First published in the Quoted Cleantech Newsletter June 2010. Copyright Cleantech Investor Ltd 2010

by Nigel Hawkins

Currently, the European Union is facing a real financial crisis, with serious questions being asked about the future of the euro and the ability of some weaker EU members to honour their sovereign debts.

For many months, the financial shenanigans of Greece have featured prominently in the media. More importantly, for the future of the euro itself, is the extent to which other Club Med countries may be the subject of financial contagion. In particular, the Spanish economy is under the deepest of scrutinies.

In recent weeks, many EU countries have announced substantial cuts in public expenditure as they seek desperately to reduce their budget deficits. Spain has been at the forefront of this approach, which seems set to spread across much of Europe.

For investors in renewables, the prime question is whether the generous subsidy regimes that exist in most EU countries will endure – or whether they will become subject to major cuts. It is noticeable, too, that certain countries with serious budget problems, and especially Spain, have led the expansion of the renewables sector in recent years.

At a macro-economic level, renewables subsidies are a comparatively small element of any country’s public expenditure. Nonetheless, this does not mean they are sure to be ring-fenced from cuts.

Indeed, in Spain there is widespread concern about various proposals to rein in subsidies for solar investment – and perhaps for other renewable technologies. Not surprisingly, solar stocks have slumped, whilst the planned IPOs by Renovalia and T-Solar have been postponed.

Other countries with soaring borrowing deficits may well cut their subsidies for renewables generation. Even Germany’s very attractive renewable subsidies are not exempt from possible cuts.

Back in the UK, similar uncertainty abounds following the installation of the new Liberal/Conservative coalition government. Like many other countries, reducing the soaring public sector borrowing deficit – in the UK’s case, estimated to exceed £160 billion – is paramount. Whilst the first c£6 billion tranche of cuts announced recently may seem substantial, far larger cuts are inevitable over the next few months.

Of course, with an annual  public expenditure total – including net debt interest – of c£700 billion, the cost of renewable subsidies are fairly inconsequential; but cuts cannot be ruled out.

To date, the new coalition’s energy policy seems to favour both feed-in tariffs and the imposition of a carbon floor: the latter policy seeks to promote new nuclear-build through direct intervention in the carbon market.

Aside from politics, financing concerns remain a major issue in the UK renewables sector. The six integrated energy companies operating in the UK generally have high net debt levels that they are seeking to reduce: deferring or abandoning marginal investment projects are obvious options.

Significantly – and rather encouragingly – for the renewables sector, National Grid has recently announced a £3.2 billion rights issue. This will help it fund a much higher UK capital expenditure programme – and most of this is renewables-driven. In total, National Grid plans to invest £22 billion over the next five years, part of which will finance the roll-out of a high tech smart grid.  

For smaller companies in the renewables sector raising finance is likely to be increasingly challenging. Such a scenario has faced Engyco, which is seeking to assemble a portfolio of electricity facilities focusing on solar power in Spain. But it has now postponed its planned £1 billion IPO in London.

In summary, difficult times not only for the EU – and its cherished euro currency – but also for the renewables sector.

Undoubtedly, the latter boomed during the days of plenty. Today, though, the financial environment is very different.

Nigel Hawkins is a Director of Nigel Hawkins Associates, which specialises in the provision of investment and policy research.