
This is KKR's first investment in renewable energy, and the first investment by its newly-formed infrastructure fund that invests money from pension funds. Analysts said that wind farms make sense for pension fund investments because their cash flows are essentially linked to inflation. As inflation rises, the theory goes, wind farms should benefit from rising utility rates without any corresponding increase in fuel prices. Wind farms also provide pension funds with a sustainable component to their investment portfolios.
Of course, this assume that utility rates for renewable power generation will follow market forces in the future when, in fact, they do not follow market forces today. Investments in renewable energy projects make economic sense today because many countries in Europe have adopted Feed-In Tariff (FIT) structures that allow generators of renewable power to collect a premium rate. The FIT is designed as an incentive for developers of renewable energy. But there is no assurance of what the FIT will be in the future. For example, several countries including Spain, France and Germany cut their FIT for solar power plants last year on the ground that a sufficient number of projects had already been developed.
Nonetheless, KKR's investment is part of a trend by pension funds and private equity funds to enter the renewable energy market in Europe. The size of wind farm investments in 2010 were about double the investments in 2009. And KKR says this is just the start. It is looking at additional wind power investments in France, German, Italy and Spain.
John Howley
Woodbridge, New Jersey