European Parliament roundtable: At the intersection of financing and policy – investing in low-carbon energy technologies in the EU

How to address these financing needs – particularly to meet the SET-Plan and 2020 energy targets –was the topic taken up by a workshop on 26 April organised by the European Parliament’s Committee on Industry, Research and Energy (ITRE). The event allowed for the sharing of experience and perspectives by private investors, venture capitalists with investments in innovative energy technologies, and the European Investment Bank (EIB).

Financiers and investors manage risks against expected returns; therefore, policy needs to be well designed so that the entire low-carbon energy package is attractive, not just the support mechanism. Investors need to be convinced about the long-term viability of clean energy – both technologically and administratively – to add additional SET-Plan technologies to their portfolio.

“The 2030-2050 debate needs to get underway already, as the 2020 time horizon is too short for investment in longer-term assets,” said Kirsty Hamilton, Associate Fellow at the think-tank Chatham House. “So far, administration has ruled both infrastructure and innovation.”

Venture capital is one key driver for innovation. In Europe, however, it faces a range of challenges. Though there are successful innovations and capable entrepreneurs, the EU does not have an uninterrupted supply of venture capital. According to participants at the workshop, Europe it is only at one-tenth the level of American venture capital investment.

“The world economy has begun a transition to low-carbon energy technologies,” said the Austrian MEP Paul Rübig. “The EU cleantech industry needs – by focussing on innovation – to reposition itself in view of a changing landscape. Also, robust energy policy is more important than ever to rebuild market confidence”

Resources and policy: the best recipe for capital

Insurance is another crucial component for successful financing and implementation of technology. Investors in clean energy say they need sound regulatory environments, attractive risk-return profiles and stable local conditions.

Karsten Löffler, Head of Operations and Projects for private insurers Allianz Climate Solutions, said low-carbon and clean energy is high on the insurance agenda but it is difficult to deal with the variable regulations that characterise the low-carbon energy world.

Capital market risks and climate change are two strategic areas Allianz and other private insurers focus on. The group has invested EUR 500 million in more than 20 wind parks (with a total capacity 450 MW) across Italy, Germany and France

By the end of 2012 the Allianz renewable energy portfolio will be expanded to a total value of EUR 1 billion.

Incentives and obstacles

Above all, investors in low-carbon energy are looking for a stable investment market. Karsten Löffler said that Allianz looks for low and medium-risk investments where the desired returns can be satisfied.

Return-risk profiles define flows in clean energy projects. Investors need stable country-specific and site-specific factors, including:

• economic stability (e.g. low inflation)

• good infrastructure (good quality roads, rails, power grids, etc.
• acceptance of municipalities for investments
• recycling requirements for used clean energy equipment (e.g. in solar panels, the disposal of thin film photovoltaic modules)

“Will feed-in tariffs be reliable in 20 or 25 years? There are currently doubts about this in the markets. The state of feed-in tariffs and inflation fears, for example, are decisive for further investments,” Karsten Löffler said.

Are CCS and offshore wind energy insurable?

Carbon Capture and Storage (CCS) is crucial for the transition to a low-carbon economy. But according to Mr Löffler, CSS is currently non-insurable, as the long-term future of underground CO2 storage is unknown. Monitoring procedures are unclear, and it is difficult to determine risk – and hence very difficult to insure.

The priority SET-Plan technology portfolio includes wind, solar, bioenergy, CCS and Smart Grids. So far the returns on CCS are small and there are correspondingly few investments being made.

Similarly, offshore wind parks are exposed to several different risks, such as the unclear effect of sea water, submarine earthquakes and extreme weather conditions. It is relatively complicated to find the insurance cost for the running phase; however, in the long-term it will be insurable.

From insurance to endurance

Attention has recently been shifted from the United States and the EU to Asia. According to New Energy Finance, Chinese wind new-build finance grew by 27% (USD 21.8 billion) in 2009 over the previous year, and solar was up by 97% (USD 1.9 billion). In 2009 China became the largest wind turbine manufacturer – and is already the largest solar manufacturer.

Markets, technology, mass manufacturing, regulation and capital for low-carbon technologies are moving from being concentrated in the European Union to a global framework.

Guido Agnostinelli, Senior Associate at Good Energies, a for-profit venture capital investment fund, said that it is only a matter of time before technology innovation, as well as skilled engineers, entrepreneurs and students will start to move elsewhere as well.

“If technology continues to be created and developed abroad it will be increasingly difficult for the EU to be a dominant player,” Mr Agnnostinelli said, although “Europe still maintains a remarkable base of educated human capital with leading edge know-how.”

‘Booming but fragile’

The market for clean technology in the EU is booming but still fragile, and is highly dependent on policy measures. Single countries can disrupt global markets, as was the case for the 2008 solar photovoltaic market slump in Spain.

Some of the best ways of improving the current environment are attracting a larger institutional investor base to venture capital, increased public procurement for R&D for small and medium-sized enterprises (SMEs), and increased public funding for basic R&D.

EIB and financing low-carbon technology: the scale of the technological challenge

The European Investment Bank (EIB) can bring unparallel access to capital and be a valuable risk-sharing partner, in part by leveraging maximum investment from a limited Community pot.

There has been a large increase from the EIB in the renewable energy and energy efficiency sector in the past years. Since 2004, Bank loans for renewable and energy efficiency projects have increased from 25% to more than 50% of its total energy production lending.

The EIB is also involved in broad 2020 discussions and brings expertise to bear on goals of the low-carbon sector.

“There is a need for a greater mix of technologies,” said Edward Calthrop, Senior Economist with the EIB “But equally important is the time element and the sequencing of investments. Low-carbon technologies cannot be implemented without proper infrastructure; therefore, investment and policy decisions need to be made at appropriate times.”

Marguerite Fund and Risk-Sharing Finance Facility

Two EIB programmes that promote a low-carbon energy infrastructure agenda are the Risk-Sharing Finance Facility (RSFF) and the Marguerite Equity Fund.

The RSFF scheme aims to improve access to debt financing for private companies or public institutions promoting activities in the field of R&D. The principle is credit risk sharing between the European Community and the EIB. It helps extend the ability of the Bank to provide loans or guarantees for investment with a higher risk and reward profile, such as low-carbon energy technologies.

RSFF has a EUR 2 billion capital cushion: EUR 1 billion from the EIB and the same amount from the Commission’s Seventh Research Framework Programme, enabling the Bank to lend more than EUR 10 billion for R&D investment.

The Marguerite Fund is a pan-European equity fund which aims to act as a catalyst for infrastructure investments implementing EU policies in the areas of climate change, energy security and trans-European networks. Marguerite is the first joint initiative of Europe’s leading public financial institutions.