First published in the Quoted Cleantech Newsletter - October 2009. Copyright Cleantech Investor Ltd. 2009

by Nigel Hawkins

The UK’s political conference season is seeing considerable debate about the potential for renewable energy. There has been much to discuss given the many policy documents that have been issued, especially with ever more ambitious targets being set. Certainly, there has been no shortage of spin, from both leading parties, about the ‘brave new world’ of renewables.

More serious, though, is the shortage of adequate finance for renewables investment. Despite the UK Government’s efforts over many years, new renewables investment in the country is uncomfortably dependent upon the six integrated energy suppliers and on the monopoly grid operator, National Grid.

For some years now, these six companies have dominated UK electricity generation. EDF, Europe’s largest generator, and the two German companies – E.On and RWE – are the leading players in England, along with Centrica. North of the border, Madrid-listed Iberdrola, the owner of ScottishPower, and Scottish and Southern Energy, which owns many fully depreciated hydro plants, prevail.

Whilst the net debt levels of most of these companies have soared over the last two years, they can still raise substantial funds for their investment requirements. Spain’s Iberdrola, the most valuable quoted renewable energy company, has seen its share price rally since the low point last November, despite some uncertainties attached to its home country’s regime of renewables’ subsidies. Meanwhile, both E.On and RWE saw their shares rebound strongly after conservative parties secured a small governing majority in the recent German general election, since both stand to gain materially from the likely scrapping of Germany’s nuclear phase-out policy.

However, EDF’s investment focus is very much on new nuclear-build. And, whilst E.On remains committed to heavy renewables investment overall, much of it will be in the US onshore wind sector, which offers real potential.

Centrica’s strong interest in renewables has been diluted somewhat by the recent plunge in gas prices, which has created opportunities for further acquisitions in addition to its successful Venture Production purchase.

But Scottish renewables investment remains robust, with both Iberdrola and Scottish and Southern Energy continuing to support new wind projects there.

However, other renewables investors are finding it far harder to raise funds following the credit crunch. In many cases, a higher equity component is now required compared with previously, and this raises the overall cost of capital and thereby lessens expected returns.

Securing grid connections also remains a serious problem, especially in developing offshore wind plants. This scenario is not helped either by the fact that National Grid’s net debt currently exceeds £22 billion: it also has a substantial investment programme to fund in the US.

Against this background, it is hardly surprising that the various renewables companies quoted on AIM have generally performed badly over the last year. Investors fear that further equity fund raisings will be required in many cases.

In terms of renewable technologies, only onshore wind – with a few exceptions – has made real progress to date in the UK, especially in Scotland where planning requirements are less restrictive. Offshore wind undoubtedly offers some prospects, along with biomass plants which the Government has been trying to develop.

In the latter case, London-listed Drax Group has announced a plan to build 900MW of biomass capacity; less satisfactorily, the firm’s recent 2009 interim results were lacklustre as the recession has reduced both electricity demand and prices.

Marine investment revolves around whether any of the Severn Barrage proposals eventually come to fruition, whilst fuel cells offer real long-term potential: interestingly, Ceres Power’s share price has rallied strongly in recent months.

In summary, there are clearly areas of real concern. In particular, in view of the dependence on the six integrated energy companies to deliver the required investment, there are real doubts about their ongoing commitment – given the many attractive investment opportunities beyond the UK, notably in the US, and their own deteriorating finances.  

Nigel Hawkins is a Director of Nigel Hawkins Associates, which undertakes investment and policy research, mainly in the utilities sector.