Green energy investment incentives fuel debate

Commentators and journalists have been quick to hail this as good news in the short term for families and industry - who have effectively paid for the subsidies through their energy bills, which are amongst the highest in Europe. But for many renewable energy companies it is a blow to a sector already struggling to find stable, long-term investment and compete with emerging players in the market.

Here in the UK, despite a good public relations offensive, the deferral of the renewable heat incentive and slashing feed-in tariffs have raised questions over the government’s ability to meet its ambitious climate change targets.

Too heavy a burden

The Italian government estimates that its current incentives scheme, if continued, could cost some 150 billion euros over the duration of the incentives (15-20 years). It promises a new scheme to support renewable energy, to be announced soon. However, some companies say the uncertainty means many banks, already hit by the credit crunch, will be even more reluctant to finance new projects, at a time when investment is urgently needed to keep the EU competitive.

Cuts in subsidies are sweeping across Europe. The UK recently reduced its solar tariffs by 50% for smaller installations, while Germany too recently announced subsidy cuts to its solar industry of up to 29 percent.

The end of the boom?

Thanks to European government incentives, the green energy industry in Europe has boomed for the last five years. Italy became the second-biggest solar power producer in the EU after Germany. The two countries, together with Spain, made the biggest commitments to solar power development in Europe.

However, the European financial crisis, reduced investment and increased international competition, particularly from China, means supply has outstripped demand, leading to falling prices in a saturated market. Four major German solar companies have gone under since December, and market leaders in France and Denmark have also reported significant losses in 2011. This has had a significant impact on investment funds with high exposure to these stocks.

With investment drying up, European companies risk being overtaken by the emerging players in the market. China has committed $800 billion for developing non-carbon energy sources up to 2020 and is already the world’s largest producer of wind power, while renewable energy markets in India, the Middle East, Africa and Latin America are expected to grow by an annual average of up to 18 percent over the next decade, according to a study released last year by Bloomberg New Energy Finance.

Renewables subsidies in the UK: contradictions

The drive for renewables is an attempt to break society’s reliance on increasingly expensive fossil fuels and to tackle the threat of global warming as a result of carbon emissions. In the UK we have aggressive targets to produce 15% of our energy from renewable sources by 2020 – less than eight years away. Currently we generate in the region of 6% to 7% of our energy from renewable sources, so at the very least power from renewable energy needs to double in the next 8 years.

However, politicians currently seem to lack the political will to get past the inevitable increase in energy prices. The government has said that its plans could push up electricity bills 27% by 2020, which the BBC estimates could add £280 to the average household bill. This increase in cost has been a main driver in government policy and its rash cut to solar feed-in tariffs, which was proclaimed unlawful by the UK courts.

Feed-in Tariffs (FITs) and Renewable Energy Obligations certificates form an important part of the system in the UK to encourage investment in renewable energy. But the oil and gas industry seem to be winning the climate change public relations war despite the government’s stated ambitions. In the recent budget the Chancellor included a £3 billion tax break for the oil and gas industry to drill new deep wells off the north coast of Scotland. The move was deeply condemned by environmental campaigners, for both the risk to the environment and because it contradicts our stated commitment to reduce reliance on fossil fuels, at a time when the emerging renewables industry needs support.

From our analysis at Worldwise Investor, based on the cost of the Feed-in Tariff over the last year we estimate that so far the cost of the FIT to the consumer is about £200m per annum. Thus the recent government handout to the oil and gas industry, paid for from UK taxes directly, is the equivalent of 15 years of Feed in Tariff support, which are paid for by the consumer.