Memorandum by Renewable Energy Finance—Policy
Project, Chatham House
The Renewable Energy Finance-Policy Project
at Chatham House has sought to examine the finance sector perspectives
on renewable energy policy design and investment, by working directly
with renewable energy financiers, predominantly located in the
City.
This submission would simply like to provide
the Committee with the bullet point results, and attached short
discussion Summaries, of two meetings with financiers concerning:
(i) current investment conditions in the UK market;
and
(ii) the matter of how renewable energy trading
across the EU might affect renewable energy financing, including
cost savings.
This submission may therefore, have some bearing
on the following questions set out in the Call for Evidence:
— How does the UK's policy compare
with the United States, Australia, Canada, and other EU countries?
— What are the barriers to greater
deployment of renewable energy?
— Has Government support been effective
in leading to more renewable energy? Should such support favour
any particular form of renewable energy over the others? For instance,
what are the relative merits of feed-in tariffs versus the UK's
present Renewables Obligation Certificate (ROC) regime?
— How do the costs of generating electricity
from renewables compare to fossil fuel and nuclear generation?
What are the current estimates for the costs of "greener"
fossil fuel generation with carbon capture and storage and how
do these costs compare to renewable generation?
— Should British support for renewables
in other countries be allowed to contribute towards meeting the
target for the UK?
Two initial points may be useful to highlight:
1. There is now very significant interest and
activity from the finance and investment sector in renewable energy.
The latest data set from New Energy Finance, the global clean
energy financial research and information provider, demonstrates
the very significant growth in the last four years to a 2007 global
total of US$148.4 billion across all segments of clean energy
sector investment activity. Rising and high oil prices, climate
change, energy security are all driving the general perception
that this is a growth sector and will remain so.
The New Energy Finance analysis finds that the
2007 total is 19% of energy industry infrastructure investment
globally. This draws attention to the fact that the current, relatively
low level of renewable energy installation is a result of past
investment. The exponential year on year rise in investment from
2004-2007 indicates a stronger degree of energy sector change
is underway, which will start to become evident in the next years
as investment into expansion and technology feeds through into
installed capacity.
It also demonstrates that financiers and investors
perceive a commercially attractive economic upside to renewable
energy, and are actively looking for opportunities with the right
risk and return profile in which to invest.
A further reflection of this is the mid-2007
total of $18 billion under management in approximately 180 investment
funds focused on sustainable energy. The UNEP Sustainable Energy
Finance Initiative-New Energy Finance report Global Trends
in Sustainable Energy Investment 2007[115]
finds that both publicly quoted and private funds have seen high
growth since 2005 (43% and 59%, respectively). Private funds are
split across specialist and, more recently, generalist fund managers
who have recognised the value—and profile- of sustainable
energy investment.
Notwithstanding the credit crunch, renewable
energy continues to attract strong investment interest, albeit
within the context of greater caution in the overall marketplace.
2. Capital is mobile, as such, the UK has yet
to prove as attractive an investment location as other European
countries.
Renewable energy investment, in terms of projects
on the ground, is a policy driven market, as such the national
regulatory environment (including planning, grid as well as the
support scheme), and its stability (perception of regulatory risk),
is a key factor in whether investments proceed.
It may be relevant to consider this in the context
of UK government intention to develop its renewable energy industry
capacity short to medium term, lead on new technology development,
and capitalise on financing expertise in the City.
Summary points from Finance breakfast meeting
on UK investment issues, May 2008:
— Capital is mobile, and RE investment
in the UK has largely stalled, or is actively leaving, in favour
of other more attractive locations elsewhere in Europe or further
afield.
— Planning is a significant and immediate
problem, with delays, appeals, filing for non-determination and
last minute objections from the MoD (Ministry of Defence). MoD
was singled out as systematically challenging wind farms, and
for which solutions are required in the near term. Grid connection
issues and timing also directly impact ability to finance projects.
— There is no strong argument against
RO Banding ("pick the system and stick to it"), although
some financial institutions and certainly all the banks present
will need to see banding enacted into law before they can invest
against a higher ROC multiple, this creates a timing/delay issue.
Further uncertainty should be actively avoided (such as "its
all up for grabs on the RO" approach) as this could further
increase perception of regulatory risk.
— The state of the financial markets
means capital is being managed very carefully indeed, institutions
are "de-risking". Well structured and priced RE is able
to be financed, but through increased syndication, banks clubbing
together to bring about the right risk/return conditions for bigger
deals.
