Investors in wind power get cold feet

NIALL Stuart had been hoping that investment in renewable energy projects would begin flowing after the UK government published its white paper on energy market reform.

Green energy supporters believed it would provide a clear framework for investors by setting guidelines on pricing and the returns they might expect.

Instead, the chief executive of Scottish Renewables was hit by news that a fund specialising in low carbon energy had postponed a fundraising because it could not attract the capital it needed, as it became apparent that investors did not believe the government had provided the clarity it promised.

Stuart said the 380-page white paper simply didn't provide enough details of how the future energy market would operate and had therefore failed to end the uncertainty about the role of renewables and the tariffs they would attract.

The white paper was published earlier this month, and within days Climate Change Capital postponed raising finance to buy a 61.3 million stake in a Scottish wind farm due to what it called "difficult market conditions".

The firm, which specialises in funding low carbon projects, said it would consider withdrawing from other projects associated with the fundraising effort, even though it believes wind power is an "excellent area" for investment.

A Climate Change Capital spokesman said: "It's a difficult market but our decision has nothing to do with the wind industry.

"It is an area we will continue to explore and look to support and develop, as we see it as a vital area for the UK future economy and future energy supply."

Although the seller, Scottish and Southern Energy, said the incident would not affect its plans to invest 1.7 billion in its infrastructure in the current year, ultimately the large electricity firms will invest more in renewables if they can sell some of their existing developments to generate new capital.

Stuart said: "Renewable energy is one of the few growth areas for capital investment. However, electricity market reform and speculation over the Renewables Obligation banding review has created uncertainty around future returns on investment and impacted on investor confidence.

"There are also no guarantees that reform of transmission charging will create a more favourable financial framework for investment in Scotland as we had hoped."

The Renewables Obligation has so far been the main support scheme for renewable electricity projects in the UK. It places an obligation on suppliers to source an increasing proportion of their electricity from renewable sources and provides levels of support for different technologies. The levels of support are reviewed regularly and the UK government is currently consulting on the support for 2013-17.

Meanwhile, electricity market reform seeks to provide a carbon price floor, set emissions standards and introduce long-term contracts for suppliers.

Nathan Goode, head of energy and sustainability at Grant Thornton, said it was not surprising that investors found it all too complicated. "We are finding deals difficult to get at the moment," he said.

That was partly due to regulatory uncertainty, he said, but funding for wind farms was also being impacted by low average wind speeds over the last couple of years, which has depressed rates of return on existing projects.

"It all gets a bit complicated for investors. It makes it harder to see what returns they can get," he said. "I can see why investors, especially those new to the sector, will wait and see how it works out.

"If you put (regulatory uncertainty and low wind speeds] together, and there's a lot of other operators elsewhere in the world to put your clean tech money into, then the UK is having to fight hard to compete as an attractive place to invest in."

The threat of investment moving abroad was one raised recently by Sian George, the Edinburgh-based head of the European Ocean Energy Association (OEA). She told officials at a European conference that marine energy could be a huge global industry centred on Europe if it had the investment needed to help it get established.

But she said the industry could move to countries such as the US, Canada and Australia, which are all looking to develop the marine energy technology sector, if they provided better regulatory incentives.

Already, some of those countries are introducing favourable tariffs for marine electricity, and there is a threat that not just the investment but whole swathes of companies could relocate to more favourable environments.

Stuart said fledgling technologies such as wave and tidal energy found it hard to attract private sector finance. He hopes the planned Green Investment Bank could help in that sector.

"The whole focus of the investment bank should be not to compete with other financial investments, but to fill a gap in the market and help the development of these new industries," he said.

But he stressed that the renewables industry had built solid foundations in Scotland, thanks to the Scottish Government's renewable energy target to generate 100 per cent of equivalent Scottish demand.

He said that had encouraged investors such as Gamesa, Doosan and Mitsubishi to come to Scotland, and companies such as Weir Group and Wood Group into the renewables market.

For those larger companies with access to funding, technical issues, not finance, were seen as the main challenge to the development of large-scale renewables, he said.

And he thought the investment environment was likely to improve once more details of the government's plans emerged.

Investment is seen as one of the main benefits and one of the biggest challenges of Scotland's ambitious target to produce 100 per cent of its electricity demand from renewable sources by 2020.

Supporters say a 30bn investment will create 40,000 jobs and give a massive boost to the companies that will build the infrastructure, turning Scotland into a world leader in green energy.

Stuart said the government's white paper was likely to signal "the beginning of the end" for investor's recalcitrance.

But he added: "There's still a huge amount of detail to be delivered."