAR reported eight of Mexico’s 11 pension funds invested US$522 million in CFE’s first FIBRA E (Investment Trust and Real Estate), representing 89.6 percent of the financial instrument’s local placement and 59.7 percent of the global placement. The trust is intended to finance CFE’s generation, transmission and distribution projects in Mexico.
“Pension funds provide the best of both worlds. On one hand, they facilitate utilities’ long-term vision, whose core business is to continue investing and growing. On the other hand, they provide the financial structuring, sophistication of infrastructure and private equity investment funds without the rush of investing and divesting,” says Osvaldo Rance, Head of Mexico at Cubico Sustainable Investments, an investment firm specialized in renewable energy projects with Ontario Teachers’ Pension Plan and PSP Investments as 50-50 shareholders. “We do not have an established and approved investment amount, but rather we approve operations on a case-by-case basis, subject to its own merits — technology type, geography and yields — to gauge available opportunities. The primary advantage is a pension funds’ long-term vision and the inherent discipline and focus this vision entails. Patience is a virtue we pride ourselves on as we do not have to comply with investment and divestment periods and any project can be aligned with our investment philosophy,” he adds.
Pension funds are set to become a critical asset in renewable energy project development as development banking looks to share the risks and rewards with other financial entities to secure Mexico’s energy transition, especially at a time when the continuity in the Energy Reform’s consolidation must be secured as the incumbent administration prepares its handover after Mexico’s presidential elections in July. By CRE’s estimations, Mexico requires close to US$100 billion in investments in power generation alone to remain competitive compared to international markets.