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Forecasting Finance in a Turbulent Renewables Industry

Renewables funding has a bright future, according to analysis firm Frost & Sullivan. Its latest report estimates that the venture capital funding market for renewable energy will triple by 2020 due to positive regulatory policies, public support for lowering carbon footprints and technological innovation.

But while the future may be bright, the present is still cloudy. According to a study by Bloomberg New Energy Finance, new investment in clean energy fell 11 percent in 2012. So if the sky is the limit, why does the present horizon hang so low?

Contributing factors

“The economic crisis has made investors cautious about the energy sector,” said F&S analyst Vinod Cartic. BNEF said that as well as new investment being weighed down by regulatory uncertainty and policy changes in big markets such as the US, India, Spain and Italy, sharply lower prices of solar and wind technology also exerted downward pressure on investment.

According to BNEF, overall global investment in clean energy in 2012 was US$268.7 billion, down from $302.3 billion in 2011. F&S's Cartic termed 2011 “a stellar year for renewables deal-making”, so it is perhaps not surprising given the global economic crisis that 2012 didn't quite match up.

Angus McCrone, BNEF's chief editor, told REW that “there was a lot of gloom last year due to uncertainty about the direction of policy in major economies, and political arguments in countries such as the UK. So the atmosphere in the sector was negative for the last year, and shares hit an eight- to nine-year low in late summer. It wasn't a great year in terms of sentiment and investor confidence.”

Moving toward 2020

Will Bloomberg's negative factors hang on and influence Frost's projected upward momentum? 2020 is, after all, not so far away, and the policies that will encourage sufficient growth for countries to meet their targets need to be in place now if they're going to work by then. If regulatory uncertainty is currently dragging down investment figures, will an upward trend that depends on positive policies come to pass?

McCrone believes there is “good momentum” in the renewables sector globally. While some countries suffered investment setbacks in 2012, and even in Germany investment was quite a bit down on 2011 levels, in other countries such as Japan and South Africa, investment is up sharply. "If you take your eye off the problems in individual countries and look at the world picture, it's much more reassuring", said McCrone.

And Michael Liebreich, BNEF chief executive, said: “Rumors of the death of clean energy investment have been greatly exaggerated. Indeed, the most striking aspect of these figures is that the decline was not bigger given the fierce headwinds the clean energy sector faced in 2012.”

Focus on Europe

Both analysis firms see investment shifting away from Europe and toward emerging markets. But some analysts predict that growing regulatory certainty — even if policies are not what the sector would have wanted — will create growth in western Europe very soon.

Cartic, for one, believes that the current regulatory uncertainty “will provide for a clearer pathway in terms of positive policies. Germany is one such country that has been very positive regarding its policy on solar energy and wind energy. Companies are looking to invest in such havens of investment, and once regulatory policies clear up in Spain and Italy the same is likely to follow suit.”

For instance, Cartic said, Ikea Group, the world's biggest furniture retailer, will double its investment in renewable energy to $4 billion by 2020 as part of a drive to reduce costs. And he pointed out that in November 2012 the UK government passed a bill whereby households would have to pay an estimated £20 ($31) in 2013 to fund clean energy investment, growing to £95 ($148) in 2020. Energy companies would get £7.6 billion ($11.8 billion) from this to invest in low carbon power. According to Cartic, these measures point to a reversal of 2012's downward trend and the likelihood of significant growth by 2020.

Significant growth

While in many reports the Western European market is projected to stagnate while emerging markets take up the slack, F&S predicts significant growth for Europe.

“While China, India and other emerging economies will be playing a major role in the years to come, Europe is not expected to stay far behind,” said Cartic. He cited steps taken by the European Commission, including integrating renewable energy into the internal market; transforming infrastructure by identifying 12 priority infrastructure corridors; empowering consumers with micro-generation and smart meters; and driving technology innovation through R&D (for example, Stadtkraft is looking into osmotic power generation). Cartic expects that these steps will play a major role in keeping Europe in line with global growth. “Even though emerging economies will have bigger growth stories in the near future, Europe is expected to play its role as a market of significant growth,” he said.

McCrone told REW that “the EU has its renewable energy targets to 2020 and we think those are still credible. Europe is on course to meet those targets”, he said, providing policymakers can get it together. But there are other factors, including falling technology costs “so you can actually put in the same number of megawatts for less money than would have been the case before”, and some technologies' approaching competitiveness with fossil fuels. “This will generate some organic growth in rooftop solar in particular, in Mediterranean countries and even a bit for the north as well.” According to McCrone, even Spain is on track to meet its 2020 targets despite its current uncertainty due to disruptive changes in its tariff system and political direction.

Given Europe's maturity as a market, “in some countries the best projects have already been done — in Germany, Denmark, etc. — so that does limit the amount of investment in the next few years, in onshore wind in particular,” McCrone said.

An important factor for McCrone is the timing of offshore wind investment transactions. “These tend to be a billion dollars or more, so if you get two in a single year it tends to push up the overall EU investment number; if there are six in one year it's pushed significantly. A couple came through late last year and helped to support the EU numbers quite a bit,” he said.

Uncertainty about Germany's grid policy held back offshore wind investment in 2012, but “there is more confidence on that at the moment,” said McCrone. And he cited startup of the UK's Green Investment Bank as potentially helpful too. “While not putting money into new projects, its money is going into operating offshore wind projects, which will enable some money to be recycled to build more projects,” he said.

The last word

BNEF believes investment in 2013 will be up on 2012, close to the 2011 figure. Both policy certainty and emerging markets will help; and technology prices will not fall as fast in 2013 as they did in 2011-2012. BNEF also expects clean energy shares to rebound nearly 30 percent in 2013. 

Lead image: Airplane and clouds via Shutterstock

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