More generally, in the last 18 months, the large
financial institutions have arrived at a deeper level of understanding
about RE; they are "there" in terms of the more mature
renewable energy end (eg onshore wind) and want to put capital
in, under the right conditions. Finance is therefore not a constraint,
per se, in scaling up the sector.
The slightly longer Summary note of this meeting,
with greater information on the discussion, and views, from financiers,
is attached.
Summary points, Finance Roundtable on EU trading
of Renewable Energy, November 2007:
— There are already significant flows
into the sector from the mainstream finance and investment institutions;
there is no issue in the demand (liquidity) for Renewable Energy
(RE) assets, and a `glut of money' is available to invest in this
industry if the conditions are right.
— London-based financiers are actively
investing across Europe, and looking further afield.
— Investment is going into the UK,
but deal flow is not meeting potential. Notwithstanding a shift
to "banding", real concern remains around planning and
grid issues, as well as turbine supply issues. The UK competes
with other territories where those are expedited.
— Renewable energy trading across Europe
is conceptually a good idea, and could assist build-out, with
investment flowing to most favourable territories; however, there
are a number of issues and concerns. These include:
— length of time to "bed down"
a new system, and get investor confidence, given both the complexities,
and the fact this may be perceived as `unnecessary tinkering',
impacting confidence in financing stability;
— cost-savings are unlikely to meet
potential: for example investors opting to trade would need to
be attracted by high enough returns for the risk;
— linkage with domestic support schemes,
for example the impact on current ROC values in the UK;
— difficult domestic politics may arise
with the potential for public backlash, and may increase perception
of regulatory risk; and
— reduced pressure to solve grid, planning
or other domestic issues could actually result in ongoing delays
and reduced build overall.
— Any announcement that keeps the `door
open' to trading would need very carefully managed, including
very clear information on the impact on current schemes, including
ROC values, in order to avoid being counterproductive.
— The general conclusion is that it
is better to strengthen existing schemes, including the ETS, and
the existing support mechanisms, which investors are comfortable
with, rather than start a complex new scheme, which some indicate
may not actually help achieve the target, or could in fact prejudice
the ability to meet targets.
We would be happy to submit the more extensive
Summary note of the this Roundtable on Renewable Energy Trading,
if it would be helpful to understand the broader discussion; and
would be happy to help with any further information arising from
this submission.
NOTE: FINANCIERS MEETING, UK RENEWABLES ENERGY
INVESTMENT 28 MAY 2008
Financiers ranged across banks, private equity
(including projects and project developers) and specialised advisory,
covering Europe and the Middle East. The renewable energy sectors
covered were: onshore wind, offshore wind, solar, biomass and
energy from waste.
KEY ISSUES
— Capital is mobile, and RE investment
in the UK has largely stalled, or is actively leaving, in favour
of other more attractive locations elsewhere in Europe or further
afield.
— Planning is a significant and immediate
problem, with delays, appeals, filing for non-determination and
last minute objections from the MoD. MoD was singled out as systematically
challenging wind farms, and for which solutions are required in
the near term. Grid connection issues and timing also directly
impact ability to finance projects.
— There is no strong argument against
RO Banding ("pick the system and stick to it), although some
financial institutions and certainly all the banks present will
need to see banding enacted into law before they can invest against
a higher ROC multiple, this creates a timing/delay issue. Further
uncertainty should be actively avoided (such as "its all
up for grabs on the RO approach in the consultation) as this could
further increase perception of regulatory risk.
— The state of the financial markets
means capital is being managed very carefully indeed, institutions
are "de-risking". Well structured and priced RE is able
to be financed, but through increased syndication, banks clubbing
together to bring about the right risk/return conditions for bigger
deals.
More generally, in the last 18 months, the large
financial institutions have arrived at a deeper level of understanding
about RE; they are `there' in terms of the more mature renewable
energy end (eg onshore wind) and want to put capital in, under
the right conditions. Finance is therefore not a constraint, per
se, in scaling up the sector.
DISCUSSION
Finance sector view of UK market
— Investment has largely stalled or
leaving UK at present, due to regulatory uncertainty; planning
delays and other factors. One player has decided not to put further
money into the UK.
— There remains strong interest in
the sector, but capital is mobile and is going where it is easiest
to invest and make right level of return: markets such as Spain,
Germany, Ireland, Italy, Sweden and France are attractive, as
well as Eastern European countries (and the US and China) as growth
areas.
