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This year, Allianz Capital Partners (ACP), the asset manager for Allianz Group’s alternative investments, announced two major investments in the U.S. renewable energy sector – the Kelly Creek wind project and the Great Western wind park, both developed and owned by EDF Renewable Energy. David Jones, the Head of Renewables at ACP, tells us why these investments are attractive and why he expects to continue investing in U.S. wind energy, despite less enthusiasm for clean energy within the new administration of U.S. President Donald Trump.
Excerpts from an interview...
In the recent past, ACP has invested in some renewable energy projects. Is climate change a crucial factor for you when making investments?
At ACP, we integrate environmental, social and governance (ESG) factors into our investment processes in all three asset classes. We firmly believe that considering ESG factors, such as our exclusion policy, corporate and country analysis, monitoring and risk management, in our investment management is not just a short-term trend, but will change the business for the better in the long term.
Other than the social responsibility angle, what is the attraction of renewable energy investments for ACP? What are the associated risks and how do you deal with them?
Our alternative investments have attractive risk-return profiles and long-term returns that match the long-term liabilities of Allianz insurance companies. The average expected return is around 4-6 percent - higher than for many other asset classes – and uncoupled from the ups and downs of the financial markets.
Of course there are environmental risks, given that it's impossible to accurately predict wind and sunshine, but these are manageable within a range as is construction risk. These risks are relatively small when you compare them to the risk of political or regulatory changes in countries our assets are located in. Retroactive reduction in incentives, for example, is an unmanageable risk which we try to avoid. That explains our geographic approach to date, but we are starting to look at high-growth developing markets for a potential expansion of our investment mandate.
Some countries contribute to climate change more than others. You said ACP is interested in exploring new markets for investments. Are there any particular countries you have in mind?
If a market is interesting in terms of regulatory framework and political stability, then we are, in principle, interested in looking at new investment opportunities. For example, about a year ago, we completed our first renewable energy allocation outside Europe with a tax equity investment in a wind farm in the United States. This was a major milestone for us.
Individual projects in the United States are usually larger than those in Europe. For big investors like us, these are very attractive because the resources required – such as time and due diligence expenses – are the same for investments in larger projects as for smaller projects. So, there are some economies of scale in the investment process.
Do you think the political priorities of U.S. President Donald Trump will be an obstacle for investments in renewable energy? If yes, to what extent?
He certainly seems less enthusiastic about clean energy than the previous U.S. President. Although he seems skeptical about climate change, there is still a high degree of confidence that the Production Tax Credit scheme will stay in place for projects until its currently scheduled “sunset” in 2020. Regulatory certainty is key for investors and there is a very good precedent in the United States of avoiding retroactive changes to tax incentive schemes. So, for projects that qualify for PTCs, there is still considerable confidence.
What seems likely after 2020 is that there may be no federal incentives for renewables, but many U.S. states are expected to seek continuation of the rollout of renewables. So we expect there will be schemes on a state-by-state basis to encourage development.
Will ACP continue to invest in clean energy in the United States after the recent changes in the political climate?
As long as the Production Tax Credit legislation is still in force, we hope to continue to make investments in the United States until 2020. Only time will tell what will happen after 2020, but we are confident about our investments, especially as the renewable energy sector in the United States is huge - creating lots of jobs and contributing to the growth of the economy.
The large ticket size of a typical wind project in the United States helps us to live up to our aspirations. From a standing start around 18 months ago, ACP has already invested tax equity in four wind farms in the country and benefited from the energy output of those wind farms, which have a combined generating capacity of over 900 megawatts.
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