Solar subsidy cuts to hit liability matching strategies

UK - Government plans to cut a subsidy boosting the appeal of solar panel infrastructure investments could scupper scheme plans to use these investments as part of their liability matching strategies, fund managers say.

The Department of Energy and Climate Change is set to cut the Feed-in-Tariff - a government subsidy for low-carbon technologies - from the solar panel industry by 50% next month, threatening to undercut the profits of solar companies and returns for pension funds investors.

With record low gilt yields, schemes have moved into solar panel investments as an inflation hedging strategy due to their Retail Prices Index inflation reviews - but the cut in subsidisation could create turmoil for firms and investors.

"There's been lots of pension fund investment in solar PVs," Aviva Investors real estate investment director Chris Laxton warned last week. "But the sector won't make sense under the new regime."

The current FIT will be removed from solar panel manufacturers from 12 December - which fund managers say could lead to a period of flux for manufacturers.

Impax Asset Management said the government needed to have clearer policy to reassure pension fund investors about the benefits of renewable energy.

Chief executive Ian Simm said: "Institutional investors are looking to increase their exposure to infrastructure in general. Power generation infrastructure is heavily in demand at the moment but government needs to set out a stable long-term framework of regulation and appropriate subsidies. If that were to happen, institutional investors would be much more willing to commit money."

However, Gravis Capital Partners managing partner Stephen Ellis said solar panel prices had fallen 70% since the FIT was introduced - offsetting the loss of the tariff.

"It should have no impact. The pension funds are going to have to be focusing purely on the most efficient installers, the most efficient systems. You will get a more wide ranging selection of investment opportunities if the price comes down."