Why operational energy transition infrastructure can be a perfect fit for DC pensions
Investing in long-term operational energy transition infrastructure, especially within a semi-liquid structure, could help schemes balance liquidity and risk-return requirements, while also meeting broader sustainability objectives.
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In today’s market environment – defined by persistent volatility, elevated interest rates, and heightened macroeconomic and geopolitical uncertainty – focus has shifted towards the potential for private assets to enhance portfolio diversification, returns and resilience.
This is especially true for many institutional investors, such as defined contribution pension schemes, that have historically focused their portfolio in traditional, listed asset classes such as stocks and bonds.
Within this, private infrastructure is a key investment option. Often used as a replacement for listed equities, interest in this asset class has been understandably tilted towards higher-return strategies with greater exposure to key emerging growth themes.
This is reflected in fundraising data, where we have seen evidence of a switch in investor demand towards Core+ (targeting low double digit annual returns) and Value Add (targeting low-to-mid teens returns), which have accounted for the largest share of increased private fund capital raising for infrastructure so far in 2025.
Infrastructure fundraising in 2025 largely within Core+ and Value Add
Source: Preqin Pro, Schroders Greencoat LLP. Data as of 19 August 2025
At Schroders Greencoat, we see clear merit in such approaches, and have strong confidence in a range of opportunities in the Core+ and Value Add segments, particularly those aligned with high-conviction energy transition technologies and scaling late-stage development platforms.
Yet for many institutional investors we believe there remains a strong alignment for operational infrastructure. Again, this is particularly true of DC investors, whose objectives are focused on long-term value creation, portfolio stability, and delivering diversification relative to traditional asset classes to support member outcomes.
As we will cover in more detail below, these strategies have a cashflow-generative orientation that supports long-term liquidity, stability of risk and return over time, and greater comfort around delivering robust valuations. In addition, a drive for cost-effective management provides greater alignment and transparency with member outcomes.
Operational infrastructure related to assets supporting the global energy transition can further help to align allocations with broader portfolio sustainability objectives. This reflects the focus on long-term stewardship and management of underlying assets, and by providing a source of long-term capital that is pivotal to fuelling the wider development ecosystem.
At the same time, while investors will inevitably be drawn to the financial and sustainability benefits, investing in operational energy transition infrastructure can also contribute towards the broader ambitions of the Mansion House Accord, which aims to channel UK DC assets into productive finance and long-term growth initiatives across the economy.
This has led to Schroders Greencoat focusing its offerings for DC pensions on operational infrastructure assets, with a small element of development and construction assets (limited to circa 10-15% of the portfolio). This ensures members get the most efficient outcome possible, while retaining a small element of exposure to earlier-stage investments in a heavily risk managed way.
Stability of returns
At the heart of operational infrastructure is a straightforward investment principle: own essential, already-operational assets – in the case of energy transition infrastructure, this would include solar parks or wind farms – and hold and manage them for the long term. These assets are actively delivering services, typically by producing renewable energy that is sold to the grid or to other contracted off-takers.
Returns come primarily through yield. In simple terms, investors benefit from the premium generated by the income stream over the amortised cost of acquiring and operating the asset. This is typically modelled through discounted cashflow analysis, incorporating variables such as power price forecasts, generation yields, and interest rate assumptions. These provide a set of risk premia that differentiate these investments to, say, global equities and bonds, bringing valuable portfolio diversification and potentially enhanced resilience and returns.
Unlike development-based strategies that rely on successful project delivery and future capital gains – which in turn require step-changes in an asset risk profile that may take a number of years to robustly identify – operational infrastructure therefore provides investors with tangible, near-term income streams.
For DC savers, this can be particularly valuable, with several structural characteristics supporting both lower return volatility and a clear line of sight on expected cashflows:
Contracted revenues and operating costs: Many operational assets benefit from long-term, inflation-linked contracts, often with government counterparties. This makes income streams highly predictable and protects against inflation risk.
Predictable performance: The generation profile of wind and solar assets can be modelled with high confidence using historical weather data and asset-specific performance metrics.
Lower leverage: Unlike greenfield project finance strategies, buy-and-hold Core assets are typically financed with lower debt levels, reducing financial risk and sensitivity to interest rate movements.
While these characteristics may deliver slightly lower headline returns – typically in the 9–11% range, which would still represent a premium to expected yields on global equities – they also offer resilience. That, coupled with a current ‘buyers’ market’ and upward drift in expected returns in recent years, due to significant growth of new projects at a time of reducing dry powder and fewer long-term investors, should draw fresh attention.
Levered discount rates for operational assets (which broadly equate to the expected long-term return), for instance, have risen by approximately 200bps since early 2023, signalling a favourable entry point for long-term investors. The graph below shows these figures for a portfolio of UK wind assets Schroders Greencoat manages, but we see similar dynamics across most geographies and technologies we manage.
Core infrastructure returns have materially re-rated
Past performance is not a guide to future performance. Source: Listed Greencoat fund quarterly reports Q1 2015- Q1 2025. Discount rate refers to UK wind assets. There is no guarantee that this rate trajectory will remain the same in the foreseeable future.
Reducing cash drag and improving liquidity
DC schemes face unique challenges around liquidity and valuations. This is primarily due to evolving populations over time, reflecting members both entering and exiting the scheme, and continual changes to scheme demographics over time.
This has historically made illiquid private market strategies, which traditionally involve locking capital up for 10 years or more in structures that are more opaque in relation to valuations and fund charges than public market equivalents, harder to accommodate within default funds.
