How to address these financing needs – particularly to meet theSET-Plan and 2020 energy targets –was the topic taken up by a workshopon 26 April organised by the European Parliament’s Committee onIndustry, Research and Energy (ITRE). The event allowed for the sharingof experience and perspectives by private investors, venturecapitalists with investments in innovative energy technologies, and theEuropean Investment Bank (EIB).
Financiers and investors manage risks against expected returns;therefore, policy needs to be well designed so that the entirelow-carbon energy package is attractive, not just the supportmechanism. Investors need to be convinced about the long-term viabilityof clean energy – both technologically and administratively – to addadditional SET-Plan technologies to their portfolio.
“The 2030-2050 debate needs to get underway already, as the 2020 timehorizon is too short for investment in longer-term assets,” said KirstyHamilton, 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 innovationsand capable entrepreneurs, the EU does not have an uninterrupted supplyof venture capital. According to participants at the workshop, Europeit is only at one-tenth the level of American venture capitalinvestment.
“The world economy has begun a transition to low-carbon energytechnologies,” said the Austrian MEP Paul Rübig. “The EU cleantechindustry needs – by focussing on innovation – to reposition itself inview of a changing landscape. Also, robust energy policy is moreimportant than ever to rebuild market confidence”
Resources and policy: the best recipe for capital
Insurance is another crucial component for successful financing andimplementation of technology. Investors in clean energy say they needsound regulatory environments, attractive risk-return profiles andstable local conditions.
Karsten Löffler, Head of Operations and Projects for private insurersAllianz Climate Solutions, said low-carbon and clean energy is high onthe insurance agenda but it is difficult to deal with the variableregulations that characterise the low-carbon energy world.
Capital market risks and climate change are two strategic areas Allianzand other private insurers focus on. The group has invested EUR 500million 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 beexpanded to a total value of EUR 1 billion.
Incentives and obstacles
Above all, investors in low-carbon energy are looking for a stableinvestment market. Karsten Löffler said that Allianz looks for low andmedium-risk investments where the desired returns can besatisfied.
Return-risk profiles define flows in clean energy projects. Investorsneed 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. insolar panels, the disposal of thin film photovoltaic modules)
“Will feed-in tariffs be reliable in 20 or 25 years? There arecurrently doubts about this in the markets. The state of feed-intariffs and inflation fears, for example, are decisive for furtherinvestments,” Karsten Löffler said.
Are CCS and offshore wind energy insurable?
Carbon Capture and Storage (CCS) is crucial for the transition to alow-carbon economy. But according to Mr Löffler, CSS is currentlynon-insurable, as the long-term future of underground CO2 storage isunknown. Monitoring procedures are unclear, and it is difficult todetermine 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 andthere 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 andextreme weather conditions. It is relatively complicated to find theinsurance cost for the running phase; however, in the long-term it willbe insurable.
From insurance to endurance
Attention has recently been shifted from the United States and the EUto Asia. According to New Energy Finance, Chinese wind new-buildfinance 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 thelargest wind turbine manufacturer – and is already the largest solarmanufacturer.
Markets, technology, mass manufacturing, regulation and capital forlow-carbon technologies are moving from being concentrated in theEuropean Union to a global framework.
Guido Agnostinelli, Senior Associate at Good Energies, a for-profitventure capital investment fund, said that it is only a matter of timebefore 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 beincreasingly difficult for the EU to be a dominant player,” MrAgnnostinelli said, although “Europe still maintains a remarkable baseof 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 candisrupt global markets, as was the case for the 2008 solar photovoltaicmarket slump in Spain.
Some of the best ways of improving the current environment areattracting a larger institutional investor base to venture capital,increased public procurement for R&D for small and medium-sizedenterprises (SMEs), and increased public funding for basicR&D.
EIB and financing low-carbon technology: the scale of the technologicalchallenge
The European Investment Bank (EIB) can bring unparallel access tocapital and be a valuable risk-sharing partner, in part by leveragingmaximum investment from a limited Community pot.
There has been a large increase from the EIB in the renewable energyand energy efficiency sector in the past years. Since 2004, Bank loansfor renewable and energy efficiency projects have increased from 25% tomore than 50% of its total energy production lending.
The EIB is also involved in broad 2020 discussions and brings expertiseto bear on goals of the low-carbon sector.
“There is a need for a greater mix of technologies,” said EdwardCalthrop, Senior Economist with the EIB “But equally important is thetime element and the sequencing of investments. Low-carbon technologiescannot be implemented without proper infrastructure; therefore,investment and policy decisions need to be made at appropriatetimes.”
Marguerite Fund and Risk-Sharing Finance Facility
Two EIB programmes that promote a low-carbon energy infrastructureagenda are the Risk-Sharing Finance Facility (RSFF) and the MargueriteEquity Fund.
The RSFF scheme aims to improve access to debt financing for privatecompanies or public institutions promoting activities in the field ofR&D. The principle is credit risk sharing between the EuropeanCommunity and the EIB. It helps extend the ability of the Bank toprovide loans or guarantees for investment with a higher risk andreward profile, such as low-carbon energy technologies.
RSFF has a EUR 2 billion capital cushion: EUR 1 billion from the EIBand the same amount from the Commission’s Seventh Research FrameworkProgramme, enabling the Bank to lend more than EUR 10 billion forR&D investment.
The Marguerite Fund is a pan-European equity fund which aims to act asa catalyst for infrastructure investments implementing EU policies inthe areas of climate change, energy security and trans-Europeannetworks. Marguerite is the first joint initiative of Europe’s leadingpublic financial institutions.