Aerial photography of the 110 MW Crescent Dunes CSP project in Tonopah, Nevada. Photo courtesy of SolarReserve.

By Susan Kraemer

SolarReserve’s project development company, Tonopah Solar Energy was formed to develop the 110 MW Crescent Dunes Concentrated Solar Power (CSP) project in Tonopah, Nevada. The CSP plant uses sunlight for heat to run steam turbines, using molten salt energy storage to supply Las Vegas nightlife with solar electricity till midnight.

Banco Santander’s stake in Tonopah Solar Energy had provided funding for just over a quarter of the equity required to help fund the project’s construction costs of nearly USD 1 billion.

Canada’s Public Sector Pension Investment Board and Ontario Teachers’ Pension Plan would each hold a stake in a new joint venture holding Santander’s portfolio of clean energy assets, both existing and in-development. The ownership of the over USD 2 billion portfolio will be split approximately into thirds between Santander and each of the two pension funds.

The plan always was for Santander to sell once they could monetize the value created, according to SolarReserve CEO Kevin Smith.

Happy buyers

“We provided a tour of the project to a group from Ontario Teachers and PSP as part of their due diligence activities,” Smith tells CSP Today. “They were very enthusiastic about the technology and recognised the storage capabilities could allow solar to compete directly with conventional fossil generation.”

The three entities intend to invest “significant additional amounts” through the new joint company over the next five years. The portfolio will be managed by an experienced team led by Marcos Sebares of Banco Santander, which has consistently been voted the greenest bank in the world.

Sebares sees the new joint company marking a new phase positioning Banco Santander as one of the world’s leading renewable energy investment companies.

“We have a strong balance sheet and long term investment strategy, with a mandate from shareholders to grow the new company over the next five years," he says.

The US Department of Energy must approve the transfer, expected in early 2015.

“As part of the conditions of the Loan Guarantee, the DOE has some approval rights for sale of the ownership positions by the original participants when the Loan Guarantee closed,” Smith explains. “But the DOE has been very cooperative in reviewing this transaction, and we expect a decision shortly.”

Teachers’ Senior Vice-President of Infrastructure Andrew Claerhout says: "We are excited about partnering with Santander and PSP Investments and look forward to supporting management in growing this company significantly in the coming years.”

Bruno Guilmette, Senior VP of Infrastructure Investments at PSP Investments adds that “It also allows PSP Investments to continue to develop its portfolio of private energy assets while contributing to environmentally sustainable energy production.”

Fossil divestment movement

There is an increasing movement away from fossil fuels towards renewables among institutional investors, according to Bloomberg New Energy Finance.

Some examples include four Danish pension funds that have partnered with DONG Energy to acquire a 50 % stake in the Gode Wind 2 German offshore wind project, and PensionDanmark, that invests 5 % of its USD 21 billion in renewable energy assets, with stable healthy returns of over 9 %.

In the US, in addition to the SolarReserve’s Crescent Dunes CSP project, BrightSource Energy’s Ivanpah project received pension fund investment in 2010.

The 392 MW Ivanpah tower project in California. Picture: BrightSource.  

The California State Teachers Retirement System (CALSTRS), the second largest pension fund in the US, contributed to USD 150 million in equity financing raised by BrightSource Energy during the construction phase of Ivanpah.

Just months ago, ahead of the UN climate summit in Lima, CALSTRS pledged to more than double its investment in clean energy.

CALSTRS retirement fund CEO Jack Ehnes told NPR in September that the recent great recession held brutal lessons in pricing carbon risk in their portfolios, as a critical issue they needed to factor in as a very long term investor, but one with substantial investment in carbon assets.

“Right now if the planet burned all the proven reserves that are out there for oil we would in fact exceed this two degree limit that everyone is concerned about when life will greatly change on this planet. So with that as a benchmark, what we see in the oil industry is continued exploration - in fact, hundreds of billions of dollars being invested year after year, that take us well beyond what we call that carbon budget,” Ehnes told NPR.

Stranded assets

What does overdependence on fossil energy mean for an investment in a portfolio like CALSTRS?

“That probably will mean that ultimately the value of those companies, those assets, what we call stranded assets, will be devalued,” Ehnes said.

Concern over potential stranded assets is beginning to gain traction among more mainstream investors, with a growing awareness that investing in low carbon growth makes long term sense for governments, businesses and financial institutions.

The Bank of England’s recent announcement that it would investigate the global economic risk of stranded carbon assets suggests that the highest levels of government and finance are responding to the prospect of an accelerating global shift away from fossil fuels.

The World Bank has already halted funding for most new coal projects, focusing instead on renewable energy, while both the European Investment Bank and the US Export Import Bank have made similar commitments.

Institutional investment barriers

Institutional investors are required to maintain very high levels of liquidity, transparency, diversification, and risk, with the requirements codified by financial regulation. These rules hamper investment where there is policy uncertainty - as is the case with renewables.

The start-stop expiration of incentives for renewables, like the almost annual re-legislation needed for renewing the US Production Tax Credit is one example, as are retroactive reductions in tariff payments in Italy and Spain, because these create uncertainty.

This policy instability is one reason that pension funds have such a hard time divesting from fossil energy, with its stable and permanently embedded incentives.

CALSTRS, for example, still holds Exxon and Chevron as two of its top ten stocks. And even doubling of its renewable energy investment affects only a small fraction of its investment portfolio.

Even well-meaning clean energy policy can erect barriers for institutional investors. The 30 % Investment Tax Credit (ITC) was responsible for the deployment of nearly all of the CSP development in the US during its brief moment in the sun, but pension funds don’t benefit directly from the ITC, as they are tax exempt.

Still, once built, using that brief ITC window before its end in 2016 - as Crescent Dunes and four other large-scale CSP projects were before the ITC’s effective expiration last year for projects that take more than two years to permit and build - these CSP projects do become a safe long term investment due to their 25 year contracts with utilities for power.

Generating “steady income” like toll roads

The San Francisco-based Climate Policy Initiative estimates that despite these barriers, over the next twenty years, the top 150 or so institutions could realistically provide up to a quarter of renewable energy project equity investment - and over half the related debt.

“An increasing number of funds are measuring their exposure to carbon risk or seeking out lower-carbon investment options, including renewable energy projects,” explains Stephanie Pfeifer, CEO of the Institutional Investors Group on Climate Change.

Even the Wall Street Journal, not known for extolling the benefits of clean energy investment, explains the Crescent Dunes investment as similar to such other “steady income” assets as toll roads, noting that the “pension funds” interest comes as they and their peers increasingly target electric utilities, toll roads and other infrastructure assets for investment, drawn by the steady income the assets generate, which matches up well with their long-term liabilities.”

SolarReserve agrees with the Wall Street Journal’s “steady income” assessment.

“Over the last several years, we have seen a continued increase in institutional investors moving to clean energy, partially due to their concerns about the environment,” Smith confirms. “But also because they see sound long-term investment opportunities in clean energy.”