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Renewable energy financing hit by political uncertainty and financial woes

The Eurozone debt crisis and recent negotiations over US sovereign debt have had a negative impact on renewable energy financing, according to Ernst & Young.

By Kari Williamson

According to Ernst & Young's latest global renewable energy country attractiveness indices, financing costs have risen to new highs in the most vulnerable economies, while less exposed markets are experiencing a return towards more competitive funding terms.

UK rising on EMR

The UK has risen from 6th to 5th position within the Renewable Attractiveness Index due to the Electricity Market Reform (EMR) White Paper.

The EMR is designed to provide a robust regulatory framework to enable the UK market to compete for scarce capital required for new energy infrastructure. This has resulted in the UK switching places with Italy - which dropped several points due to its sovereign credit rating downgrade and reduced access to finance for the renewable energy market.

Cloudy horizon

A consistently difficult planning regime, and uncertainty regarding the Renewable Energy Banding review, paints a cloudier outlook for renewable energy in the UK.

Following on the back of aggressive reductions in the level of support for small scale renewable energy, recent data shows that half of all onshore wind farms in England and Wales are being rejected at the planning stage, raising doubts as to whether the UK will reach its 2020 renewable energy target.

Whilst climbing a spot in the Index measuring renewable energy investment attractiveness, the UK loses a point in the All Renewables Index.

Debt and austerity measures

Ben Warren, Ernst & Young’s Environmental Finance Leader, explains: “The dual pressures of the continuing sovereign debt crisis and Government austerity measures in a number of mature renewable energy markets are weighing heavily on the global renewable energy sector. The spotlight is firmly focussed on value for money and affordability when it comes to decarbonisation.

“At the same time, the cost of finance is proving reasonably volatile, with sovereign risk being only partly countered by increasing competition from lenders. Meanwhile, institutional capital, hitherto frustrated with under-performing equities markets, is increasingly looking at infrastructure, including renewable energy as a relatively safe haven to deploy their not inconsiderable funds.”

End of nuclear?

Following the Fukushuma nuclear disaster, several countries have reviewed their policies for new nuclear power.

Japan has now scrapped plans for new nuclear development, but in the short-term is focusing on rebuilding infrastructure, reducing energy demand and investing in natural gas to build up base-load capacity, which caused the country to fall one place in the renewable energy index.

Germany climbed two points in the index, up to third place, having announced an end to its nuclear programme as of 2022, while France remained static in the index at seventh despite re-affirming its support for nuclear power.

Warren says: “Government and corporate responses to the Fukushima nuclear disaster and the Arab Spring put more emphasis on the strategic importance of energy security, which will demand an increasingly important role for renewable energy.

“During this period of austerity however, project developers, promoters and owners will have to look for increasingly cost effective finance, which in itself is likely to mean more innovation in financing structures, and new sources of capital entering the market.”

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