A part of Watch Media

AMWatchMonday6 February 2023

  • Search
  • Log in
  • Fund Management
  • Pension
  • Responsible Investing
  • People
  • Search
  • Log in
  • Latest
  • Search
  • Log in
  • Fund Management
  • Pension
  • Responsible Investing
  • People
20/02/2017at 14:04

Low returns deter pension funds from offshore wind

Pension funds are seeing their returns shrink to sizes unfit for the risks of offshore wind turbine investments. Pension fund Industriens Pension cannot picture itself entering new offshore projects while PKA has declined several projects due to the low returns.
Photo: Senvion
by MICHAEL TRIER DUELUND

Many pension funds are turning their backs on offshore wind farms, as the reward potential from the risk is seemingly too low when investing in offshore wind turbines.

Developers are fiercely underbidding each other, resulting in smaller returns for investors in the offshore wind projects.

One of the pension funds to notice that returns have been pushed down is Danish Industriens Pension, which has already invested a total of DKK 1.6 billion (EUR 215 million) in two German offshore wind farms in the North Sea. These two investments were made in 2013 and 2014 respectively.

"During the few years since, the interest has significantly increased in this type of investments. This also means that the prices have gone up and we can see that nice shares have actually been traded in wind farms – even in the North Sea – and they are being traded at much higher prices than the prices from when we entered. We would not be able to enter an investment today and get returns anywhere near as positive as what we're getting from out current investments in the area," says Jan Østergaard, head of unlisted shares at Industriens Pension, to FWAM.

He explains that a higher price means lower returns.

In general, could you say that returns have gone too low for you to enter new offshore wind projects?

"We will probably not invest in any more offshore wind farms. Not at the moment anyway. We looked into wind farms at the right time. We're now seeing that there are other types of infrastructure assets where we can get a better investment case than via wind power," says Østergaard.

New players outbidding mature players

The offshore wind market is characterized by the fact that politicians want wind power, but they want it cheap. Many wind farm developers accept this premise. Recently, Dong Energy lost a Dutch tender for two major offshore wind farms, Borssele 3 and 4, totalling 680 MW.

A tender, which Dong looked set to win, as the Danish company had previously won the tenders for sister farms Borssele 1 and 2. Instead, the winner was a consortium, consisting of Shell, Van Oord, Eneco, and Mitsubishi/DGE, which emerged victorious by bidding with a price of just EUR 54.4 /mWh. This price is EUR 18 less than Dong's winning bid for Borssele 1 and 2.

No thank you

At Sampension, approximately one billion Danish kroner have been invested in onshore wind farms. As of now, the fund has not made direct investments in offshore wind.

"Our stance thus far has been to willingly look at these projects, but we have not invested in any offshore yet. This is mainly because we don't think  we would be compensated in returns for the fact that the risk is still relatively high. It's not just a matter of regulatory risk – that plays a part of course – but it's also a technical risk, which is different than the risk of handling onshore wind projects," says Henrik Olejasz Larsen, Chief Investment Officer at Sampension.

PKA was among the first pension funds to directly invest in offshore wind farms and is now co-owner of four offshore farms after selling its share of the German wind farm Butendik. PKA also finds it increasingly difficult to pinpoint offshore wind projects with attractive returns.

"We made solid returns in all of our investments. But we can determine that the expected returns on new tendered projects are under pressure and this, of course, poses a challenge," says Michael Nellemann Pedersen, Chief Investment Officer at PKA.

"We have said no thanks to some operational projects, simply because we thought that the returns had been pushed down too far. So they were not compatible with the risk we would be taking on. You cannot underestimate that there is still risk involved," he adds.

The longer the line, the lower the returns

Morten Imsgard, share analyst at Sydbank, explains the two main factors which have put pressure on the returns of offshore wind turbines.

First, there is increased competition between developers such as Dong, Vattenfall, and Shell for the licenses to erect new offshore wind farms.

"This means that prices in Europe, available to project developers per megawatt of produced electricity, have plummeted over the past six months, driven by very competitive auctions in the Netherlands and Denmark," says Imsgard.

He explains that the increased competition is derived from rising political monitoring of the progress in the transition to renewable energy, while there is also focus on making this transition cheap.

The other side is that investors are struggling to find good returns, which is why many are seeking towards offshore wind turbines, where returns are typically higher than in many other investments, because the risk is greater.

"When Dong divests half a wind farm, my impression is that they currently have an incredible amount of potentially interested partners on the project. And, of course, the longer the line of potential investors outside of Dong wanting to invest in half a wind farm, the more Dong can pressure them into accepting lower returns on these alternative investments," says Imsgard.

Offshore wind is more mature

Another Danish pension fund, PFA, expressed last February that it had been pushed out of climate-friendly investments because demand in the market was just too great.

"There is no doubt that the interest for climate investments has grown globally. Meanwhile, the supply of projects is limited and this puts pressure on prices," said Henrik Nøhr Poulsen, Chief Investment Officer at PFA, in comments to Danish media Børsen.

Since then, PFA has allocated DKK 40 billion for investments in alternatives. However, PFA declines to participate in an interview about potential investments in offshore wind.

Pensiondanmark and PKA were both among the first pension funds to invest directly in offshore wind farms. Copenhagen Infrastructure Partners handles the majority of Pensiondanmark's investments in energy-related infrastructure, including investments in offshore wind turbines.

At Copenhagen Infrastructure Partners, Senior Partner Christina Grumstrup Sørensen declines to comment on the development of returns in offshore wind turbines.

