Low interest rates, big challenges: insurers have to look for alternative investment strategies. Over the last few years Allianz Deutschland has considerably extended its investment in wind farms. But what are the peculiarities that have to be taken into consideration when investing in wind power plants? David Jones, Head of renewable Energy at Allianz Capital Partners, provides us with answers.
Mr. Jones, why is an investment in wind farms particularly attractive for insurers?
Insurers have very specific requirements when managing investments. They are usually faced with long-term liabilities. Life insurance policies that are signed today usually don't fall due for many years or decades. In order to fulfil these obligations, insurers like Allianz need stable investments and long-term yields – and this is exactly what wind and solar farms have to offer. Here we are looking at an investment horizon of at least 25 years. What's more, yields from investments in wind and solar energy are higher than those of many other investment classes, such as government bonds - at the moment the market yields for renewable energy are at round about 5-6 percent and these yields are also totally uncorrelated with the ups and downs of the financial markets. They positively contribute to diversification.
What are the critical factors that need to be taken into account when purchasing wind turbines?
The most important issue for us is keeping our customers' money secure. Right now, the environment in the capital markets is rather stormy. It can be a real competitive advantage if we can offer shelter from all that volatility. Our investment team has of expertise in finance, traditional energy generation and renewable energies. We work as a small team of 14 experts who can draw on many years of experience in developing, structuring and managing energy projects. This helps us to assess the robustness of projects and to make realistic and deliverable long term operating assumptions. On top of that, a core part of our business model is to always acquire 100 percent of a wind or solar park and keep them on our books until the end of their operating lives. That differentiates us from our competitors in the market.
Does the profitability of such an investment not also strongly depend on whether one can rely on a guaranteed feed-in remuneration?
Regulatory risk is the most important aspect of a renewable energy investment. It has materialized in several markets such as Spain and Italy. As regulators seek to control the rate of investment going forward, they should only amend incentives in a way that does not negatively affect investments that have already been made. Therefore we seek to invest only in countries with solid political support and make sure that we have a variety of remuneration structures in order to mitigate and diversify this risk.
Would investments in wind energy also make sense without government incentives?
As long as wind investments are still dependent on subsidies, they remain a challenge. We can observe that policymakers are currently focusing their attention more on securing a sustainable economic recovery and that the long-term political challenge of addressing climate change has fallen down politicians' priority lists. We see tangible evidence of this in the reduction or termination of renewable energy incentives in many markets and even the retroactive cutting of incentives in some, such as Spain and Italy. This badly damages investor confidence. At the same time these developments illustrate the need for renewables to become cheaper so that they can also compete without subsidy against hydrocarbon-based energy generation.
Why don't you invest for Allianz in offshore parks as well - they promise even higher returns?
We are also open to investments in offshore wind energy. But so far we have not found an opportunity where we have been convinced that the potential return commensurately rewards the additional long term risk compared with onshore wind. However, I'm still optimistic that we ultimately will. In such a case, we would only take a minority stake in the overall investment and leave the larger part in the hands of a major electricity provider who has experience with offshore wind farms.
The low interest rate environment makes wind turbines more attractive when compared with other investments. Is there a tendency for bubble forming?
Given the ongoing low interest rate environment, I am concerned that the volume of capital chasing yield has driven asset prices up. This in turn has driven returns down to levels where the long-term risks — regulatory, operational performance, wind and power prices — are not being properly remunerated. There are many new and inexperienced investors in the sector who are driving asset prices upwards towards bubble-level pricing that we saw in the build-up to the 2008 crisis. I'm hoping that 2015 will see more investors revising assumptions based on growing experience in the wind sector, in operational performance and in macro developments such as the impact of the shale gas boom on long-term power prices. If this re-evaluation takes place, the market will no longer overheat, and the long term risk in wind investments will be reduced for the benefit of investors.
In the USA, large companies such as Ikea, Google, Microsoft and Facebook are more and more investing in wind farms to improve their eco-balance. Do you also see the investor landscape broadening on the European continent?
We do see a similar broadening of the landscape in Europe – indeed we sell the production of our Maevaara wind farm in Sweden to Google for use at its data centre across the border in Finland. Seven years ago we were one of a much smaller crowd; today many companies have discovered its advantages. But for Allianz, renewable energies aren't just some short-term trend. Since we started, we have invested over 2.4 billion euros in renewable energy for the Allianz Group. Our wind and solar parks have a generating capacity of approximately 1,400 megawatts of electricity – producing enough green electricity for around 800,000 European households which is comparable to a city the size of Barcelona. The key for us is diversification, which we can offer our customers thanks to our wide-ranging investment portfolio. That makes Allianz an especially attractive investment manager.