Tag Archives: Germany

How are European policymakers and investors embracing the ‘new normal’ in EU renewable energy policy?

December 7, 2016 |

 

The growth of solar PV in Germany has benefited from small-scale investors

Costs have declined dramatically in the renewable energy sector and deployment levels are at an all-time high. But why does the outlook for future investments seem so mixed across Europe?

Today, policy and finance issues are now arguably at least as important as technology, with policy now the key determining factor in ensuring continued growth in renewables. Policymakers are not in the same position as they were five years ago however when the costs of technologies such as solar were much higher and policy decisions had very different outcomes. Even the costs of offshore wind are falling significantly as indicated by DONG’s recent winning bids for the Borssele 1 and 2 projects at €72.2/MWh and Vattenfall’s astonishing €49.9/MWh bid for Kriegers Flak.

In future, investment will need to come from a variety of sources and not just from large utilities which has traditionally been the case. This means that policy will need to change dramatically to adapt to this new, broader range of potential financing options.

Our latest report which is published today, European Renewable Energy Policy and Investment 2016 finds that the cost of financing will be driven as much by the types of investors as by how investors evaluate project risks, returns and policy. In other words, how investment is divided among utilities, institutional investors, households or companies is one of the most important factors determining the average cost of renewable energy to the system.

In Germany and Spain, for example, very different policy incentives were concentrated on very specific investor categories, ie, small end users in Germany and the utility sector in Spain. Both approaches achieved high levels of deployment in a relatively short time but were not necessarily cost-effective.

What does this mean for policymakers & investors?

We found that there is plenty of investment available to meet and exceed current EU and country level targets, if the right policy is in place. Policy will determine not only how much investment is available, but also the mix of investors and its cost. Policies set in motion today could develop, or close off, options that could be major sources of investment and technological advancement in the future.

In addition:

  1. Long-term targets are essential for attracting investment so a decrease in targets can be devastating for a developer since sunk development costs may need to be written off to reflect the reduced likelihood of completing the project
  2. The adoption of renewables across the EU has been fuelled by a varied mix of investor types, often introducing new entrants and causing a change to the previous ownership structure of energy systems.
  3. There is enough investment appetite in Germany to comfortably meet ambitious targets provided that support levels and other key policies are set appropriately. This gives comfort to policy makers that their ambitious targets can be achieved (and potentially exceeded), however there is insufficient capital for just one or two categories of investors to meet the targets on their own so policies must appeal to a broader investor base.
  4. Now is a good time to encourage investment with base rates at historically low levels, which in turn depresses equity return requirements, however policies are not in place to encourage this investment in many regions. Interest rate increases will necessitate higher support levels.
  5. Political risk perception is increasing and has a negative impact on investor appetite. Across the majority of EU regional contexts and renewable technologies we see a negative outlook of eroding investment sentiment.
  6. Misalignment of policies within EU member states and across EU directives is having unintended consequences, damaging the outlook for a rapid, coherent energy transition.

What does this mean for policymakers?

Policy should always encourage the lowest possible cost investment from the most appropriate set of investors in keeping with four main objectives:

  1. Balance cost-effectiveness and deployment
  2. Balance short-term cost-efficiency versus longer-term development.
  3. Develop technology mixes and options.
  4. Shape the industry to achieve industrial objectives and/or public support.

Regional views

An important part of this work was the regional perspectives, looking specifically at two countries, Germany and the UK, and two regions, the Nordics and Iberia. We also looked at three widely deployed technologies, solar PV, onshore wind and offshore wind and have forecast investor appetite within those categories for each region up to 2020.

United Kingdom

Future offshore wind investments in the UK look promising among utilities, developers and financial institutions

Future offshore wind investments in the UK look promising among utilities, developers and financial institutions

While the UK has a solid track record with building renewable power assets and is the global leader in offshore wind, its slow progress with decarbonising the heat and transport sectors means that it is unlikely to hit its 2020 renewable energy targets with the current suite of policies.

Over the last six years, the British government has changed several key renewable energy support policies including making cuts to feed-in tariffs for small and large-scale renewables, the transition away from a 14-year-old green certificate scheme with support levels set by government (the Renewables Obligation or RO) towards a Contract for Difference (CfD), with support levels set by competition. These changes have caused a period of uncertainty among investors.

