Clean energy investment needs greener light

February 10, 2009

— Paul Taylor is a Reuters columnist. The opinions expressed are his own —

paul-taylorInvestors in clean energy are like motorists stuck at broken traffic lights. The public policy light is green but the price and credit lights are deep red.

Investment in wind, wave and solar power should be booming after the European Union last year adopted an ambitious goal to draw 20 percent of its energy from renewable sources by 2020 to help fight global warming, and U.S. President Barack Obama made green power a central plank of his government’s policy.

But the credit crunch, economic recession, the spectacular fall in oil prices since last July and a record low European carbon price have cooled investors’ ardour.

Consultants New Energy Finance forecast zero investment growth in climate-related companies this year, after a spectacular growth rate of 60 percent in 2006-7.

“The commercial lending market is holding back and until that can be addressed, it’s going to be a major constraint,” says Christopher Knowles of the European Investment Bank’s energy and environment department.

Yet to achieve the EU’s 2020 target, investment decisions need to be taken soon on long-term projects to build a smart electricity grid, giant offshore wind farms and networks to bring renewable energy to Europe’s industrial heartland.

How can the private investment logjam be broken?

One way could be to extend the public support system through which countries like Germany and Spain guarantee higher-than-market prices to generators of renewable energy.

The scheme provides secure revenue to green power producers, making their projects as safe investments as municipal bonds. But critics say it inflates the cost to consumers and taxpayers.

For example, the price guaranteed for photovoltaic energy is 20 times the cost of electricity from conventional power plants, said former International Energy Agency chief Claude Mandil.

Another idea is to put a floor under the carbon price by creating a carbon central bank that could withdraw emissions allowances from the market if the price fell below a certain level and issue extra permits if it rose above a fixed ceiling.

Mark Lewis, managing director of commodities research at Deutsche Bank, says carbon prices are artificially low because firms have been selling off emissions permits they received for free to raise short-term cash that they can no longer borrow.

“This sends the wrong price signal for investment and for changing consumer behaviour,” Lewis told an energy conference organised by the French Institute for International Relations.

Last week’s record low price of 9.5 euros ($12.17) a tonne makes it more economical to build new coal-fired power stations than to invest in renewable energy and smart infrastructure.

A carbon bank, like a monetary central bank, would be empowered to intervene if market forces were not achieving the desired policy objectives, and the mere threat of intervention might be enough to curb speculative peaks and troughs.

However, a reform of the EU’s Emissions Trading Scheme just adopted for the period 2013-2020 contains no such provision.

The United States, Australia and Japan can learn from the mistakes made in Europe, Lewis says, by insisting that industry buys carbon permits from the outset instead of getting them for free, and by creating a carbon bank.

The EU could then link its system into a global emissions market, involving initially the advanced industrial nations and eventually the emerging economies too.

Laying the foundations of an international cap-and-trade system that would create a global price for carbon would be a giant advance at the U.N. climate change conference in Copenhagen later this year.
EU Energy Commissioner Andris Piebalgs contends the best way to guarantee the necessary investments in Europe is through a 10-year infrastructure investment plan backed by public money from member states’ economic stimulus programmes.

In the short term, the European Commission plans to allocate 5 billion euros in unspent EU funds as seed money to promote cross-border energy interconnectors, an electricity supergrid and clean coal plants using carbon sequestration technology, as well as broadband telecoms networks.

But to Claude Turmes, a leading European Parliament member on climate issues, the money is too thinly spread to break the investment deadlock in renewable energy.

The Luxembourg Greens lawmaker says it would be better to use the money to leverage credit from the EU-owned European Investment Bank at subsidised interest rates to build the infrastructure backbone needed to transport renewable energy.

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