— Many financial institutions take
a long term view—20-25 years—they are looking ahead
to the regulatory regime across that timeframe, and how this might
change.
— Significant investment will be required
in renewables, infrastructure refurbishment and energy and utilities
more generally described as an "energy revolution".
This needs set out in an integrated way, in the form of an energy
strategy where all forms of energy production are more closely
linked together. This needs to provide clarity on the regulatory
underpinning across those areas (many renewables financiers also
finance other parts of the power or energy sector).
— Banks will have to have a degree
of comfort that they will get their money back, and in this regard
will have to be able to present on regulatory issues internally.
On the private equity side, major UK institutional investors (including
pension funds) are contributing to RE funds; at present there
is a consistent message back about delays and hold ups in the
UK sector due to various factors. There is currently seen to be
a disconnect between targets and implementation.
Water sector regulation is seen as relevant:
the Regulator provides certainty in five year blocks and advanced
warning about `tweaks' to inflation which the banks can incorporate
into sensitivity analysis undertaken on financial models for these
projects. This approach helps provide stability.
Planning and Grid
— Planning is significant problem,
with an expectation now that every project will be turned down
and go to Inquiry; a solution to the MOD's radar-related opposition
to projects is required—in the near term—otherwise
a number of projects will fail.
— A new planning regime, won't help
small and medium scale distributed generation, which are also
important for implementation of UK's targets.
There is frustration at the fact that Local
Planning Authorities are effectively carrying out national energy
policy.
The Scottish Executive has met with financiers
and is seen to be ahead on taking a more active stance with its
Local Authorities on planning matters, with the intention to actively
engage to raise awareness on RE. However, the sense is that a
real solution will require a strong stick or carrot at local level.
On solutions, relevant approaches noted:
— the current waste obligation on Local
Authorities which face penalties for non-compliance, this has
opened up significant investment activity;
— Spain takes a national level planning
approach—major infrastructure projects are completed within
a year;
— An enforced time period for assessment
through the Town and Country Planning Act, with payment of costs
for any overrun. One financier separately estimated that an average
nine month delay (project goes to Inquiry) has costs of £500,000.
Framing of the employment opportunities ("green
collar jobs") in the RE sector could help, but is largely
absent from the UK debate, including at a local level. This is
in contrast to places like Germany, where this factor has been
analysed, and is actively presented.
— Looking ahead: grid connection is
also a significant issue; if a project developer comes with a
grid connection slated for 2017 they will be told `come back in
2014', financiers will need to see this before they will invest.
STABILITY OF
RO REGIME
— There is no disagreement with ROC
banding approach at this stage, more a case of confidence that
it will be implemented. There was a sense of "keep the system
(enacted into law), but clear out the undergrowth if you want
it to work"—referring to grid and planning issues.
— It is very important not to create
further uncertainty over this in the Consultation process ie an
`its all up for grabs approach' as this will only increase the
perception of regulatory risk in the UK.
RO Banding levels
From a debt perspective offshore wind is risky—turbine
prices added on top of technology, operation and maintenance,
grid connection risks mean that at present the economics of offshore
are difficult: 1.5 ROCs "may not be enough". Banks need
to have an appropriate return for the risks they are taking, and
currently there are only a handful that will play in offshore
wind. Shell's decision to pull out of the London Array reflects
this.
However, if ROC banding tracks turbine price
in some way, then it will be buffeted by external market factors
and not be stable, plus raising tricky questions such as how often
it is reviewed etc.
RO versus feed-in tariff and the cost of capital
It has been suggested that a feed in tariff
system would be better from a consumer/taxpayer perspective, as
it reduces risk and makes the cost of capital lower.
However, there would be significant risks from
such a change due to the disruption it would cause. It was explained
that, in the case of a wind farm, there are four actors that share
the value: the developer, long-term equity investor, the bank,
and the turbine supplier (each will have to provide a level of
return for the risks they take, with the bank generally taking
less risk and a smaller slice). Each system (RO, FIT) would rebalance
the relative size of the slice that each of those actors would
get. Wind turbine manufacturers, for example, are pricing turbines
according to the market they are in, and what price can be tolerated
by the other players.
Heat and Biomass
This was not explored in the short timeframe,
however a question over the availability of biomass feedstock
for the heat market was raised, but not answered.
June 2008
115 www.sefi.unep.org;
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