Wind Bankers III: PensionDanmark

PensionDanmark, one of Denmark’s largest pension funds with 629,000 members employed in 26,000 private and public companies, is one of the first, if not the first pension fund to take offshore wind very seriously. It has already invested in 2 offshore wind farms and it is eyeing more.

The organisation has embarked on an ambitious strategy to more than double its investments in “stable assets”, such as infrastructure for renewable energy, to around 10%, up from approximately 4% of its assets today. This will lead to the pension fund pumping a further $2bn directly into infrastructure over the next five years and one of the main beneficiaries is wind energy.

Roughly half of these investments in infrastructure will be channelled into a new infrastructure fund managed by Copenhagen Infrastructure Partners, a newly established team made up of former employees from Danish energy giant DONG Energy. The other half of the investments will be managed by PensionDanmark’s in-house team.

PensionDanmark is the only investor in the new fund, which, over the coming 3 to 4 years, will invest in infrastructure in Europe and North America. Assets will include everything from production to transmission in the wind energy sector and a substantial part is earmarked for wind related investments.

Infrastructure fund

Torben Möger Pedersen, Chief Executive of PensionDanmark, explains to Offshore WIND: “PensionDanmark has an obligation to invest members’ savings to get a good rate of return to protect or increase the purchasing power of their savings. At the moment government bonds are a challenge because they have such a low interest yield. Rates are lower than inflation, buying them is actually destroying purchasing power.

“Banks are limited in their capacity to deliver long-term debt, utilities are reducing balance sheets and government budgets are stretched. We believe that funding from these sources will be very low in the years to come.

“We are looking for assets that can give a higher rate of return than government bonds without the risks and volatility associated with listed equities. PensionDanmark has identified a number of infrastructure assets which give us these characteristics, including offshore wind and other renewable assets and high quality real estate.”

The new infrastructure fund is an effective way to quickly expand capacity in this field, he says. “We need experienced people and we are pleased to be able to work with the former DONG team, who are among the most experienced in this field in Europe.”

Around €500m in wind investment

Around €500m of the budget is expected to be invested in on- and offshore wind related assets. “The majority of wind projects have some kind of government guarantees on the power price. The regulatory regimes are different in the UK, US, Denmark, Germany, etc. but for the most part there is generally a feed-in tariff that reduces the top line risk of the projects.”

Currently, PensionDanmark has two major offshore investments. In September 2010, PensionDanmark bought 50% of Nysted Wind Farm for DKK0.7bn from DONG Energy. In the deal the parties agreed to a profit sharing agreement under which DONG Energy provided PensionDanmark with a fixed amount operating guarantee (e.g. if the price of electricity drops below a certain threshold). On the other hand, DONG Energy gets a greater share of the profits if the power price increases from the current level.

Nysted largely created the model structure going forward for the company, he says. In March 2011 PensionDanmark – as lead-investor – invested DKK3.8bn for a 30% share in Anholt Offshore Wind Farm, with fellow Danish pension fund, PKA, buying a 20% stake. The Anholt Offshore Wind Farm will have a capacity of 400MW providing electricity for 400,000 Danish households. With 111 Siemens’ 3.6MW turbines, the park will be fully commissioned by end-2013.

PensionDanmark at the moment is not interested in taking the construction risk on. In the first 3 years, the construction period, the involvement is debt-based and then converted into equity on the condition that the Anholt wind farm is fully working, stresses Mr Pedersen.

Sharing the risk

Here, DONG Energy remains responsible for operations and a significant investor in the project, which ensures that the risk is spread and that there is an alignment of interest between the financial investors and the power company.

“This is pivotal to mitigate risks on this type of investment, especially given the length of the deal,” he says.

“We have a very tight partnership with DONG and there are certainly plans to diversify to other parts of Europe and the US.

“This model can be replicated in Germany and the UK. Currently we are looking in Northwest Europe and North America where the political risk is small.” But at this time he cannot disclose details.

PensionDanmark has recently entered into a partnership with German energy group E.ON in a structure similar to the partnership with DONG Energy to ensure a further spread of risk. “Both E.ON and DONG are very experienced and financially strong industrial partners and the parties have shared the ownership to ensure an alignment of interests. Moreover, we have reduced risks by using wellproven technology from high quality turbine producers, which are willing and capable of offering a technical guarantee for a number of years.

“We wanted to ensure that the partners must be capable of taking on the risk and to distribute the risks amongst us. In Anholt the O&M risk is taken by DONG, the technical risk by the turbine supplier Siemens., the Danish transmission system operator, takes on the risk of transmitting from offshore to land and if it can’t do that then it has to compensate for eventual losses. When designing this structure we focused on a proper risk sharing agreement.”

US investments

In August, PensionDanmark also acquired 50% of 3 US wind farms– 2 in Texas and 1in Pennsylvania – owned by E.ON. E.ON retains a material ownership share and is still responsible for the day-to-day operation of the wind farms, which supply 120,000 US households with green energy. Around 90% of the power generated by the wind farms over the next 15 years has been sold to a number of US utilities companies at a fixed price.

The US trio comprise: Papalote Creek I in Texas, (180MW, 109 Vestas wind turbines), Papalote Creek II also in Texas, (200MW, 87 Siemens wind turbines) and Stony Creek in Pennsylvania, which represents 53MW and has 35 General Electric wind turbines.

This is the first transaction of its kind between the two companies. The US market investment was a question of diversification and it was also attractive to become a partner of E.ON, he says. “We are the first pension fund they have made such a transaction with. The US wind farms are a good supplement to our European farms.”

Public-private partnership

If companies like DONG and E.ON are keen to reduce their balance sheet and sell off assets to fund future investments, this might be a new way of establishing a new form of public-private partnership in the long-term, Mr Pedersen points out. The wind farms in its portfolio are putting in a good performance, which enables PensionDanmark to get rates of return that it finds attractive, he comments. Indeed, construction of Anholt is running ahead of schedule. Turbines have been installed according to plan and the first power was produced in September 2012. “It is a milestone, everything until now has been in line with our expectations, on budget and on time. We are expecting returns of 6-8%.” 

Window of opportunity 

In Denmark itself the DONG partnership was approved by all the political parties and generally, there is a lot of political support for renewable energy. A new energy agreement in the Danish parliament in the spring declared that 50% of all power should come from renewables by 2020.

Mr Pedersen says that most of the investments needed to reach the ambitious Danish 2020 targets – representing some €10-15bn – will be private not government funded “Realistically this can only be realised if you can attract long-term money from pension funds and the like,” he emphasises.

Investments have been welcomed with a very enthusiastic response from our members, he says. “They are positive that their own fund can provide them with green power and, coincidentally, production capacity from the parks will equal the early power consumption of our more than 629,000 members! We are able to supply them both with green power and attractive returns on their savings.”

The company has a very substantial pipeline of new projects, he adds. “There is a window of opportunity for the next few years.”

Helen Hill