Why Renewable Energy is an attractive investment

epgThe European Generation Strategy Summit & Power Project Financing and New Technologies Forum took place in Vienna on 27-29 November 2013, attracting high-end players from the European energy market and politics. The European Sting, a keen follower of Energy Affairs at the Old Continent, was there to contribute to the dialogue and report on the event. The participants discussed the evolution of the EU energy strategy and possible future challenges before it, raising issues of reshaping the traditional energy industries with smart integration of renewable energy sources (RES) into the energy system.

Market Directions

Over the last two decades the structure of the European energy market has dramatically changed, as principles of sustainability, economic efficiency and energy security became widely embraced by society. Today all European states demonstrate a willingness to adhere to these principles and most of them show a readiness to promote sustainable development through the use of alternative energy sources. For instance, in Norway almost all electricity is generated by water sources. And Latvia, hugely dependent on Russian oil and gas in the past, is now meeting national demands for electricity by using hydro energy (54% of overall electricity supply) and biomass (3% of overall electricity supply). Other countries are actively developing solar and wind farms, with Spain being the absolute leader in this segment of the RES market.

However, not all participants were optimistic about the RES revolution in the European energy sector. Opponents pointed out that renewables disturb the balance of the energy system, are costly to produce and too expensive to consume and are not worth to be supported and developed in the future.

On the other hand the impact of the global environmental crisis has become impossible to ignore, calling the international community to find solutions fast. Andre Jurres, CEO, NPG Energy, in his “Future of Energy” speech emphasized that with a constantly growing population, energy consumption will only continue to rise, making international environmental goals a mere ambition, impossible to achieve.

NPG Energy sees the use of alternative energy resources as a path to sustainability and the only way into the future. However, at the moment progress along this path is rather slow and requires large financial contributions and constant investment.

In view of the importance of finance for anything to move forward a special day was dedicated to Energy Project Finance during the conference. This article analyzes the outcomes of the special financing day, discussing the key trends, structures and methods for finding investments to implement alternative energy projects.

Financing Baseload and Renewable Energy Projects

The financial panel of the Forum included UniCredit Bank, EnerCap Capital Partner, European Investment and Partners, Deutsche Asset & Wealth Management International GmbH. The key players on the financial market showed interest in the development of renewable energy projects. Energy sector experts discussed deals that equity investors are seeking and the terms they are ready to offer.

Daniel Kockisch, UniCredit Bank Austria Project and Commodity Finance Director, spoke about financial structures and the requirements of financial institutions for energy projects. Marta Navarrete, Former EU Commission Program Manager explained how to deal with the financial needs for infrastructure development and transitions. Jim Campion, EnerCap Capital Partner, addressed the audience on how to engage institutional investors for financing renewable energy projects. The panel was followed by numerous questions and a fruitful discussion.

Potential Investment for Renewable Energy Projects

Renewable energy projects are recognized as socially beneficial are often stimulated and supported by government through energy market instruments such as feed-in tariffs, premium, renewable obligations, tenders, fiscal incentives. This support makes renewables an attractive product for private equity funds, equity, capital/project grants.

Apart from venture capital, traditional banks also have an interest, introducing special programs to offer debt finance mechanisms, mezzanine debt, senior debt, and guarantees.

Similarly, international financial institutions, such as EBRD, IFC, European Investment Bank (EIB) are participants of the energy market. For instance the EBRD has introduced alternative energy programmes in Armenia, Georgia, Russia, Ukraine, Bulgaria and Estonia.

Governmental grants and export agency guarantees are another way for securing finance in this sphere.

Barriers to finance RES

With all that said, it is necessary to admit that RES projects are controversial. First of all they are risky, i.e. investors have a wide range of risks to consider, starting with country risks, such as change of government policy to technological, administrative procedures. Second, the subsidies granted to alternative energy projects are under a great deal of political influence and, thus, depend on how long the government can afford to subsidize and invest in innovations.

Stabilizing Policies, Rules and Regulations

These risks may be overcome by providing a stable legal system and guarantees to investors that conditions would not change in future. According to Dr Bjorn Peters, representative of Deutsche Asset & Wealth Management International GmbH, investors seek stability through understanding of the future. Even ‘what if’ scenarios and trends are taken into account by investors when considering a deal.  RES regulation should be predictable and based on a concrete set of rules that is not likely to change or be politically affected.

Conclusions

According to the World Economic Forum, energy production remains the main contributor to global warming. Therefore sustainability is critical to the overall energy architecture. In this path local government plays a key role in this process as it can mitigate risks and provide guarantees for investors. Moreover, energy sector to develop need more scientific innovation to make RES more market efficient.

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