First published in Quoted Cleantech, December 2010. Copyright Cleantech Investor Ltd. 2010    

Over the last few weeks, the financial markets have been dominated by the ongoing euro crisis as the authorities desperately seek to prevent contagion, not to mention the ongoing traumas of the banking sector, most specifically in Ireland.

At first glance, there is no obvious linkage between these financial dramas and the roll-out of renewable generation plant. In fact, aside from obvious concerns about the availability of finance, there are three other crucial issues.

First, much of the impetus for promoting renewable generation has been European Union-led. Several of the key targets, such as the 20% by 2020 aspiration, derive from the EU, which also exerts pressure on individual countries, such as Poland, to reduce the emissions levels from coal-fired plants. Indeed, the Emissions Trading Scheme (ETS) was established by the EU and first started trading in 2005.

Yet, there is real doubt about the survival of the euro, voiced even by such powerful EU advocates as the German Chancellor, Angela Merkel. It may be that the Eurozone will split into two; alternatively, some countries may withdraw altogether. Or, it could end in chaos.

Irrespective of the euro’s final outcome, it is hardly conducive to a long  term, EU-backed renewable generation policy.

Secondly, it is significant that some of the countries most directly affected by the euro crisis are those which have championed renewable generation. To date, it has been the EU’s geographically outlying countries that have suffered most from the crisis – they bear a close correlation with those driving forward investment in offshore wind and wave technology.

Whilst Greece has faced the most intransigent problems, Ireland’s appalling economic plight has become very apparent of late, with all three of its banks needing to be effectively nationalised.  And market expectations are that Portugal will also come under the most severe pressure.

The EU authorities, conscious that Spain’s economy is far larger, have identified that country as its firewall to protect the euro. If Spain needs massive financial support, it is very questionable whether it would be available.

In any event, countries receiving EU financial aid, which includes some IMF contributions, are required to impose heavy public spending cuts – hardly a conducive environment to raise expenditure on renewable generation.

As such, Ireland’s aspirations of becoming a significant player in renewable generation are now far less bright as it grapples with its massive financial problems: Portugal may well be in a similar situation shortly.
 
To an extent, the market has already factored in the impact of these developments. Spain’s case is particularly relevant as its Government seeks to curb its public expenditure sharply.

Subsidy cuts to new renewable generation developments are under way; this will adversely affect Spain’s solar sector which had boomed previously.  To what extent subsidies to existing wind plants in Spain will be affected is not clear. Not surprisingly, investors are nervous, which is bound to have a material effect on new plant developments over the next few years.

All in all, these are uncertain times for the renewables sector – an industry that had thrived in prosperous economic times, but one that looks increasingly hard to justify during periods of economic retrenchment.

Nevertheless, the EU’s integrated energy companies are continuing to invest, with Spain’s Iberdrola and Germany’s E.On being particularly prominent. Much of their investment, though, is directed towards the US, which may also see subsidy cuts.

What is clear, though, is that the cherished hopes of the green lobby regarding renewable generation are most unlikely to be met. What is less clear is how large the shortfall will be as economic realities kick in.  

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

 

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