What Drives Financial Investment In Renewables?
The General Assembly of the United Nations has designated 2012 as International Year of sustainable energy. According to Secretary General Ban Ki-moon, we need a global clean energy revolution: a revolution to make energy available and accessible to all; to minimize climate risks; to fight poverty and improve the health of the planet, enhancing economic growth, peace and security.
Within this global revolution, there are plenty of spaces for the participation of private investors alongside governments and international institutions. But how are investors being encouraged to support this collective effort to transform the planet? Let’s take a glance at the factors which affect their preference of one country or a geopolitical area over another:
Regulatory Environment & Geographical Location
Firstly, it is important that there is a credible and stable regulatory and political environment, to give investors comfort that if there is a change in government the rules and regulations will not be rewritten over night. The financial community needs to know that the decision to support alternative energy is robust and is firmly supported by the wider community, and that there is an attractive investment environment.
Secondly, investors will consider the geography of the country and how this will impact the mix of energy – renewable and traditional – in which they will invest. For example, wind power is attractive in France, while solar is attractive in Italy and Spain and hydro in the Nordic countries.
Turkey has developed an energy plan which is considered to be very attractive, as it includes assistance for infrastructure modernisation. The geological nature of Turkey offers the opportunity to develop all the main renewable energies and the environmental awareness of the population has grown significantly in a few years. The energy mix of each country is also important because it determines the payback period required for the investment. For example, while bio-mass is a good choice in the absence of other resources, particularly as it stimulates employment in economically weak rural areas, and it is essential in reducing greenhouse emissions, the technology is slower in producing profits.
Thirdly, the geopolitical position of the country is important. The financial community knows that any country which relies on Middle Eastern oil, Russian gas or Algerian methane may suffer supply constraints due to the evolution of the geopolitical environment. The political instability of some countries in the Mediterranean, Persian Gulf, and Central Asia has plunged Europe into periods of energy crisis before – in 1973 for example. It was from moments such as this that the interest in renewable energy, and its promise of energy self-sufficiency initially developed.
The energy mix of each country is also important because it determines the payback period required for the investment.
Fourthly, the attractiveness of a country’s regulatory environment and the incentives for investment are critical. Let’s take for example three countries that have maintained a balance between economic development and the environment, and which have considered a blend of traditional and new sources of energy.
To meet its energy needs, South Africa launched a development plan for 50,000 MW by 2030. 42 percent of which will be covered by renewable energy across wind, solar / photovoltaic, biomass and hydroelectric power. This is against a backdrop of political stability, economic growth and attractive regulatory framework.
Bulgaria is now attracting capital for solar and wind power, with a focus on solar. While the duration of incentives are only decided at the time of construction of the plant, the typical rate is 25 years for solar compared with 15 years for wind.
Within four years, Italy has become a European leader for solar power, due to the incentives within the Energy Bill (Conto Energia). While much investment is focused on installing equipment; that is imported from Germany and China, Italy is clearly building growing expertise in this area. Due to the financial crisis, both at a European and Italian level, and to different emerging priorities for the Government the attitude, and laws, that pushed the industry in the past years have changed very often.
After less than one year since it approved the 4th Conto Energia, the Italian Government, through its Minister of Economic Development, is discussing the 5th version of the law that should be approved this month and operative from July 2012. It will be more restrictive (rumors forecast a possible cut of 50% of the previous incentive fares) but the most critical implication of the new law is that a new law is again under discussion. Uncertainty on ROI is the foremost factor that is freezing most of the investments in the sector. Big solar plants (developed from both Energy industries and private companies) need a robust financial leverage and the current conditions push investors to stay on hold (in the best case) or to look for more attractive sectors.
Italy currently has about 159,895 renewable energy plants, of which there are 2,729 hydroelectric, 487 wind, 155,977 solar, 33 geothermal, 669 bio-energy. Collectively, these produce almost the same amount of energy as two nuclear power plants.
The challenge for governments now is to balance incentives with a clear industrial direction, to help sustain the young industries born around renewable energy and stimulate the market for greater investment in R&D. This not only helps to make the further development of plants more cost effective, but also helps to generate profits by exporting technology to other developing markets.
This article is part of a report “Europe’s Energy – At A Crossroads”, published on April 15, 2012 by MSLGROUP on the state of the energy industry in Europe. With the backdrop of socio-economic challenges facing other countries including climate change, growing fuel poverty and security of supply, MSLGROUP’s dedicated energy team has to confront various issues every day on behalf of our clients and in this report, we share our thoughts on these issues. MSLGROUP has a growing footprint across Europe and beyond, and a fantastic team in place to help our clients rise to the challenge of communicating effectively with stakeholders around the world on these and other critical issues.
Alessandro Chiarmasso’s expertise lies in travel and tourism, sustainability and energy as well as crisis and issue management. The corporate practice lead at MSL Italia, he has led teams for clients including Nestlé, Volvo Trucks, American Express Bank, British Airways and ME Making Energy, one of the leading EPC contractors in the photovoltaic sector in Italy.
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