Q&A – Railpen: The role of pension funds in BESS

Pension funds, like most institutional LPs, typically take a more passive role in infrastructure investing, partnering with GPs that then deploy capital where they see fit.  

However, Railpen has opted for a different strategy, seeking direct investments in infrastructure companies and projects. The pension fund manages around £34 billion (€39.2bn $44.5bn) in assets for the 350,000 members of railway pension schemes and is one of the UK's largest and longest-established pension funds. Railpen is also responsible for the administration of other pension schemes for energy and infrastructure companies with around 150,000 members. 

Railpen has made several notable investments in the renewables space, including the acquisition of the 30MW Bracks Solar farm and a 50% stake in the 66MW Barachander onshore wind project in Scotland. The pension manager has a history of investing in the early stages of projects, as such investments "align with its investment model." 

However, battery energy storage systems (BESS) are becoming an increasingly important part of its strategy, as shown by its investment in Constantine Energy Storage, a UK-based BESS platform. Last month [March 2025], Constantine reached financial close on a 612MW portfolio of nine BESS projects, having secured £180 million in debt from a consortium of lenders.  

inspiratia sat down with Lewis Vanstone, investment director at Railpen in the real assets team, to discuss the pension manager's unique investment strategy, and how it navigates the risks of investing in battery storage. 

Railpen has taken an active role in investing in energy transition companies rather than simply being an LP. What is driving that mandate?

When I joined Railpen in 2019, my remit at the time was to access direct infrastructure investments for Railpen. Railpen had not made direct infrastructure investments prior to that and had invested in a few infrastructure funds up to that point.  

This shift was really off the back of Railpen's investment transformation program, which was all about the internalisation of investment expertise, which was driven by value for money and also having more knowledge and control over investments within the organisation. 

This gives us more control over decisions ultimately, rather than investing through a fund manager, where they tend to hold the discretion through funds. We see a number of benefits to this direct implementation model. 

One of these is the value for money, so there is a cost differential to externalising all that investment with managers. 

Having quality information and being close to the deals also allows us to leverage that knowledge in our decision-making and seek out value-add initiatives for the assets. 

Liquidity is the third reason. When you are an LP in a fund, you are typically locked in for the duration of the fund. If you then sell, it will typically be at a significant discount to NAV due to the limited pool of LP buyers. Whereas in holding direct positions, if we want to sell, there is a bigger universe of buyers, which include other LPs, investment managers, corporates and strategic investors. 

Our deal size ranges from £50-£150 million, with several of our investments coming up to the top end of that figure. The bigger the tickets, the more efficient they are to manage in general. 

We typically invest in infrastructure directly, but we have worked with investment managers in different ways. For example, we have worked with Greencoat on biomass and with Cube Investment Management on waste collection in the Nordics. 

If it is a sector we do not know so well, or if it is a geography we do not know so well, there is a rationale to partner with an investment manager. This gives us access to the investment, allows us to leverage resources and get some of that knowledge about the market. 

So, your mandate is not limited to the UK? All the pension liabilities are in Sterling and are linked to UK inflation. So, that creates a bias towards UK infrastructure investments. 

There is also a secondary benefit to our members from investing in infrastructure in the UK, because they can make use of the essential infrastructure we invest in. 

However, we will invest outside the UK, where we see a characteristic or a revenue model that we cannot get in the UK. That was the case with waste collections in the Nordics. Then, the other reason would be simply that the risk-return is at a premium compared to what we could get in the UK for the same asset. But that needs to be quite a clear blue water return differential or risk-return differential to make it appealing. 

That is why, up to now, we have been very selective about our non-UK investments. 

Given other pension funds like Nest, Universities Superannuation Scheme, and the Local Pensions Partnership Investments have also adopted, or are considering adopting similar strategies, how do you see GPs adapting to this shift?  

I think that will create more of an onus on GPs to partner with LPs in a more bespoke way rather than through funds. 

The top-tier managers will still attract plenty of capital for their funds, but I think there will be a subset of managers who will look to work with LPs and asset owners in a more active way. So, it will be interesting to see how the market develops. 

How do you navigate risk when approaching these kinds of investments, given your role as a pension fund? 

More broadly, when looking at energy investments, we look for strong infrastructure characteristics. 