However, operational infrastructure presents a different profile. Because it generates contracted, recurring income, it enables schemes to access regular distributions that can provide a steady source of liquidity, without the need to sell down other assets.
This can in turn reduce the need for DC schemes to hold larger allocations in low-return cash or short-duration bonds, potentially resulting in improved overall capital efficiency that could support better member outcomes over time.
Furthermore, the consistency of risk profile, together with the transparency of the inputs, makes operational assets easier to value from period to period. This reduces the risk of disadvantaging one cohort of investors versus others (ie existing versus incoming members or vice-versa).
Semi-liquid structures such as UK Long-Term Asset Funds (LTAFs) have added a further layer of flexibility. These vehicles provide periodic liquidity windows, allowing schemes to access their principal capital if needed, subject to notice periods and fund-level liquidity constraints.
By combining a semi-liquid wrapper with the yield characteristics of operational infrastructure, schemes can better align their liquidity profiles with long-term strategic objectives, without sacrificing access, transparency or fairness.
An additional benefit lies in mitigating the “J-curve effect”, the return profile commonly associated with private market strategies that is characterised by negative early returns as funds are invested, turning strongly positive later as investments are harvested. Because operational assets are already constructed and income-generating – and LTAFs involve investment in existing, perennial portfolios – capital is deployed more efficiently and begins delivering returns sooner.
Rethinking additionality
For DC schemes with strong sustainability and climate objectives, investing into the entire chain of the energy transition can help to deliver on these ambitions.
In this area, the appeal of development-stage investments is intuitive. These are the assets that add new, clean capacity to the grid, offsetting fossil fuel reliance – this is the concept of “additionality”.
Yet the story is incomplete without acknowledging the vital role that long-term capital plays in enabling this development. Put simply, without investors willing to acquire and manage operational assets from the early-stage investors that financed their construction, developers would not be able to recycle capital into new projects, while the cost to society of the delivery of the energy transition would be uneconomic.
This dynamic creates a self-reinforcing ecosystem. Early-stage developers build, long-term investors buy and operate, and the resulting proceeds are reinvested into future growth. This means long-term holders of assets are not just generating income from the trend towards global decarbonisation – they are its enablers.
Furthermore, given the lower but more stable return profiles, operational energy transition infrastructure investors help reduce the cost of capital for the entire sector. If development sponsors had to hold assets through their full lifecycle, their required return on investment would likely be higher, translating into more expensive power for end users.
This overall contribution is particularly relevant in the UK context, where DC schemes are being encouraged to direct capital into domestic growth and infrastructure opportunities, aligned with the government’s vision of building a more productive, sustainable economy.
At a societal level, there is a clear need for long-term owners that are focused on – and have the experience and expertise to drive excellence in – the management of renewable energy assets. Put simply, investors like Schroders Greencoat that have proven capabilities in maximising the output of their renewables assets, ensure that the energy grid extracts maximum value and efficiency from its renewable resources.
Real world impact
Building on this last point, sustainability in infrastructure is not only about what you invest in, but also how those assets are managed. Excellent operational management can create real-world impact, as well as supporting long-term value creation.
Our asset managers are technical experts that develop long-term relationships with landowners, local communities, and the contractors that operate assets on our behalf. They ensure that the assets are managed to strong sustainability standards, and support additional environmental and social benefits.
Below are two examples of real-world impact taken from Schroders Greencoat’s own portfolio:
Community engagement
A solar farm managed by Schroders Greencoat had been subject to repeated vandalism. Our asset managers travelled to the site and met with local residents to better understand the issue and how it might be addressed.
Following engagement with the local community, the asset sponsored two local sports clubs to allow young people in the area to stay active and socialise, with the aim of avoiding future security issues at the site. Since then, there have been zero thefts recorded and no damage to equipment. Our asset managers’ actions have therefore both supported the local community, while at the same time improving operational availability and performance of the asset.
Wind turbine blade recycling
Schroders Greencoat recognises the challenges with recycling certain components used in energy transition infrastructure, including wind turbine blades. Between 2022 and 2024, our team funded a £250,000 impact programme in collaboration with the University of Edinburgh (UoE) and Imperial College London (ICL) to support academic research and non-profit projects aimed at advancing industry knowledge on turbine blade recyclability and repurposing.
Research at the UoE focused on recycling old wind turbine blades into powders, which can be repurposed into surface coatings to help prevent the corrosion and erosion of new blades by rain and other particulates, extending their usable life and reducing waste to landfill. Research at ICL developed a tool aimed at supporting the wind industry in making informed decisions about the optimal end-of-life route for wind turbine blade materials.
The case for buy-and-hold for DC schemes
DC investors are increasingly turning to private markets to diversify portfolios, generate income, and unlock long-term return potential – and to support the government’s long-term vision to encourage more investment into the real economy. Infrastructure is a core component of this shift, offering exposure to essential services with returns that are both attractive and are expected to be broadly uncorrelated with public markets.
While higher-return strategies in development are attractive and could have a role to play, DC schemes should not overlook the stable returns, regular yields, and reduced volatility and risks – not to mention the stronger confidence in regular valuations and alignment – associated with operational infrastructure.
These strategies, focused on operational, income-generating assets, offer a distinct combination of portfolio stability, inflation protection and sustainability alignment, and today offer an entry point that offers higher expected returns than we have seen historically – and not materially below where many development opportunities now trade.
Operational energy transition infrastructure can meet the liquidity needs of DC structures more effectively than many private alternatives and provide a crucial link in the energy transition infrastructure financing chain, with the potential to generate real-world impact.
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