Throwing Retirees’ Money Into the Sea

(Bloomberg Opinion) -- They should be an ideal investment for a pension fund. Renewable energy infrastructure projects are typically long-dated, environmentally friendly, and offer returns that are uncorrelated with the gyrations of financial markets.

But the potential rewards have to be commensurate with the risks — and pension plans shouldn’t be in the business of chancing their precious capital to persuade governments to subsidize innovative technology.

Unfortunately, that seems to be happening in the U.K. The government has been dragging its feet on whether to support the 1.3 billion-pound ($1.7 billion) Swansea Bay Tidal Lagoon. So the Wales Pension Partnership, which oversees 15 billion pounds of assets on behalf of eight local municipalities, said this week it would be willing to invest in the project.

The plan, as envisaged by Tidal Lagoon Plc, involves enclosing part of Swansea bay with a rock wall and installing turbines to generate electricity using the ebb and flow of the sea. It would generate 320 megawatts of power. A second project planned for the nearby Cardiff Bay would produce almost ten times as much energy, enough to supply every home in Wales.

I argued last year that the government should back the Swansea Bay project. A cost/benefit analysis it commissioned from former energy minister Charles Hendry unequivocally supported both the individual proposal and the concept of developing larger lagoons.

Unlike solar or wind power, tidal power is always available so long as the laws of gravity obtain. A wind drought earlier this month that lasted for 12 days becalmed the U.K.’s wind turbines, which are capable of producing as much power as 12 nuclear reactors and in March generated record power levels. Day-ahead power prices surged to their highest for the time of year in at least a decade.

Investing in the Swansea Bay project would show that the government is serious about both backing industrial innovation and reducing the country’s carbon footprint. As a small island pounded by waves, the U.K. has the potential to become a world leader in marine energy, which Bloomberg New Energy Finance says has been held back by “a shortage of early-stage investors prepared to take on the risks of ocean-based devices.”

But the government has a broad mandate to foster green energy and the financial firepower to subsidize newfangled methods of generating electricity. A pension fund, on the other hand, has a fiduciary duty to its members that should inhibit any inclination toward fiscal adventurousness.

“Any evaluation and decision they take would not be political, it would be based on sound professional financial advice by pension fund experts,” Swansea Council leader Rob Stewart told WalesOnline. Well, you’d hope so. But would the Welsh pension fund entertain the notion of investing in tidal bay projects in Scotland, or Canada, or Australia?

The asset management industry has a big role to play in funding infrastructure development and in using its collective financial muscle to make the world a greener place. Once tidal lagoons have proved they can generate electricity consistently and cost effectively, they can and should be up for consideration as suitable investments for pension funds.

But in the specific example of Swansea Bay — which Hendry’s analysis described as a “pathfinder project” — the Wales Pension Partnership risks letting its collective heart rule its head.

©2018 Bloomberg L.P.

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