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Comment: How to re-energise investment in Europe’s renewable industry


Louise Ward

Louise Ward at Low Carbon provides an insight into how investment in renewables projects is faring across the market.

As the race to combat global warming heats up, investment in renewable energy production is also gathering pace. Last year, more than $285 billion was invested in renewable power and fuels (not including hydropower projects >50 MW). This represents a substantial 5% increase on 2014, according to the REN21 Global Status Report, and makes 2015 the biggest year for renewable investment ever.

This increase was helped in large part by China. As the world’s biggest investors, the Chinese invested some $102.9 billion in 2015, around 17% more than 2014 and more than twice as much as the next largest investor. However China is not alone. Investment rose considerably across China, India, Africa and the Middle East, and the United States, with BRICS nations now making up six of the top 10 largest markets for investment in renewable energy production worldwide. 

However, investment levels vary significantly across the globe. In Europe, the level of investment fell by 21%, despite COP21 in Paris putting the spotlight firmly on climate change last year. Within Europe, the picture differs markedly too. While Germany still ranks sixth globally for total investment, investment in renewable energy almost halved last year, falling by 46% to $8.5 billion, as changes were made to the country’s energy policy framework. Comparatively, however, investment levels in the UK rose quite significantly by around 25 per cent, despite the price of fossil fuels falling last year.

Over the last few years, the UK has been quietly yet assertively establishing itself as a renewable energy hub and is now ranked as Europe’s largest renewables investor and the fourth largest in the world, according to a recent report by REN21. Home to Europe’s largest floating solar park as well as the world’s largest offshore wind farm, the UK has been slowly but surely upping its investment in renewable energy, and it’s now paying off. During the first three months of this year, renewable sources generated more than a quarter of all electricity generated in the UK, according to the Department of Energy and Climate Change (DECC). New figures from Carbon Brief showed that May was also a record-breaking month, as for the first time solar panels generated more electricity than coal. 

However, as we’ve seen in Germany, growth can be threatened by unfavourable policy changes. Meanwhile instability in the market can negatively impact investor confidence. Without a stable regulatory backdrop, investors are less willing to make funding available for renewable energy projects. This means that many planned developments may never be realised, while targets agreed at COP21 last year could quickly become unachievable. 

How can European countries become more attractive for investors?

To ensure that investment in renewable energy remains on track, governments must give investors the confidence to invest in long-term buy and hold assets, such as wind and solar projects. By creating a stable environment, countries can attract institutional investors from foreign and domestic markets, who are looking for reliable and long-term returns. But how can the regulatory and policy risks be mitigated? 
 

  1. Adopt a long-term approach. Investment cycles extend far beyond the four or five year terms that political parties are typically in power, and there must be a willingness to reconcile these two competing timeframes. 

     
  2. Adopt a more global view. It’s important to examine what’s working elsewhere around the globe and what’s not. For many years, Germany has provided a great example to follow, however the shift to the auction regime for solar has not been without its problems. Despite investment in the country falling last year, Germany continues to benefit from a high degree of Government support and long-term policy certainty, which is what investors want to see.

     
  3. Communications must be improved. Governments can reduce uncertainties through better-communicating the rationale behind decisions – demonstrating they are driven by robust evidence rather than ideology.   
     

Provided political and regulatory risks are managed, energy infrastructure offers an attractive proposition for private capital. Renewable energy assets are a known quantum - providing long-term inflation-linked investment returns and could provide liability matching assets for pension schemes in particular. Institutional investors such as pension funds could make an enormous contribution to developing the clean energy sector of the future.

With a stable regulatory framework in place, renewable energy can offer attractive returns to institutional investors, as evidenced by three major pension funds in continental Europe recently announcing plans to boost investments in low-carbon industries by more than $31bn (£20bn) by 2020. Further inspiration can be sought from major retailers such as IKEA and Marks & Spencer, which have unveiled ambitious green investment plans. 

Not only can renewable energy combat climate change, it has been proven to bring down the wholesale costs of electricity significantly. The government must listen to the public, and take decisive steps to prevent global warming and encourage greater investment in new renewable energy projects, by establishing a more stable regulatory framework for renewable energy assets both operational and in development. Only then will institutional investors truly appreciate the compelling financial and climate case for investment.

With the official signing of the Paris Agreement, governments worldwide have a responsibility to reduce carbon emissions. Here at Low Carbon, we believe that we must achieve a true low-carbon economy, and act now to stop or reverse climate change before the damage is irrevocable. Investment in renewables is indispensable to this process and goes hand-in-hand with the cultural shift that we need to take place, where we reduce our reliance on fossil fuels. 

A broader, more diverse energy mix which includes solar and wind, for example, will not only benefit our environment but will also enhance the sustainability of our energy industry as a whole. Renewable energy is a core, resilient electricity source that’s here to stay and governments should recognise this. To ensure that COP21 targets remain achievable, governments must act quickly to ensure they are offering institutional investors an attractive environment in which to make more long-term investments in renewable energy production. 
 

ABOUT THE AUTHOR
 

Louise Ward is investor relations director at Low Carbon.

FURTHER INFORMATION
 

Low Carbon, http://www.lowcarbon.com/ 

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