If the current macroeconomic environment persists, investor interest in the UK market will likely mean sufficient capital is available to fund the existing project pipeline. However, it is likely that there will be less competition for projects as some investors are put off by political uncertainty, meaning less downward pressure on the cost of capital than there otherwise might have been.

Germany

Future investments across all categories in Germany look promising

Future investments across all categories in Germany look promising

Germany has the third-highest level of renewable energy installations by capacity in the world behind the US and China. It also has a range of ambitious targets that exceed the minimal levels set out by the EU. These targets include achieving 35% of generation from renewables in 2020, 50% by 2030 and 80% by 2050, and keeping CO2 levels at 60% of 1990 levels by 2020.

While Germany’s goals for onshore wind and solar remain ambitious, it is clear that policymakers are setting their sights on offshore wind as a major new source of energy. Our analysis indicates that these targets are, overall, achievable.

Now that amendments to Germany’s renewable laws have been announced uncertainty has reduced, although it will take some time before the significance of these changes is fully understood. Once investors fully understand the impacts of policy changes, then it is very likely that the ambitious renewable deployment targets can be achieved.

Iberia

Potential investments could be large in Iberia, but investor appetite is still low in the region

Potential investments could be large in Iberia, but investor appetite is still low in the region

The last decade has seen a period of upheaval in Spanish and Portuguese politics, and in particular in their once-thriving renewable energy sectors. Following the global financial crisis, governments in both countries have taken greater control of rates of growth in the renewable sector. The investor pool has shrunk, chilled by uncertainty and losses because of a series of regulatory changes.

In Portugal, recent M&A transactions suggest that international investor confidence in the sustainability of the regime remains, however, as in Spain, short term political objectives remain uncertain.

There are important lessons to be learned by policymakers both in the peninsula and outside about the importance of long-term planning, transparent regulation made by independent regulators, and a balance between the interests of all stakeholders in the energy system. These will be instructive if the countries are to pursue the next phase of decarbonisation successfully in the 2020s. Reducing the tariff deficit and increasing interconnection with the rest of Europe will be vital steps towards strengthening the case for more renewables.

 

Nordic region

Future investment in the Nordic region favours larger investors, such as utilities developers and financial institutions

Future investment in the Nordic region favours larger investors, such as utilities, developers and financial institutions

The Nordic region’s objective is to accelerate and implement a smooth energy transition in a market characterized by general over-capacity, low wholesale prices, flat or limited demand growth and most of the EU 2020 targets already achieved. In such a market, maintaining the momentum of the transition is not an easy task. In fact, investors that had initially piled into the Nordic wind market due to its intrinsic resource value, have more recently been hurt by low prices due to the oversupply of green certificates. These have resulted in investor losses, reduced incentives for new wind investments and an overall reduction in investor interest in the region.

However, investors and capital remain available, while the intrinsic long-term value of Nordic wind resources remains world class.

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National-level climate finance tracking can help countries meet NDC goals effectively

November 10, 2016 |

 

Around the world, 74% of total global climate finance and over 90% of total private climate finance is raised and spent in the same country. As low-carbon, climate-resilient assets become increasingly attractive to national actors compared to the alternatives, action on climate is largely happening within national contexts.

In fact, the domestic bias of climate finance is likely understated. CPI’s Global Landscape of Climate Finance reports have repeatedly highlighted substantial data gaps around domestic budgets in particular.

In 2014, the majority of global climate finance was raised and spent in the same country. Because domestic investment dominates, it is vital to get policies right. This requires robust national-level climate finance tracking.

The majority of finance was raised and spent in the same country. Because domestic investment dominates, it is vital to get policies right. This requires robust national-level climate finance tracking.

Clearly, understanding how finance flows within countries is key to accelerating countries’ transitions toward low-carbon and climate-resilient economies.
CPI has worked with counterparts in Germany, Indonesia and most recently Côte d’Ivoire to track their climate finance and other organizations are also tracking climate finance at the national level. For example, Institute for Climate Economics (I4CE) used CPI’s approach as a foundation to conduct a similar exercises in France, Trinomics has done similar work in Belgium, and the United Nations Development Programme (UNDP) has worked with seven Asia-Pacific countries to understand climate-related public expenditures in their national budgets.