These include visibility over long-dated contracted cash flows, resilience to GDP risks or non-correlation with economic growth, having high credit counterparties and looking at established technologies. 

We look for optimal ways to mitigate and manage risk where we can. One example of this is the merchant revenue stack within battery storage. For us, we needed to have visibility on how the contracting market is going to develop. We looked at what our buy-in was and how are we going to save on CapEx or procurement strategy while maintaining quality. 

That ultimately then drives the lowest possible spread needed to drive your return. 

Looking at BESS, we began to do due diligence in 2021 before the energy price volatility period kicked in. So, our entry price and the initial assumptions were relatively prudent and conservative. 

We looked at break-even spreads quite heavily and considered which markets, services and strategies those battery assets could access. 

Ultimately, we needed to get comfortable with the level of margin risk, but also qualitatively consider how the market is going to develop. Is there going to be more opportunity to contract those revenues? We have seen some of that play out through floor revenues, and tolling agreements. 

I think we will see it evolve further over the next few years as the use case for the UK battery fleet is proven. Buyers like Drax, for example, prove that batteries can be utilised as part of a wider portfolio of generation assets and flexibility assets. 

How do you see the contracting market for BESS in the UK evolving in the coming years?

Between the capacity market and revenue floors or tolls, I think you can achieve a relatively modest level of contracted revenues today. In the near term, you can get to 30 to 50% contracted levels manageably. But I can see it developing further. Right now, there are talks of certain insurance products coming to market. 

There is the potential to bid in for different services with National Grid and DNOs in the coming years. I also think the co-location opportunity with renewables will grow. That will become more valuable, and it will be valued in the pricing that utilities and PPA providers provide to the renewables project. 

What we are aiming for is striking a balance between maintaining a level of upside while also contracting some revenues. We found that, for the time being, floors are a useful tool. But once we get a better sense of operational revenues over the next few years, that will give us more visibility and more of a baseline expectation. At that point, it may be a more optimal time to contract more of the revenue stack. During one of the panels at inspiratia's Energy Storage Summit last month, the financiers and advisers spoke about getting more pension funds involved in financing BESS. Do you see more players entering the market? 

We would welcome other pension funds coming into this space but accept the perceived risk profile makes it tricky on the face of it. 

There are two big risks, one of which is the merchant revenue risk. I think there is a potential for other asset owners having a holistic portfolio mix between renewables plus storage. There is an element of a hedge there, and they are quite complementary as a portfolio, particularly if you are a direct investor.  

The other factor is construction risk. There has not been a massive pool of operating battery storage assets being bought and sold in the UK. I think a lot of pension funds may be uncomfortable with construction risks, delays, and cost overruns. 

So, I think as there are more operational assets in the market in the next few years, you might see one or two more players come in, but it will likely initially be through investment managers rather than direct investments. 

As a follow up to that, what would you like to see from a project sponsor or a developer that is looking to get pension funds involved directly? 

Having realistic and sensible assumptions. But that is not always the case. I think that in return for giving that funding certainty to developers, you want, frankly, a better deal than if the project were to be put to market in an auction. 

At the same time, pension funds are uniquely placed to provide that certainty, given the volatility and geopolitical factors we have seen over the past few years. 

Another topic brought up at the panel was the idea of making deals with higher investment grade. Is that something that is expected to happen soon? 

The tricky part of achieving that is still on the contracting and revenue side. I think it is possible, but the other side of it is making sure that you have tier-one equipment, and tier-one contractors with really strong credit. 

The contracting market in the UK is not that strong. There is also a lot of construction risk and grid risk. It is not straightforward, but I think having stronger counterparts on the revenue side helps. You see some of the utilities like SSE and EDF offering floors, and I think those are valuable counterparties to make it closer to investment grade. 

While the contracting market in the UK is not strong, are there any countries where you see this strategy being more viable, like Italy? 

We have a small position in a joint venture through AGR Power. We are looking at the upcoming MACSE auctions later this year with great interest, as most investors are in this space. I think that it would be great if the UK followed suit. 

But actually, the UK's capacity market is well established. It is a small portion of the battery revenue stack. Whereas these MACSE auctions in Italy are much more of a bulk buy, giving sponsors almost a single revenue stream so that the operator can use that battery as needed. It is a different model, and it is quite nice to have that diversification as well. That may attract a different set of investors potentially if there are those contracted revenues.