"I'd rather look at it this way: There has been a technological and commercial breakthrough. For offshore wind, it has always been criticized for being immature with very little volume, where it's hard to find big suppliers as well as invest in new capacity and new technology. In reality, it's just a curve you have climbed over, so that now you get much bigger turbines and the ships are dedicated and built just for this," she says.

English Edit: Gretchen Deverell Pedersen

Sign up for our newsletter

Stay ahead of development by receiving our newsletter on the latest sector knowledge.

!
Newsletter terms

Front page now

Ukrainian refugees currently reside on the premises, but the property used to lay grounds to domestic company Haldor Topsøe. | Foto: PR
AMWatch

Denmark's Sampension invests in temporary refugee housing

Along with asset manager Kristensen Properties, Sampension acquires former domiciled property presently housing Ukrainian refugees. Extensive building improvements lie ahead.
  • Sampension raked in "significant profit" from sale of biogas firm
  • Alternative valuations raise questions as pension funds upgrade book values despite listed market bleeding
Federal Reserve Chair Jerome Powell at a news conference in Washington, U.S., February 1, 2023. | Foto: Jonathan Ernst/Reuters/Ritzau Scanpix
AMWatch

Investors can fight the Fed all they want. Don’t fight the tape

For subscribers

Chief Risk Officer of ATP Kim Kehlet Johansen | Foto: PR/ATP
Pension

ATP rejects new criticism of its investment model

For subscribers

Head of Nordea Asset & Wealth Management Storre Snorset. PR / NORDEA
Fund Management

Wholesale and institutional sales dampened Nordea’s AUM recovery in Q4  

For subscribers

Fredrik Nordström, CEO of the Swedish Investment Fund Association, believes that unclear EU regulation plays a significant role in the decisions of fund managers to reclassify their Article 9 funds. | Foto: Karl Gabor
Fund Management

AUM in Swedish Article 9 funds halved in Q4 – EU regulation partly to blame

For subscribers

Head of Danske Bank Asset Management Christian Heiberg says he is in a much better mood today than he was just six months ago. | Foto: Pr / Dbam
AMWatch

Danske's outflow continued in Q4 due to loss of flagship team

For subscribers

Further reading

Foto: PR/TDC
AMNews

CIP partner moves on to new challenges

Copenhagen Infrastructure Partners (CIP) COO and partner leaves the company to pursue opportunities elsewhere. He will stay on as advisor.

For subscribers

Speed is of the essence when launching new investment products, CFO Masih Yazdi says. | Foto: PR / SEB
Fund Management

SEB aims for speedy product launches to make up for huge AUM drop in 2022

The loss of a SEK 50bn mandate affected SEB’s AUM performance last year. Looking ahead, CFO Masih Yazdi believes that alternatives and fixed income will be important investment areas.

For subscribers

Ilmarinen's Deputy CEO Mikko Mursula. | Foto: PR Ilmarinen.
AMNews

Ilmarinen changes benchmarks to become carbon neutral in 2035

The Finnish pension giant has been involved in developing MSCI’s new climate indices that include companies that are taking measurable steps to tackle their emissions.

For subscribers

Latest news

  • Investors can fight the Fed all they want. Don’t fight the tape – 07:41
  • Denmark's Sampension invests in temporary refugee housing – 3 Feb
  • ATP rejects new criticism of its investment model – 3 Feb
  • AUM in Swedish Article 9 funds halved in Q4 – EU regulation partly to blame – 3 Feb
  • Danske's outflow continued in Q4 due to loss of flagship team – 3 Feb
  • Ilmarinen changes benchmarks to become carbon neutral in 2035 – 3 Feb
  • Wholesale and institutional sales dampened Nordea’s AUM recovery in Q4 – 3 Feb
  • Norway set to tap its oil wealth to finance war aid for Ukraine – 2 Feb
  • Investors are skeptical of companies' sustainability storytelling: "It takes more than just a good story" – 2 Feb
  • Norway's oil fund will vote out board members from firms lacking climate goals – 2 Feb
See all

Jobs

  • Porteføljemanager til danske ejendomme i PenSam

  • PenSam søger en jurist med interesse for den finansielle sektor

Watch Jobs

  • Regnskabs-/økonomichef

  • Business Intelligence Specialist

  • Business Controller til DAHL Advokatpartnerselskab i Jylland

  • Jurister søges til Corporate Legal i Danmarks Eksport & Investeringsfond

  • Erfaren fuldmægtig eller advokat med interesse for danske og internationale virksomheder

See all jobs

Jobs

  • Porteføljemanager til danske ejendomme i PenSam

  • PenSam søger en jurist med interesse for den finansielle sektor

See all jobs

Colophon

AMWatch
Search

Sections

  • Fund Management
  • Pension
  • Responsible Investing
  • People
  • Sitemap
  • RSS feeds

Editor

Anne Louise Houmann

alh@amwatch.dk

Tel.: +45 2830 5142

Editor-in-chief

Anders Heering

Publisher

JP/Politiken Media Group Ltd

Advertising

annoncering@infowatch.dk

Tel.: +45 7077 7491

Advertising

Job Advertising

job@infowatch.dk

Tel.: +45 7077 7491

Jobs

Subscription

Try AMWatch or get an offer for a subscription meeting the exact needs of you or your company.

amwatch@infowatch.dk

Tel.: +45 7077 7491

Learn more about subscriptions here

Address

AMWatch

Rådhuspladsen 37

1785 Copenhagen K, Denmark

Tel.: +45 3330 8382

Guidelines

  • Privacy Policy

Copyright © AMWatch — All rights reserved

Microsoft is in the process of discontinuing Internet Explorer – and so are we.
For a better experience, we recommend using one of the following browsers.

Kind regards,
AMWatch

Google ChromeMozilla FirefoxMicrosoft Edge