While these countries have made a start, more work is urgently needed as improved national tracking will critically inform countries’ efforts to implement their Nationally Determined Contributions (NDCs) submitted under the Paris Agreement. The International Energy Agency (IEA) has estimated that, to implement NDCs, energy efficiency and low-carbon technologies require$13.5 trillion in investment over the next 15 years. Ensuring that investment from a range of national and international sources is optimized will help ensure impact and value for money.

There are many benefits to improving national-level climate finance tracking systems

Identifying, tagging, and tracking budget allocations that respond to climate change challenges enhances governments’ ability to allocate appropriate resources at the national and local levels and ensure they are being spent as intended.

Increasing understanding of what different domestic and international, public and private actors are investing, in which climate-relevant activities, and what instruments they are using to deliver finance, can help identify blockages, and highlight opportunities to better coordinate spending and reallocate finance to areas where it will have more impact.

Extending the scope of tracking exercises beyond climate finance can reveal how much public money is flowing to support business-as-usual investments including in fossil fuels, and unsustainable land use. Understanding where public incentives are misaligned with climate goals can highlight opportunities to improve policies and ensure public spending is coherent.

CPI has designed related tools to inform decision makers thinking around this broader question and is applying them in the context of REDD+ related finance in Côte d’Ivoire to support the country’s work to develop a REDD+ strategy.

Ultimately, such tracking provides a basis for decision makers to ensure that limited domestic and international public resources are targeted where and how they are needed most to help countries achieve their goals. Effective tracking provides a starting point to inform discussions about what is happening, and informs the design of more cost-effective policies and financial instruments to mobilize investment.

CPI remains committed to improving understanding of climate finance flows at the national and local levels.

Since 2010, CPI has supported decision makers from the public and private sectors, at international, national and local levels, to define and track how climate finance is flowing from sources and actors, through a range of financial instruments, to recipients and end uses. Providing decision makers with robust and comprehensive information helps them to assess progress against real investment goals and needs. It also improves understanding of how public policy, finance and support interact with, and drive climate-relevant investment from diverse private actors, and where opportunities exist to achieve greater scale and impact.

This blog is part of a series on climate finance tracking challenges. Read more here.

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If you would like our support tracking your climate finance flows, get in touch here.

This article first appeared on Public Finance International.

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Could New Investment Structures in the German Renewable Energy Market Make the Market More Cost-Competitive?

June 2, 2015 |

 

Germany is in the midst of a major energy transition, one that could serve as a model for the rest of the world. At the core of the challenge is the need to continue to grow renewable energy (and drastically reduce dependence on coal) while containing the cost of renewable energy to government and ratepayers.

German policymakers are looking to control costs by replacing the feed-in tariffs that have driven renewable energy deployment and cost reduction with new competitive mechanisms. However, if these policy changes are made without considering their impact on how projects are financed, they could inadvertently increase costs. Any changes to policy should be made with a comprehensive understanding of the current and potential investors in renewable energy and the impact that different policy mechanisms and financing structures could have on their costs and ability to invest.

CPI, with the support of the European Climate Foundation, is examining this important aspect of the transition to inform policy and financing activities that could allow Germany to advance its energy transition at lower cost. In this project, we will:

  1. Size the investment potential for different types of renewable energy across potential German investor groups in the sector – utilities, developers, financial investors, large energy users, small energy users, and municipal and other governments.
  2. Assess the market opportunity for new financing instruments, including new financing structures such as YieldCos, crowdsourcing, and municipal funding, which we identified as potential opportunities in previous work.
  3. Identify policy options that seem to have the most favorable impact or provide the biggest barriers to investment. Starting with opinions expressed by investor groups and their analysts and advisors, as well as a review of investment cases and our financial modelling, we will analyze the impact of policy changes to financing costs for different market segments.

 
Alongside this project, CPI is also working with the Stockholm Environment Institute (SEI) on a New Climate Economy project, to identify and analyze the barriers faced by investor groups across five European countries/regions (Germany, UK, Nordic countries, Iberia, Italy).

The lessons from these projects will be relevant for Europe and beyond. With Europe’s new, more ambitious renewable energy and carbon emissions reduction targets for 2030, changes to European policies and regulations will be necessary, as well as policy and regulation in EU member states.

