Liquidity constraints and regulation biggest barriers to investment in renewables

Liquidity constraints and insufficient regulation remain barriers to investment in renewables in the UK, but the market is picking up.

Investment manager Downing LLP has conducted a new survey of 100 professional investors from pension funds, other institutional investors and wealth managers, finding that 75% view a lack of liquidity in certain areas of the renewable energy sector as the biggest barrier to investment.

Meanwhile 70% of respondents – who collectively manage £118 billion in assets – said that regulation needed to improve, and 70% said that high costs were still an obstacle to investment.

Additional challenges include there not being enough transparency – which was cited by 54% of respondents – and a lack of a track record of data in certain areas – which was cited by 31%.

Tom Williams, head of Energy & Infrastructure at Downing and manager of Downing Renewables & Infrastructure Trust, said: “Renewable energy is gaining more importance to institutional investors and wealth managers as they consider the climate change risk to their portfolio.

“However, the asset class needs to be more transparent, lower cost and be supported by appropriate regulation. Transparency is one of the key reasons why Downing Renewables & Infrastructure Trust chose to become an Article 9 fund.”

Over the next three years, almost all of the respondents (94%) expect the renewables sector to become more attractive however.

Macro-economic factors such as high inflation and more volatility were identified by 71% of those surveyed as being the biggest driver of the growth in attractiveness, which was split into 45% saying it will be much more attractive and 49% saying slightly more attractive.

The energy market has been particularly volatile in recent months, in part because of the Russian invasion of Ukraine and the impact this has had on wholesale oil and gas prices. This has compounded rising prices throughout 2021, driven by the COVID-19 pandemic, supply chain constraints and weather events, amongst other factors to create record high oil, gas and electricity prices.

Due to these surging wholesale prices, the price cap in Britain was increased by 54% in April, driving up consumer bills. Together with high inflation rates, this has created a cost of living crisis, with surging bills alone pushing potentially 6.3 million households into fuel stress.

This has led to an increased emphasis on the importance of renewable energy to transition the country away from a reliance on international oil and gas markets. Already, solar companies have seen the value of their assets surging due to the high power prices, with ORIT, Bluefield and Foresight all reporting increased NAVs.

Around half of those surveyed said that a predicted fall in fixed income yields is also increasing the attractiveness of renewables, along with 62% of professional investors citing regulatory changes that are driving decarbonisation as one of the top factors increasing the attractiveness of renewables.

For example, the targets for the rollout of renewables like offshore wind have recently been increased within the British Energy Security Strategy, giving greater security to the expansion of the sector.

Similarly, 46% of those surveyed pointed to tougher regulation against oil and gas companies as a key reason.

Along with the attractiveness of renewables improving, liquidity is also expected to improve, according to 62% of respondents.