With End of Subsidies in Sight, Green Backers Move Cautiously

Anna Hirtenstein

For almost two decades, investors in renewable energy have been able to fall back on government incentives and subsidies to underpin the returns on whatever they back. Now, they’re starting to think they need to proceed with caution.

Sharp plunges in the cost of wind turbines and solar photovoltaics have brought forward the time when governments and their regulators can envision renewables standing on their own without support. In some places, notably Germany, technologies that were once the most costly form of green power like offshore wind now are planning to compete at market power prices.

Those trends will upend the business model for making money off renewables, with subsidies in retreat and renewables increasingly competing with fossil fuels on price. Institutional investors, bank lenders and private equity firms that have been among the biggest backers of the green-energy industry diverged in their view about what happens next at a Bloomberg New Energy Finance conference in London on Tuesday.

“It’s definitely a worry,” said Robert Pottmann, head of renewable energy and new technologies at Munich Ergo Asset Management GmbH, a division of insurer Munich Re Group. “The good old times with feed in tariffs in most countries are gone, at least where we are investing.”

Insurers like Pottmann have been lured toward green energy by steady returns on projects underpinned by contracts that have support from government or regulators. That money may dry up as clean power projects take on more exposure to market prices, the executive said.

“You need predictable, stable, robust cash flows in order to show the regulator that this investment is appropriate,” he said. “At the end, if you have substantial merchant exposure, then it’s no longer an infrastructure investment.”

So-called merchant risk or exposure is when projects sell their electricity on the wholesale power market, vulnerable to its volatility, rather than fixing a price in a contract.

“Power prices are very hard to forecast,’’ Pottmann said. “Stress testing on what consultants have said in the past is not favorable. It’s very complex and often politically driven.”

Bank View

Banks are also watching the development closely, according to Mark Muldowney, managing director of energy and infrastructure at BNP Paribas SA, a major lender to the clean-energy industry.

“We’re very interested but cautious, I think this is an area of real concern to the market as a whole,” Muldowney said.

BNP recently said it would double its lending to renewable energy, planning to allocate 15 billion euros ($18 billion) a year by 2020. However, like Munich Re, it also wants the projects it lends to have predictable cash flows so it knows it will be paid back.

“We like to see certainly a debt repayment always being supported by either a guaranteed price or a price that we can be very confident is fixed,” said Muldowney.

There are other types of investors who will be willing to lend in a post-subsidy world, as they are interested in projects with higher risk – and the commensurate rewards, Muldowney said.

“What we’ve been seeing is large numbers of people saying ‘We’ve been really frustrated all this time, earning modest returns on projects supported by government contracts. What we really want is some power price exposure so we can potentially earn much higher prices,’” Muldowney said. “There’s some people out there who want to do that.”

Private Equity

Least concerned about evaporating subsidies was Neil Auerbach, chief executive officer of Hudson Clean Energy Partners LP. The venture capital and private equity firm in New Jersey sees freer market forces prevailing on green energy as an opportunity.

“Subsidies are considered by investors that I talk to and for us as more of a problem,” Auerbach said. “Fixing price and subsidies are two different things. What I’m talking about is price clarity, the price has to be predictable.”

The issue is crystallizing quickly, since the sort of incentives that built the industry are starting to wind down now, according to Jerome Pecresse, chief executive officer of the renewables unit of General Electric Co., a major maker of wind turbines.

“Within a few years, the era of subsidies will be behind us — less than five,’’ he said. “Subsidies are progressively disappearing for onshore and in Europe offshore, you’ve seen a few projects happening without subsidies.”

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