Investment climate in Europe is getting worse


November 23, 2017

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Feeling the Monday blues? Then don’t read the next paragraph. Seriously, go and listen to ‘Pet Sounds’ or something. Read P.G. Wodehouse. Just don’t read this! You have been warned.

You see, I spent some time last week reading WindEurope’s latest ‘position paper’, called ‘Creating A Business Case For Wind After 2020’, and the first line is a tad bleak. It says that “the European power sector faces a deteriorating investment climate [because] the risk faced by investors in capital-intensive assets is too high… [and] wholesale electricity prices are too low and volatile”.

There are a few reasons for these low electricity prices: oversupply, sluggish growth across Europe, and falling coal and gas prices globally. These are a challenge for all investors in major power projects but are an even bigger headache for those in wind. The price of electricity usually falls when wind farms are at their most productive; and the structure of the grid stops wind competing on a par with conventional sources.

The paper adds the lack of a “level playing field” means the European Union risks failing to achieve its 2030 decarbonisation goals in the most cost-effective way. Still feeling ‘Mondayish’?

The plus side is the paper suggests solutions, and they are good ideas. But we still doubt that they would be widely implemented.

Its first proposal is that the EU should encourage member states to reduce barriers for companies that want to sign power purchase agreements with wind farm owners.

We have seen in the US that these corporate PPAs can give investors the certainty they need to make projects happen but, at present, few European nations are set up for these. The UK, Netherlands and Scandinavian nations are the most advanced.

WindEurope said European countries should reduce legal barriers, and that Europe’s Guarantees of Origin tracking system should be rolled out more widely, to give firms the certainty that the electricity they are buying comes from renewables. It’s a good idea.

Its second proposal is that the European Union should encourage its member states to adopt revenue stabilisation mechanisms, including Contracts for Difference and feed-in premiums, which can give investors the certainty they need to invest.

Many of you will already know how these structures work but, for those who don’t, the idea is simple. Wind farm owners sell their electricity on the open market, and then the government tops up that price to a pre-agreed ‘strike price’ that is set by a competitive auction. This gives investors the certainty they need to invest and, crucially, it is not at a high price that is punitive for taxpayers.

If the open market price is above the ‘strike price’ then the government would either pay nothing to the scheme owner, like in Germany, or the owner would pay back the difference to the government, like in the UK’s Contracts for Difference scheme. This helps developers secure the money they need to build schemes cheaply. This is also good.

These ideas make sense and we feel confident that they would help give investors more confidence if they were used around Europe. The EU should support them.

But that does not mean they will be widely used. You see, the EU can back these ideas if it wants, but that doesn’t mean it will be able to encourage member states to do likewise. As so often, this comes back to the vagaries of national energy policies.

We would only expect EU member states to lend their support to ideas like these if they already like renewables, and that will be the biggest challenge. We know that support for clean energy is patchy in Europe. We know that only seven out of 28 EU member states have comprehensive plans for renewables after 2020. And we know that the rise of right-wing parties could bring a rise in climate change scepticism.

There are steps that European nations could take to level the playing field for wind investors, but many won’t. We see plenty of politicians who are happy to keep the sloped playing field – and maybe add driving rain and a three-man advantage.

But let’s end on a positive: even if the playing field isn’t level, that doesn’t mean the side benefiting from it will win. Happy Monday!

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