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Financing Europe’s Climate Goals

On 9 April the European Commission adopted its new rules on State Aid in the energy sector. The measure is crucial for the future development of renewables, which for the time being at least are still almost wholly reliant on state hand outs in some form or other to secure private investment.

According to the Commission, the guidelines will support the 27 Member States in reaching their 2020 climate targets, while addressing the market distortions that result from renewable energy subsidies. It aims to achieve this by promoting a gradual move to market-based support.

Explaining the decision, Commission Vice President in charge of competition policy, Joaquín Almunia, said: "It is time for renewables to join the market. The new guidelines provide a framework for designing more efficient public support measures that reflect market conditions, in a gradual and pragmatic way. Europe should meet its ambitious energy and climate targets at the least possible cost for taxpayers and without undue distortions of competition in the Single Market. This will contribute to making energy more affordable for European citizens and companies."

The new guidelines, which will be valid from 1 July 2014 until the end of 2020, include key features such as the gradual introduction of competitive bidding processes for allocating public support and the gradual replacement of feed-in tariffs by feed-in premiums — a supplementary payment on top of electricity market prices — which aim to expose renewables to market price signals.

Under the terms of the plan, a pilot phase in 2015 and 2016 will allow competitive bidding procedures to be tested across a relatively modest share of Member States’ new electricity capacity. Furthermore, the new rules still allow smaller installations to be supported with feed-in tariffs or an equivalent under a special regime.

Renewables Riposte to Reform

Considering the implications of these new rulings on the future financial health of the European renewable energy sector, concerns were levelled that EU-wide reform of the feed-in tariff system could leave such developments vulnerable.

For example, in the U.K. the Renewable Energy Association (REA) trade group CEO, Dr Nina Skorupska, set the problems out clearly, saying: “This is a huge leap into the unknown. Policies which pay developers a fixed price for their power have been shown to work and deliver a major increase in renewable electricity — up to 15 percent last year. These new guidelines are based on economic modelling, which suggests that competitive mechanisms will deliver equally good results at lower cost to the consumer. We support measures to reduce policy costs as renewables continue their journey towards price parity with fossil fuels. But putting so much faith in untested theory is a big risk.”

The REA warns, for instance, that as a result there could potentially be a policy void for all non-wind projects between 1 MW and 5 MW.

Similarly, the European Wind Energy Association (EWEA) has raised concerns that the Commission proposal refers to phasing out support for renewable technologies that are expected to become "grid competitive" between 2020 and 2030, without specifically defining what “grid-competitive” actually means.

EWEA says the complex nature of the state aid guidelines risks exacerbating investor uncertainty around the renewables industry.  They argue that Member States must be “flexible in implementing the proposals.”

European photovoltaic trade group EPIA has also expressed doubts, arguing that the new rules risk discriminate against small-scale generation.

"To drive a better market integration of renewables forward, the Commission should rather focus on removing existing barriers on the market, instead of forcing renewables into a market which is simply not fit for them," said Alexandre Roesch, EPIA’s head of regulatory affairs.

Fanny-Pomme Langue, Policy Director for the European Biomass Association (AEBIOM), tells REW: “The objective of the Commission is to make renewable energy support more market orientated. In this debate, AEBIOM has raised the importance to take into account the fact that the bioenergy sector is not homogeneous with different sizes and processes. The guidelines leave the possibility to Member States to derogate from feed-in premium and the bidding procedure for small size installations producing renewable electricity. We welcome this possibility although we estimate that the thresholds are too low regarding the bioenergy sector”.

Indeed, perhaps the most damning indictment comes from Cooperatives Europe, representing 92 cooperative member organizations, with its president, Dirk Lehnhoff, saying: “Neither the threat of global warming nor the enormous potential for employment creation has been sufficient for EU policymakers to continue the shift towards more decentralized renewable energy systems in the EU. Maybe the current Ukraine crisis and the linked energy security issue will be their final wake-up call for change.”

Show Me the Money

In Global Trends in Renewable Energy Investment 2014, the Frankfurt School-UNEP analysis concludes that in developed economies, such as those in Europe, developers have indeed relied on subsidies to support the investment case. However, they also note that in Spain for example, where feed-in tariff support was removed in 2012, some modest renewable energy projects are still taking place. They cite the example of Grupo Enerpro, a Spanish developer that completed a 1-MW solar project without public subsidies, a first for the country, selling its output at the market price. Further PV projects are planned by Grupo Enerpro this year.

The Global Trends report also notes that clean energy funds had a strong 2013 with new financing vehicles also growing in popularity. According to their analysis crowd-funding is becoming a more mainstream way to raise financing for small-scale projects, in particular solar.

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Furthermore, the authors report evidence that institutional finance is increasingly moving into clean energy, with 2013 seeing record volumes and with development banks also seen as a “robust source of investment.”  An example comes from U.K. asset manager Glennmont Partners, which secured a EUR 50 million equity investment from the European Investment Bank for its Clean Energy Fund Europe II, which targets onshore wind, solar, biomass and small hydropower projects, the report says.

Conversely, asset finance of utility-scale renewable energy projects declined 13.5% in 2013, largely because of falling equipment costs, uncertainty over future energy support policies and reduced investment by utilities, the authors note.

Meanwhile, public stock market investment in renewable energy companies and funds recovered to average levels for the previous five years in 2013, at $11.1 billion, after a slump the previous year.

However, venture capital and private equity investment in renewable energy collapsed by almost half in 2013, its third consecutive annual decline, the report says. European private and VC investment was down $100 million to $500 million in 2013.

Nonetheless, one area that has attracted considerable interest over the last year is the growing use of bonds to finance renewable energy projects. This is a point picked up on by EY in the latest edition of its Country Attractiveness Index.

According to EY, the issuance of ‘green bonds’ soared to almost US$14 billion in 2013. EY suggests this indicates a “deep pool of capital for the clean energy sector to tap.” The group adds that bond funding is a common ?nancing mechanism for infrastructure assets with an established rate of return and the maturing renewable energy industry, with proven technology and a well understood resource risk is now much more suited to access these types of capital resources.

And, preliminary figures from Clean Energy Pipeline suggest a promising start to 2014, with new investment in the global clean energy sector totaling some $61 billion in the first quarter, a 14 percent increase on the corresponding period of 2013. In particular it highlights the strong performance of European offshore wind and note this is expected to continue in this quarter.

Clean Energy Pipeline’s numbers also indicate that the first quarter was notable for a number of clean energy equipment manufacturers completing secondary offerings, such as Danish wind turbine manufacturer Vestas, which raised $598 million.

Driving Renewable Energy Development

Placing this in an overarching policy context, late March gave a boost to the renewable energy sector when EU leaders — sitting in the European Council spring meeting — held a first policy debate on a framework for climate and energy policies for 2020-2030. They agreed that a final decision on the future framework should be reached by October 2014 at the latest. Significantly the Council also agreed that any agreement must be based on principles including the development of “a supportive EU framework for advancing renewable energies and ensure international competitiveness,” as well as “provide flexibility for the Member States as to how they deliver their commitments in order to reflect national circumstances and respect their freedom to determine their energy mix.”

It is no surprise that energy policy remains central to the European renewable energy business case. Nor is it surprising that any uncertainty in this regard tends to stifle investment. But it is also evident that many sources of finance remain available for European renewable energy developers - even where, in some cases, subsidies do not.

Lead image: Green Money Tree via Shutterstock

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