Kirsten Gosvig’s pension fund bought a $485 million stake in Denmark’s largest offshore wind-power project, an investment that’s forecast to earn at least twice the average historical return of hedge funds.
PKA Ltd., which manages retirement money for the 40-year-old nurse, will earn 7 percent to 9 percent a year on the Anholt wind farm. That’s the view of PensionDanmark, which joined PKA in the first investment ever by pension funds in an unbuilt wind park at sea. The return would beat the HFRX Global Hedge Fund Index’s 2.8 percent compounded annual gain in the last 10 years.
Pension funds are sinking money into offshore projects that banks consider too risky as the payback depends on unproven gear that will be pummeled by gales and corrosive salt water in a 20-year lifetime. PKA, PensionDanmark and the Dutch PGGM NV are helping plug a 40 billion-euro ($58 billion) funding gap in European utilities’ plans to anchor 7,000 turbines in the ocean.
“Utilities have pulled pension funds into the space,” said Fintan Whelan, chief financial officer of Mainstream Renewable Power Ltd. The Dublin-based developer part-owned by Barclays Capital has stakes in sea-based projects with 7.6 gigawatts of capacity, equal to about seven new atomic reactors.
The Anholt deal was “a milestone” for the wind-power industry, said Ronan O’Regan, director of renewables at the global consulting firm PricewaterhouseCoopers LLP.
The Danish utility Dong Energy A/S sold stakes in its project to PensionDanmark and PKA, the Hellerup, Denmark-based manager of 16.4 billion euros for 245,000 mainly public workers including nurses, midwives and physiotherapists. The investment is set to benefit from a Danish government guarantee of above-market prices for the emissions-free power produced.
European aid for clean energy has generated the largest project pipeline, followed by Asia and North America. European nations have installed about 3 gigawatts and have announced plans to add about 36 gigawatts of offshore wind energy in a decade, according to Bloomberg New Energy Finance.
The U.K. and Germany plan to build the most, led by utilities RWE AG, EON AG and Centrica Plc. The U.S. has no offshore wind parks.
Utilities in Europe are still hampered by a scarcity of investors and lenders in a technology that’s been used at only at one commercial plant for as long as 20 years, the Vindeby wind park off Denmark installed by Siemens AG in 1991.
“The viability is not proven,” said Thiemo Lang, manager of SAM Group Holding AG’s Smart Energy Fund in Zurich. “Why should you take the risk if you get more stable returns with less risk somewhere else?”
Hedge Fund Attraction
Pension managers don’t always get it right. In 2007, a then-record 15 percent made their first investment in hedge funds just before the industry’s record losses in 2008, which averaged 23 percent, according to London-based research firm Prequin Ltd. The percentage of pension firms investing in hedge funds for the first time rebounded last year to 17 percent.
Anholt’s estimated return is based on projected operating costs and revenue, including a guaranteed subsidy from Denmark’s government of 1.051 Danish kroner (20 U.S. cents) per kilowatt-hour for the first 20 terawatt-hours of production, which should last 12 to 15 years, according to Skaerbaek-based Dong Energy.
The Danish utility, which in March sold Gosvig’s pension fund the stake for 2.5 billion kroner ($485 million), has installed about half the world’s windmills at sea.
“Investments in wind farms make perfect sense from an investment perspective,” Torben Moger Pedersen, chief executive officer of PensionDanmark, said in an interview. “The risk and sensitivity to the global business cycle is significantly lower than with equity investments.”
There are inherent risks to offshore wind. Bad weather, intrinsic to windy stretches of the sea, is hostile to the mechanical and electrical equipment used.
“It’s harder to get there to repair things so you may lose production if you can’t deal with an incident for days on end,” said Jerome Guillet, managing director of Green Giraffe Energy Bankers of Paris and formerly head of energy for Dexia SA.
Dong has developed financing techniques that bring in a wider range of investors and allow it to pursue projects that would otherwise be beyond its capacity, Chief Executive Officer Anders Eldrup said.
“We have excellent knowledge in our company for how to construct the plants but we have limited capex abilities,” Eldrup said in a telephone interview. “This is a new tendency: We take in people who are not in the industry as financial investors.”
Dong, which is currently building 1,300 megawatts of wind farms off European shores, guaranteed to Gosvig’s pension fund that the generators will be installed, Eldrup said.
Europe’s push for clean energy was reinvigorated by German Chancellor Angela Merkel’s decision to shut down atomic plants after the Fukushima meltdowns in Japan in March. Germany’s Munich Re, the world’s biggest reinsurer, plans to increase its investments in renewable energy including wind parks to help boost returns while the German government and KfW, the nation’s development bank, opened a 5 billion-euro financing program for offshore wind on June 8.
“Once you have one or two offshore projects that have proved successful that should accelerate investment in this sector” by “the classic pension fund,” said Joost Bergsma, chief executive officer of BNP Paribas Clean Energy Partners.
Utilities including Dong and Spain’s Iberdrola SA may supply as much as 35 billion euros toward the 115 billion-euro investment cost for Europe’s offshore wind plans, BNEF has estimated. Commercial banks and export credit agencies may fund 20 billion euros each, leaving a 40 billion-euro gap the pension funds have begun to fill.
Dong’s Eldrup has been refining his approach to bring in institutional investors earlier in the development process. By recycling Dong’s capital more quickly he can accelerate the construction of new generators.
When Dong sold 50 percent of its Nysted wind farm off southeast Denmark to PensionDanmark in September, the project had been operating for seven years and proved its reliability. In December, the utility sold almost 25 percent of its U.K. Walney wind farm to Dutch pension fund PGGM NV and Triodos Bank BV’s Ampere Equity fund while it was still under construction.
“Our partnership with Dong has a high degree of customization, allocating risk to the party best able to bear it,” said Bart Saenen, senior investment manager at PGGM NV.
At the Anholt site, where a share of Kirsten Gosvig’s retirement nest egg is invested, nothing’s been built over the gray expanse of sea some 12 miles from port of Grenaa.
For Gosvig, who runs a team of nurses at a seniors’ home near Copenhagen and pays about 13 percent of her 45,000 kroner monthly salary into her pension, the carbon emissions avoided are an extra yield.
“We have to think about the long term,” she said. “If we don’t do anything, it’s going to be bad for our children and their children.”