Solar Power Returns Declining as Investor Interest Seen Rising

Jun 12, 2014 6:51 am ET

June 12 (Bloomberg) -- Pension fund managers are investing more in solar energy, undeterred by declining returns because the industry is considered a safe alternative to traditional securities such as government bonds.

That’s the conclusion of executives from two of the biggest Chinese solar panel manufacturers, which have listed their shares in New York. Trina Solar Ltd. said it’s seeing more interest from fund managers, and Wuxi Suntech Power Co Ltd. said these managers accept returns as low as 1.7 percent.

Pension funds are “prepared to invest more in PV, as they have done with wind, because they see it as a sustainable and reliable income,” Benjamin Hill, president of Trina’s unit in Europe, said in an interview.

The comments are evidence that fund managers are getting comfortable with solar projects, tapping stable returns as central banks keep their benchmark lending rates near historic low levels.

The European Central Bank earlier this month cut the main refinancing rate to a record 0.15 percent and moved the deposit rate below zero for the first time, meaning banks will be charged to park cash with the central bank.

Bond Alternative

While returns for new solar projects in mature markets are now too low for private equity firms, “many pension funds decide to invest into solar as it offers a good alternative to government bonds, and at the same perceived risk level offers higher returns,” Pietro Radoia, a solar analyst at Bloomberg New Energy Finance, said today by e-mail.

While the funds are most interested “in big utility-scale projects” earning between 2 percent and 5 percent, they’re content with lower returns if the plant is located in a country with a stable government and regulatory regime, such as Germany and the U.K., Suntech Chief Executive Officer Eric Luo said in a separate interview.

U.K. insurer Prudential Plc, which is also a top pension provider, earlier this year bought 25 percent of NextEnergy Solar Fund Ltd., a newly-listed 85.6 million pound ($144 million) fund that seeks to buy plants in the U.K. The South African Government Employee Pension Fund, the continent’s largest for retirement savings, said earlier this month it will buy a 40 percent equity stake in a concentrated photovoltaic project Soitec SA is building in the African country.

‘Mature Technology’

“Institutional investors that have in the past invested in government bonds are forced to look for alternatives amid low interest rates, and solar is an attractive one,” Philipp Seherr-Thoss, chief operating officer at Milk the Sun GmbH, a German online seller for solar power plants, said in an interview. “Solar is now a mature technology. You can invest large volumes over long periods with interesting returns.”

While institutional investors generally seek to buy parks starting at 5 megawatts to 10 megawatts, they “also invest indirectly via securitized vehicles of pooled smaller parks,” Seherr-Thoss said by phone from Berlin, where the company is based. He is managing the potential sale of a 30-megawatt plant in France that requires 40 million euros ($54 million) of equity and a portfolio of projects in Japan, he said.

Last year, the U.K.’s Lancashire County Pension Fund invested 12 million pounds in a bond for a community-owned solar park and Aviva Plc bought the photovoltaic installations on 4,000 U.K. homes.

--With assistance from Gelu Sulugiuc in Copenhagen.