Lancs invests direct in solar power station

Lancashire County Pension fund has made a £12m loan to a solar power station.

The station, in Oxfordshire, generates enough electricity each year to power 1400 homes. The pension fund loaned the sum over 23.5 years and will receive RPI+3.5% on the amortising bond.

Trevor Castledine, head of public market investments for Lancashire County Council, says that the small sized investment was made almost as a test to see how the fund could invest in these types of infrastructure projects. “This investment had the right risk/ reward profile,” he told Room 151. “It’s not particularly large in the context of the pension scheme but it ticked all the right boxes and was a useful exercise to go through to prove we could do this sort of thing.”

Chair of Lancashire County Council Pension Fund, Councillor David Westley, said. “There’s been a lot of discussion about local authority pension funds investing in community infrastructure…Our first responsibility is to secure the best returns for people in our pension fund, but I think many will be interested in knowing that their pension investments are helping fund worthwhile and sustainable schemes such as this one.”

The power station, Westmill Solar Co-op, had previously raised £6m in a share offer and had a seven-year loan from Investec Bank, which the Lancashire pension fund has taken over. Mark Luntley, the Local Government Association’s lead on creating a collective local government bond agency, is a Westmill board member. “Lancashire signed on this long-term, 23.5 year bond last week,” he said. “You pay a bit of the principle each time, so it is like a mortgage repayment, and is at RPI +3.5%.” As bond yields in general are so low at the moment the yield on this loan is attractive said Luntley.

A number of factors go to make up the coupon: the small size of the deal, the fact it is on a single site and locally managed by a small operator serve to push the margin up. However the high conviction of management, the fact that it is underpinned by 25% of high conviction equity investment (a lot for this type of investment) and the fact that it benefits from the old style, higher and more predictable feed-in tariff bring the margin down. The construction of the project was completed just two weeks before the old feed-in tariff, of 30p per kilowatt hour changed to the new one of 8p per kilowatt hour.

The solar station was built before Lancashire’s loan, so presented no construction risk to the pension fund. It had had surveys done to assess the amount of sunshine it could produce and vitally, the farm’s income is based on money coming in from the feed-in tariff which is guaranteed for 24 years. “The feed-in tariff is in part backed by the electricity industry but it is based on statuatory legislation,” said Luntley, “so this is like a government bond through three different intermediaries but at a better interest rate.”

Castledine says that he will now be looking for other, similar type investments. “We have to manage the assets and strategy of the fund, but clearly a long-dated index-linked investment is something with a natural home in a pension fund and a natural way of funding certain infrastructure projects,” he explained.

Lancashire’s £4.6bn fund is one of the ten largest pension funds in the UK. Many local authority pension schemes are more conservative, according to Castledine. “They don’t want to be the first movers and typically look for fund-type investments with a third party manager rather than doing direct investments,” he said. And while the majority of Lancashire’s pension fund investments are through funds and managers, the county’s investment staff and size means that they can investigate such direct opportunities.

“We don’t have a formal asset allocation to this sort of thing yet but I’m sure it won’t be long before we have a mandate to go and find more,” said Castledine. “I’m talking about long-dated debt supported by fairly predictable and good quality cash-flows. Whether that is through a government co-ordinated scheme to get pension funds to fund infrastructure generally or through direct investment I wouldn’t like to predict, we’ll make our decisions on a case to case basis.”

The government has been trying to encourage LGPS to invest in infrastructure, launching a consultation on the matter last November and considering whether to lift the 30% cap on investments in partnerships by local authority pension funds and the creation of an infrastructure investment class limited to 15% of fund assets. The Treasury has also backed the National Association of Pension Funds Pension Infrastructure Platform, intended to boost investment in capital projects. Strathclyde and West Midlands local authority pension schemes are among its six founding investors.