Wind farms are “the perfect asset” for pension funds, according to Robert Waugh, CEO and co-CIO of NatWest Group Pension Fund.
Speaking at a panel discussion on the role of renewable energy infrastructure in the energy transition at the 2022 PLSA Investment Conference, Waugh detailed NatWest’s pension fund experience with owning a park. wind.
First, he noted that as a pension fund you need to determine what you want and it will depend on whether the fund is a defined benefit (DB) or defined contribution (DC) plan.
For DB schemes, he said inflation-linked cash flow is important and traditionally this could have been met by index-linked gilts, but renewables offer a modern alternative.
“The big advantage of renewables is that you have very low terminal value volatility,” he said. “The most volatile asset is the stock; we buy it today, we get a small dividend yield and hope that in 10 years we can sell it at an equivalent price but we don’t know at what price we will sell it.
“In fact, if you take a wind farm, you have no residual value…as a pension fund, it’s the perfect asset; I have an inflation link in my grant and I have an electricity price link, which is another form of inflation link.
“We could argue that about 18% of the inflation link is from some form of eco-energy or electricity…that cash flow and inflation link makes it really attractive, with no value risk terminal and at the same time you are helping the world through a climate transition, which is what we like to do as a responsible owner.
Asked what it was like to own a wind farm, Waugh said it was generally “pretty peaceful”, but there are certain operational risks involved in owning a physical asset rather than shares and of shares.
Greencoat Capital LLP partner Matt Ridley also spoke on the panel. He summed up the opportunity in renewable infrastructure: “Net Zero is a huge challenge that will require a lot of innovation and a lot of investment in core assets – up to £130bn of capital in the conventional assets that we see.
“There’s a pretty solid investment opportunity. I think the payoff is that you can access those cash flows and they’re inflation-linked if you structure them the right way and they’re a secure and long-term income.”