Ultimately, the transition to a low-carbon electricity system will require wholesale changes to policy, technology, market design, consumer behavior, industry structure, and finance. Addressing the finance portion of the equation is critical to develop a true picture of the priorities for policy development in Germany and beyond.

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Tracking climate finance can support better policy in developed and developing countries

December 12, 2014 |

 

Climate finance tracking is one of the topics under discussion at the international climate negotiations taking place in Lima this week. Our work on tracking climate finance for countries like Germany and Indonesia and in upcoming reports for organizations has demonstrated the benefits of mapping climate finance flows. This video shares some of the insights from the recent Landscape of Public Climate Finance in Indonesia we carried out with the Ministry of Finance in Indonesia and describes how it is supporting Indonesian policymakers to develop more effective tracking systems and policies.

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Policy Watch: South Korea advances on cap and trade and world’s largest REDD project approved

June 4, 2013 |

 

This week, climate policy headlines from around the world include a new multinational renewable energy coalition, progress on cap-and-trade in South Korea, and the world’s largest REDD+ project moving forward in Indonesia.

Uday Varadarajan and Elinor Benamicontributed headlines to this edition of Policy Watch.

South Korea plans ambitious carbon market
South Korea’s government plans to meet in May with the nation’s biggest emitters to provide information about the start of cap and trade in 2015.

The government plans to select an exchange for greenhouse- gas emissions in the second half of this year and decide how to allocate free allowances to an estimated 480 emitters by June 2014, Lee Hyung Sup, a deputy-director at the Ministry of Environment, said in a phone interview yesterday in Seoul. Trials for carbon trading are set to start in June 2014, he said. Full article.

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Policy Watch: Black carbon, Beijing’s new air pollution measures, and California carbon trading

January 24, 2013 |

 

This week, climate policy headlines from around the world include a new study that ranks soot as the second-worst cause of climate change, an estimated $700 billion cost to avoid further temperature rise, and Germany’s solar development.

Elinor Benami, Chiara Trabacchi, Hermann Amecke, and Karen Laughlin contributed headlines to this edition of Policy Watch.

Study: Black carbon ranks as second-biggest human cause of global warming
Soot ranks as the second-largest human contributor to climate change, exerting twice as much of an impact as previously thought, according to an analysis released Tuesday.

The four-year, 232-page study of black carbon, published in the Journal of Geophysical Research: Atmospheres, shows that short-lived pollution known as soot, such as emissions from diesel engines and wood-fired stoves, has about two-thirds the climate impact of carbon dioxide. The analysis has pushed methane, which comes from landfills and other forces, into third place as a human contributor to global warming.  Full article.

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In Germany, one billion euros of government money go a long way

December 13, 2012 |

 

One of the major themes coming out of Doha at the UNFCCC Conference of Parties last week was the role of climate finance. Basically, if we want to reduce emissions and scale up renewable energy and energy saving measures, we need to figure out where the money to do these things will come from.

With public budgets strapped, this challenge increasingly becomes about how we can direct limited public funds to unlock private investment in a targeted, effective way.

In Germany, a recent CPI study showed that 1.5% of GDP, or 37 billion Euros, is invested in climate-related activities like renewable energy and energy efficiency. More than 95% of that investment comes from businesses and households. This small share of government spending is striking. However, it would be wrong to conclude that the government plays no role.

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Keeping track of climate progress: Are countries well-placed to meet new tracking needs?

November 27, 2012 |

 

As the business school adage goes, you manage what you measure.

When it comes to progress on climate change, measurement doesn’t often capture much public attention. However, measurement and reporting play a fundamental behind-the-scenes role: They help build confidence that countries are doing what they say, and they also build capacity for countries to identify opportunities and tackle challenges domestically.

Right now, climate negotiators are gathering in Doha for the 18th Conference of the Parties (COP 18) to the United Nations Framework Convention on Climate Change (UNFCCC). While headlines around these meetings usually focus on the lack of progress in UNFCCC discussions of countries’ emissions reduction targets, the UNFCCC is making strides on other fronts. In the past three years, countries have agreed to significantly expand the amount of information they report on their greenhouse gas emissions and their climate policies and measures.

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