Investing in Unsubsidized Offshore Wind Farms: The Pension Fund's Perspective

Gjergji Gjeta & Lorenzo Versari

Student thesis: Master thesis


With relevance to the targets governments have set in terms of increased renewable energy capacity, our research primarily focuses on the future of the offshore wind industry and the role of pension funds. These institutional investors hold the biggest share of the global wealth and have until now played an important role in the development of the industry. As costs are falling and support schemes for offshore wind projects are being decreased accordingly, debates arise over the further need for government subsidies to be in place at all. A full exposure to merchant risk would entail significantly higher levels of risk that might not be bearable by pension funds due to their high risk aversion. This thesis aims to contribute to this research gap by assessing the attractivity for pension funds of a potential unsubsidized offshore wind project. More specifically, we evaluate the investment case of a 1,000 MW offshore wind farm starting construction in 2020 in the United Kingdom, without the support of government subsidies and hence fully exposed to merchant risk. In the first part of the thesis a financial analysis of the project as a standalone is performed. IRR and APV of the project are estimated at different prices scenarios through Monte Carlo simulations. The results revealed a promising investment case with a generally positive Adjusted Present Value, except in the low-prices scenario where the Internal Rate of Return was 6.1% on average, slightly below the cost of capital required for the project.
The analysis continued with the assessment of three portfolios representing the different investment strategies pension funds pursue. Leveraging on Modern Portfolio Theory, the investment case was integrated in each of the portfolios. In order to assess the maximum exposure to the project that the different schemes can accept, the portfolios were optimized at an adequate risk level representative of Pension Fund’s risk appetite. The results of the analysis confirmed that the investment presents an attractive return profile compared to the other available asset classes. However, due to its high volatility, Pension Funds would generally not be willing to allocate a significant weight of their total portfolio to the unsubsidized offshore wind project.
Targeted initiatives designed to reduce the project’s volatility might increase the attractivity of the investment for Pension Funds. Further research in that regard is therefore recommended.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2020
Number of pages136