Feature – Infrastructure
A boost for renewable energy? With train stations, city centres and airports deserted and households switching en masse to working from home and shopping online, Covid has no doubt had a transformative impact on the energy sector. In the first four months of this year, wholesale market energy prices plunged to £42.67 per MWh from £68.27 per MWh. This has hit energy providers across the board, Ord says.
“It is something that most people wouldn’t immediately realise. Most do look at airports and transport, but we are also seeing knock on effects in our renewable energy portfolio,” he adds. Nevertheless, across the energy sector, renewables have been relatively more resilient to the challenges, compared to nuclear power and coal plants, according to Foresight. This is not to say that the sector has not faced its challenges. Foresight predicts that investment in renewables globally is likely to fall by 10% this year. But renewables have been able to weather the storm relatively better due to fixed prices and regulatory support. The subsidies for providing renewable energy are also inflation linked on either a RPI or CPI basis, and as such form an addi- tional inflation hedge, Ord says.
In contrast, nuclear power deals have struggled to counter the public perception that they rely on uncompetitive subsidised rates for their power to cover the construction costs, says Ted Frith, chief operating officer at GLIL.
Overall, the team at GLIL is optimistic about the longer-term outlook for renewables. “Falling energy prices are a short-term headwind for renewable energy. The path for decarbonisation in the UK is well engrained,” Ord predicts.
Fault lines around social infrastructure Above all, the pandemic has highlighted the urgency of exist- ing social questions, the need for affordable housing, in par- ticular. Between 2010 and 2017, homelessness and rough sleep- ing increased by 165%, according to the Institute for Public Policy Research. Meanwhile, government spending on afforda- ble homes has been slashed from 50% of the construction cost before the financial crisis, to just 12% today, Pension Insurance Corporation (PIC) says. Since the outbreak of the pandemic, the need for social and affordable housing has increased sharply. A freedom of infor- mation request by the Guardian to local councils revealed that more than 90,000 people have faced the threat of homeless- ness, and almost 47,000 people have been made homeless, despite the ban on evictions. In other words, the investment case for renewable energy and social housing should now be greater than ever.
Institutional investment in social housing has been on the rise, even prior to the pandemic. In 2018, housing associations raised close to £4.9bn from 48 public bond issues or private
48 | portfolio institutional November 2020 | issue 98
placements, doubling the cash raised the previous year, accord- ing to the Regulator of Social Housing.
One prominent investor in the UK is PIC, which has commit- ted more than £2bn to social housing and is a borrower to more than 20 housing associations. But private sector involvement in social infrastructure, from housing to healthcare, is not without complications. Investors, from pension funds to insurers, see their primary duty in deliv- ering the best risk-adjusted returns, not in fixing societies problems. Meanwhile, private sector provision of social infrastructure has in the past led to an array of social problems. Private finance initiatives (PFI) in particular have not been cost efficient from a taxpayers’ perspective and have often led to adverse outcomes for the people they were meant to help, as Stuart Hodkinson, lecturer in critical urban geography, outlines in his book: Safe as Houses: Private Greed, Political Negligence and Housing Policy After Grenfell. At a time of record low interest rates, institutional investors would struggle to justify double-digit returns in social infra- structure, when the government could fund these projects much cheaper by issuing more gilts. It is no wonder then, that former Chancellor Phillip Hammond pledged in 2018 to scrap the controversial PFI I and PFI II contracts. For Ted Frith, the lack of political clarity is another key obstacle for investors keen on committing to further infrastructure investments. “We are awaiting the publication of the infra-
Falling energy prices are a short-term
headwind for renewable energy.
Jonathan Ord, GLIL
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