Higher prospective returns from established renewable assets, emerging opportunities in storage and hydrogen, and the prospect of DB schemes selling infrastructure holdings are creating new opportunities across public and private markets.
Energy transition infrastructure is entering a new phase for pension investors, with higher required returns on established renewable assets coinciding with opportunities in emerging technologies and the potential recycling of assets between schemes.
At the Pensions UK conference, Alec Barkett, portfolio manager at Schroders Greencoat, said prospective returns from wind and solar were at their highest levels for more than a decade, reflecting higher interest rates and a shortage of available capital.
The opportunity set was also widening beyond electricity generation to include battery storage, green hydrogen and assets supporting industrial decarbonisation.
However, these investments bring different exposures. Battery returns depend partly on electricity price spreads and demand for grid-balancing services, while green hydrogen remains dependent on government support to establish commercial viability.
Barkett suggested investors could combine established renewables with higher-returning emerging technologies, citing a portfolio comprising 80% wind and solar alongside allocations to other assets.
This creates opportunities to differentiate portfolios, but also raises questions about whether newer technologies can deliver the defensive characteristics traditionally associated with infrastructure.
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Finding the right fit
Tim Giles, trustee director at IGG, warned that schemes seeking quick access through listed infrastructure risked undermining the diversification benefits they hoped to achieve.
“You compromise some of the diversification benefits,” he said, as investments become “more correlated with equity markets”.
The challenge extends beyond choosing between listed and unlisted vehicles. Trustees may have to accommodate capital calls, understand how returns develop and ensure liquidity arrangements are consistent with their investment horizon.
Meanwhile, the changing strategies of defined benefit (DB) schemes could create another source of opportunities for defined contribution (DC) investors.
Jelena Croad, head of LifeSight at WTW, pointed to the significant infrastructure assets held by DB schemes, many of which have fundamentally reassessed their long-term investment objectives.
“There is a huge amount of [infrastructure] capital sitting in DB schemes,” she said, suggesting DC schemes could acquire existing investments as DB portfolios are restructured.
This could offer access to established assets rather than requiring DC investors to fund new developments, although appropriate liquidity and valuation arrangements remain essential.
Croad said fund managers were developing vehicles to address these requirements, with the challenge increasingly centred on implementation rather than the availability of underlying investments.
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The next allocation
LifeSight has already introduced renewable energy and associated infrastructure into its default investment proposition, with the allocation serving as a diversifier within its growth portfolio.
The next challenge for early adopters of new renewables technology is identifying opportunities that provide genuinely different exposures rather than simply increasing existing commitments.
Barkett argued that UK assets currently offered attractive relative returns, supported by inflation-linked contracts and higher interest rates, although geographical diversification remained important.
He also identified grid connections as a significant constraint on development, with reforms intended to prioritise projects ready to proceed. Investment in the grid itself represents another potential opportunity.
For schemes that have yet to invest, the question remains how to assemble sufficient capital and find suitable vehicles. For LifeSight, attention has already shifted towards the next stage.
“The ship has sailed for us,” Croad said, explaining that the scheme was exploring further investments offering diversification from its existing holdings.