In November this year the UK will play host to COP 26, the UN-backed climate change conference. High on the agenda will be the willingness of everyone to work towards a Net Zero world for greenhouse gas emissions.
USS made its own pledge to be Net Zero by 2050 if not before earlier this year, and key to that strategy will be investing in technologies that create energy in a way that reduces our environmental impact.
While the environmental credentials of renewable energy is an obviously attractive reason to invest, pension schemes, in general, have traditionally been cautious due to the need to generate reliable returns in order to pay pensions. Even windfarms, which have been around for decades, take a long time to build, need finance to maintain and even then, the wind does not blow all of the time!
But USS Investment Management, which has a team of specialists who have been investing in long-term projects for decades, has the skills in-house to enable us to properly analyse the risks and rewards for the scheme.
For one thing, windfarms, and solar are by their nature long-life assets – windfarms can last 30 years or more while solar photovoltaic panels have a useful life of up to 40 years. As well as that, investors can benefit from feed-in tariffs and also enter into long-term Power Purchase Agreements, to sell an agreed amount of power over a lengthy contract. This can mitigate some of the risk of the investment.
But also, as the investment arm of a very large open scheme, it is our job to invest in as broad a way as we can in order to pay members’ pensions.
We made our first investments in renewable energy in 2006 and now have over £1.2 billion either invested or committed in the sector – either directly, for example through owning a share in a number of UK windfarms, or - through lending to renewable projects.
Only last month we announced a significant new investment in solar, a new direct investment area for us – with a €225m investment in a 4000MW Spanish energy platform. Our investment will see USS not only invest in existing farms of solar photovoltaic panels, but also support the building of a pipeline of new ones into the future.
Aside from solar, most of our direct renewables investment is in windfarms. In 2016, when the UK Government announced the sale of the Green Investment Bank (GIB) - set up to attract private investment into renewable energy projects in the UK - a number of potential partners approached us about joining them to buy the group.
We became part of a Macquarie-led consortium and ultimately bought a 37.5% stake in a portfolio of eight offshore windfarms, two of which were still under construction at the time. One of these – Rampion, was the South Coast’s first offshore windfarm and can be clearly seen from Brighton’s beaches today.
As at the end of December 2020, the greenhouse gas emissions avoided by this portfolio during the year was equivalent to taking 1.3 million petrol cars off the road [source: Green Investment Group, part of Macquarie report prepared for USS using gov.uk data for equivalent emissions from passenger vehicles].
We did not just buy into the windfarms themselves, however, we also bought GIB’s book of loans. The loan book had been established to provide finance to a range of renewable energy technologies including wind, energy-from-waste, and biomass. This was put together with USS’s existing loan portfolio which had been bought from the Co-Operative bank in 2015 and provided finance to 34 UK-based wind farms.
The combined entity was renamed L1 Renewables and now manages a portfolio worth £523m across a range of renewable energy technologies. L1 supplies power to around 172,000 energy efficient streetlights across five local authorities.
And we are actively looking for to do more, investing as an owner and a lender, in all aspects of decarbonisation technology.
Nothing in this article should be construed as an offer, invitation or general solicitation to buy or sell any investments or securities, provide investment advice or to engage in any other transaction or service.