Doubling up

The share of renewable energy in the European Union’s energy mix currently stands at 9%. But for the decade ending 2020, Europe wants 20% of its energy to come from green sources. To do that, it needs to find an extra €35bn a year, writes Bruno Alves

Here's the good news news: Eurostat, the European Union’s (EU) statistical arm,announced in April that the share of renewable energy in the EU’s energy mix has almost doubled, increasing from 5.4 percent in 1999 to 9 percent in 2009. 

That augurs well for the EU’s target of having 20 percent of its power generation come from clean energy sources by 2020. 

After all, its member states have already managed to almost double the EU’s renewable energy capacity in a decade when it wasn’t even compulsory for them to do so (until 2008, renewable targets were non-binding). The bad news is that business as usual will not be enough to achieve the EU’s energy goals to 2020. 

According to a recent study by Ecofys, Ernst & Young, the Fraunhofer Institute and the Technische Universitat Wien, the EU is currently investing an average of €35 billion per year in the renewables sector, most of it coming from the private sector. But to hit its 2020 renewable targets, it will have to double that amount to €70 billion a year and, under current conditions, the market will not plug that gap, the study states. 

To make sure it does, the EU and its member states should implement a series of measures, the study suggests, including increasing the European Investment Bank’s role in providing equity, debt and guarantees to renewable deals; encouraging governments to invest alongside the private sector for bigger projects, to lower the cost of finance; and reducing support for innovative technologies
while focusing on more cost-effective options to get the job done (this could save €9 billion a year, the study estimates). 

Crucially, the EU is already on the right track in one of the areas that matters most to the private sector – regulation – argues Peter Dickson, an investment director at London-based fund manager BNP Paribas Clean Energy Partners: “In general, regulation in Europe has created the most secure and vibrant renewables market in the world. We are very comfortable with the regulatory
climate in Europe and believe the EU’s 2020 goals are entirely feasible,” he states.

Dickson believes, though, that it is time for renewables to be thought of as an indispensible part of the European power market, and not just a niche market.

“Europe is a net importer of energy and is not self-sufficient,” Dickson says. “Renewables should be seen as just another component of the power market. The sooner they are seen as a necessary part of the power market the better.”

That shift in perspective will make a difference to the development of the renewables market and help frame its perceived high costs, Dickson suggests. “We need to internalise the costs of risk to the energy supply, importing fuels and environmental damage when we speak of renewables. Once those costs are internalised, we will find that the overall pass-through cost [of renewables] to consumers is not so high,” he concludes.

‘Subsidies inherently risky’

You know the old saying ‘if something looks too good to be true, it probably is?’ Well, that is the prism through which Fitch, the ratings agency, is considering analysing subsidy regimes to renewable energies that seem overly generous.

“Fitch will seek to evaluate whether particular features of a system’s structure (e.g., regulated end-user tariffs), or subsidy levels favouring excessively generous investor returns, may put pressure on an incentive system’s sustainability,” the ratings agency wrote in a recent report.

Fitch continues: “Should this be the case, Fitch will factor the risk into its analysis by testing a project’s ability to withstand severe temporary liquidity stresses as well as permanent reductions in the level of subsidy and may even decline to rate a debt instrument in cases of particularly high uncertainty.”

The initiative was the result of retroactive cuts imposed on the Spanish and Czech photovoltaic sectors by their respective governments.

As Fitch puts it: “[The] risk of reduced subsidies [is] inherent to renewable energy”.

The idea of framing particularly generous subsidy regimes in this context seems wise. Maybe those investors now caught in the Spanish solar debacle would have appreciated the guidance.