Dream team or strange bedfellows? Complementarities and differences between incumbent energy companies and institutional investors in Swiss hydropower

Institutional investors can potentially be a significant source of capital for financing the energy transition. This is even more important as incumbent energy companies in many European countries struggle to adjust their business model to changing market conditions. This article reports on a choice experiment with pension fund and energy managers conducting 1,129 experimental investment choices in Swiss hydropower. We find that complementarities exist with regard to financing different stages of project development – pension funds are averse to construction and development risk but comfortable in deploying capital to existing projects, while incumbents are willing to invest in all project stages. The two groups show surprising similarities in their aversion to fluctuating electricity prices. When fully exposed to revenue risk, energy firms and pension funds demand a risk premium of 5.98% and 7.94% respectively. For policy makers, this suggests that shielding investors from revenue risk, as has been done with feed-in tariffs for other renewables, might be an effective way of lowering the financing cost of hydropower. When it comes to their preferred co-investors, the two groups express mutual distaste for each other: energy firms would rather invest in consortia with other incumbents, and the same goes for institutional investors.