Europe’s renewables investors need more certainty

ࢀ¢à¢€¢à¢€¢ BY TIM PROBERT ࢀ¢à¢€¢à¢€¢

The European Union had lofty ambitions for renewables, but cheap gas and subsidy spending cuts by cash-strapped governments are denting profits and causing confusion in this sector. Investors need more certainty if Europe is to stay on a low-carbon path.

In order to incentivize the mass roll-out of renewable sources of power generation, many governments have offered generous subsidy schemes to utilities, developers and homeowners. Increasingly, however, many nations have pulled in their horns due to austerity measures and as European governments tighten their belts, renewable energy companies are feeling the impact.

After much messing about, Italian legislators finally delivered on 5 May a revised subsidy programme that outlines a structure of additional cuts until 2016. Under the new solar decree, a transitional period with gradual cuts in incentives will start from June 1 and run to 2013, after which the incentives will automatically be linked to reaching a certain level of installed capacity.

The government wants to cap solar subsidies at €6″7 billion ($8.6″10 billion) a year by 2016, and cut feed-in tariffs by between 26 and 42 per cent. But the cap still represents a significant increase on the €3.5 billion a year now distributed through the feed-in tariff scheme, which is expected to result in around 23 GW of solar capacity being installed by 2016.

Some commentators were positive. In an investment note, Mark W. Bachman of institutional brokers Auriga USA said: “While any subsidy cut is generally met with negative investor reaction, we believe the issuance of the new decree will actually be a jump-start to reaccelerate growth not only in Italy, but also in Germany.

“Solar project developers now have definitive timelines and an established subsidy schedule in which to price their projects; first movers will get the best incentives. While the new decree favours rooftop installations, there is still room for additional large-scale ground-mount systems.

“The new regime will decline on a monthly basis through 2011, and will then use a six-month schedule through 2016. Given the regionally and relatively high electricity prices, excellent solar irradiation, and declining module/installation costs, we expect the new subsidy regime to produce rates of return above investor hurdle rates.”

Industry minister Paolo Romani said: “This document finally gives stability and long-term prospects to the market until it reaches technological competitiveness.” Romani added that the decree would allow the solar industry to reach grid parity, when solar power becomes competitive with fossil fuel power generation, by 2017.

However, renewables developers have claimed that Rome’s cuts, coupled with additional red tape, would stifle development of solar power in Italy. The Photovoltaic Operators Investors (POI) opened legal proceedings against the government over the planned cuts, saying its members had made investments in Italy under regulations passed in August 2010 which had been changed once and which could shortly be replaced by other measures that were “worse, retroactive and discriminating”.

POI has also asked Rome for €500 million to cover damages expected from the regulatory changes under the new decree. Gianni Chianetta, chairman of Italian solar industry association Assosolare, said the new decree would slash investments in the Italian sector especially from operators who need bank financing and would also reduce the number of new big-size installations. BP Solar Italia will review its strategy in light of the decree.

The UK has also proposed slashing solar subsidies from 1 August. Under the proposals, solar installations generating over 50 kW and less than 5 MW face a 72 per cent cut in feed-in tariffs, reducing payments from 30.7 pence (50.2 cents) to just 8.5 pence per kWh.

Getting the balance right between incentivizing renewables investors and burdening electricity consumers with high costs is not easy, particularly when the costs of generating electricity from renewables are falling. However, Norwegian solar group REC and Danish wind turbine manufacturer Vestas warned that their earnings were being eroded due to these cuts in renewable energy government subsidies.

REC warned of oversupply, price pressure and falling demand, while Vestas reported deeper than expected operating losses for the first quarter of 2011, saying orders were lower than expected. Siemens’ renewable energy division saw profits drop by half between January and March 2011. Joe Kaeser, chief financial officer, said its solar profits were being hit hard by government austerity programmes, noting that this would remain the case for some time.

Some of Europe’s largest utilities, including RWE, are scaling back investment in renewable energy due to current low gas prices, taking investment away from wind power in particular. The same is also happening in the US. Portugal’s EDP Renewables says cheap shale gas shifts the balance in favour of fossil fuel generation.

While some renewable energy technologies are still a long way from standing on their own feet ” offshore wind is still a decade away from competitiveness without subsidy ” the costs are falling. The price of solar panels continues to drop sharply and onshore wind is cheaper than new build coal including the carbon price.

If European governments are serious about hitting renewables and carbon reduction targets, however, then they must resist the urge to chop and change their subsidy schemes and other incentives for short-term expediency. Investors need greater certainty or they may go to other regions with low-carbon ambitions.

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