London: Fresh from the close of its first renewable power fund, BlackRock’s infrastructure investing group is planning a range of follow-up products for what it sees as a hungry institutional market.

The fund, whose size BlackRock does not disclose, focuses on the equity slice of wind farms in northern Europe and North America and was shaped as a 10-year yield product. It closed on December 18, having launched in 2011.

Jim Barry, head of BlackRock’s renewable power group, says the fund and the group are testament to the expanding demand for renewables exposure, fuelled by energy market trends and infrastructure’s compelling low-risk profile.

“There has been a huge flood of capital into the space,” he says. “We felt this was an attractive institutional strategy.”

Traditionally, utilities and power developers have funded project development themselves in the US. They began turning to institutional investors only recently, in part because the projects’ tax equity financing benefits — largely off-limits to institutions — have been exhausted.

At the same time, institutional investors’ interest has picked up as more projects become available with long-term power purchase agreements in tow, and consequently unclouded by construction risk.

“It has been one of the most important trends in US renewables over the past year to two years,” says John Gimigliano, principal in charge of the energy sustainability tax group in KPMG’s Washington national tax practice. “Investment by these institutional investors — infrastructure funds as well as pension funds — has really increased significantly.”

Operational renewables projects have emerged as “a classic infrastructure-like asset”, Gimigliano says.

“They’ve got long-term-contracted cash flows through power-purchase agreements; they are going to have another 15 years of very steady cash flow,” he says. “I think that is going to be very attractive to many of the institutional investors to come in and buy these assets.”

Longer-term trends in power demand are also burnishing renewables’ prospects.

The US Energy Information Administration expects renewables to be the fastest-growing sources of electricity generation over the next 25 years worldwide, increasing at 2.8 per cent annually from 2010 to 2040, followed by natural gas, projected to grow by 2.5 per cent each year.

Barry acknowledges the profusion of shale gas does promise to transform energy markets, especially in North America, over the next generation. However, longer-term pricing uncertainty and carbon emissions have to figure in utilities’ future investment analysis.

“You come down to a classic portfolio choice by the utilities,” Barry says. “Do we invest in gas generation — which is cheap now, but what is it going to be like in 30 years? And then they also have to think about carbon dioxide even as a contingent liability. Or do they build or buy renewable power, where they can lock up the cost for 15, 20 and 25 years?”

The calculation is easier still in the US’s strongest wind market, in the Midwest, where wind currently is priced competitively with natural gas.

“It is slightly cheaper at the moment, with the help of the incentives,” Barry says. “But even without the incentives, it hunts with natural gas generation in good wind regime areas [in the US market].”

In the renewables investment sector, BlackRock competes with managers of large general funds, such as Macquarie, GIP and Alinda, as well as smaller market- and region-specific funds, including vehicles run by Haight Street Capital.

The more formidable competitors, however, are direct investors. They are led by Canadian and European pensions, such as the Canada Pension Plan Investment Board, PGGM in the Netherlands and Denmark’s ATP Livslang Pension. North American insurers, including MetLife, Prudential and John Hancock, are targeting the asset class directly as well.

In the US, Warren Buffett’s Berkshire Hathaway, through its MidAmerican Energy Holdings unit, has also emerged as a renewables titan. It committed $14bn to the sector in the past three years.

BlackRock’s renewables group, part of an infrastructure division with more than $1.5 billion invested and committed, stands as the only sector-specific platform with global reach, Barry says.

Its next products may exploit that global capability.

“We will seek to develop a range of products over the course of the next three years, but we will shape them all differently depending on the institutional need,” he says.

In particular, BlackRock favours lower-risk positions through unlevered exposure and 20- to 30-year investment horizons, as opposed to 10 years.

“In a lot of markets, there is still, on balance, more supply of opportunity to invest than there is supply of capital,” Barry says.

Financial Times