UTRECHT, NETHERLANDS — In order to maintain current investment levels in renewable energy, the E.U. will need a new financing approach, Rabobank said on July 23 in its “Rabo on Renewables” quarterly publication.
The E.U. has historically been the main investor in global renewable energy generation and its renewable energy targets require it to maintain this role. However, the financial crisis and following austerity measures have reduced investment capital globally and in particular in the E.U.
Rabobank believes a new financing solution lies in closer cooperation between banks and institutional investors, creating a new balance between investors’ risk appetite and available capital for renewable energy.
“Renewable energy investments last year totaled $260 billion, but regardless of the high total of global investments, the financing climate for renewable energy has changed, particularly in the E.U.,” said Justin Sherrard, Rabobank analyst. “Across the region, it has become harder for renewable energy projects to obtain the long-term funding they require. Investors demand a higher risk premium to compensate for dealing with government support policies that are under increased scrutiny. In addition, new capital requirements under Basel III require banks to increase their capital buffers, reducing the incentive to lend money for long periods of time.”
While the E.U. was responsible for 45% of global renewable energy investments in 2007, due to the impacts of the global financial crisis along with growing appetite elsewhere, its share had dropped to 33% by 2012. China now accounts for 27% of global investments in renewable energy and generates more power from wind turbines than from nuclear plants.
Europe must reach the same investment levels as those seen before the crisis to be able to reach environmental energy targets and keep its key role in global finance. To continue to fund renewable energy projects, banks need to develop alternative financing solutions for their clients to continue to fund renewable energy projects. A possible answer lies in increased cooperation between banks and institutional investors, Rabobank said.
Banks and institutional investors can complement each other when banks carry the construction risks, which are often high, while institutional investors carry the operational risks, which are often lower. Such a structure, already seen in the U.S., would meet the risk appetite of both types of investors and provide a structural solution for the current shortage of funding renewable energy projects.
“With more creativity on financing, the renewable energy industry will make itself more resilient and better able to rise to the challenges of funding the de-carbonation of the world’s energy system,” said Sherrard.
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