Date: 05-02-2016
Source: The Wall Street Journal
Spain, U.K, Italy have cut incentives for renewable-energy projects to reduce government spending
LONDON—Europe is tired of paying for renewable energy.
For more than a decade, countries across Europe used big financial incentives to become world leaders in wind and solar development. In 2004, renewable sources accounted for about 14% of European Union electricity generation; by 2013 it exceeded 25%, according to the most recent EU data.
But in the past few years, Spain, the U.K., Italy and others have cut incentives for renewable-energy projects, citing efforts to reduce government spending and electricity rates during a period of economic turmoil. In turn, the number of new projects receiving approval has fallen as investors turn away from an industry that offered the assurance of steady, government-backed profits.
Now, in much of Europe, solar and wind farms will compete with conventional power sources with less government support.
Cutting subsidies “sends a very strong message that renewable energy has to stand on its own feet,” said Alex Chavarot, a banker with Access Corporate Finance Partners LLP who works on renewable-energy transactions.
Only one new large-scale solar-energy project was approved in EU countries other than the U.K. in the first 11 months of 2015, for a total of 2 megawatts of new generation capacity—a five-year low, and down from 14 new projects for 240 megawatts in 2010, according to an Ernst & Young analysis of data compiled by Bloomberg.
In 2010, EU countries approved close to 6,000 megawatts of new onshore wind projects. That dropped to 1,020 megawatts in the first 11 months of last year, according to Ernst and Young. Offshore wind projects also declined, but not as much.
The number of approvals for new U.K. onshore-wind and solar projects fell in 2015. The U.K. government last year cut renewable incentives and is ending subsidies for onshore wind farms starting this year. At the same time, the government raised tax breaks for oil production.
In Europe, new investment in renewable energy totaled $120.7 billion in 2011, says Renewable Energy Policy Network for the 21st Century, or REN21, a group of government and industry organizations that tracks the industry. In 2014, new investment came to $57.5 billion.
Still, Ernst & Young partner Ben Warren said several European nations rank among the best for renewable-energy investing, including Germany, France and the Netherlands. Germany have largely maintained significant levels of subsidies, he said.
Several offshore wind projects approved years ago came online in 2015, resulting in a doubling of new electricity-generation capacity from the year-earlier period, according to the European Wind Energy Association. The group says it expects investment in offshore wind—which hasn’t been subject to subsidy cuts in the U.K and elsewhere—to remain robust in coming years.
Danish utility Dong Energy this week said it would move ahead with a plan to build the world’s largest offshore wind farm off northeast England, a project that could power more than a million homes.
But Ernst & Young says the U.S., China and India are now better places than most of Europe to fund clean-energy projects primarily because of assurances by governments that incentives won’t change in the short-term.
Investors have responded to European subsidy cuts with dozens of international arbitration cases—the cross-border equivalent of lawsuits—accusing governments of improperly changing their business terms.
An arbitration panel ruled in January that Spain’s government didn’t act illegally by lowering subsidies and wouldn’t have to pay any compensation to an investor.
Spain’s Deputy Industry minister Alberto Nadal, who heads energy policy for the country, said Spanish subsidies launched in 2007 caused renewable-energy-production capacity to soar to levels the government couldn’t afford to keep subsidizing.
“In the end, financial instability was the main reason [for] stopping investment in the energy sector here,” Mr. Nadal said.
A spokesman for the U.K.’s Energy Department said subsidy reductions, which aren’t retroactive, were necessary to keep power rates down for consumers. “As costs for renewable energy projects continue to fall, it is right that we should think about scaling support back,” he said.
The reduced incentives in many European countries follow promises their leaders made last year at the world climate-change talks in Paris to cut carbon emissions, in part through increased renewable-energy production.
EU states agreed to reduce greenhouse-gas emissions by 40% from 1990 levels by 2030.
Mr. Nadal said Spain is in line to meet its 2020 emissions-reduction goals and commitments under the Paris deal. The U.K. spokesman, meanwhile, said the country remains on track to get 30% of its electricity from renewable sources by 2020.
For more than two decades, financial rewards for solar- and wind-power developments have made European countries global leaders in renewable-energy. In the early 1990s, European countries set guaranteed prices for renewable power, often higher than market rate.
Companies like U.S.-based Silver Ridge Power plowed money into giant solar farms, including about $750 million into Italy alone. Erik Bue, the former chief of Silver Ridge’s Italy business, said one plant was to be Europe’s biggest solar-energy installation, a 123-megawatt site called Troia, on a hillside outside a small Puglia village. Mr. Bue called Troia the company’s “crown jewel” in Italy.
By early 2011, Mr. Bue’s company had permits to build the project, and constructed a substation and bought solar panels for the giant field.
At that time, southern Europe was struggling with the aftermath of the financial crisis. Spain in 2010 cut solar subsidies. Italy followed in 2011, slashing subsidies that were supposed to buoy the Troia project.
“My investors lost faith,” Mr. Bue said. He halted construction.
Silver Ridge is now pursuing an arbitration claim against Italy over certain subsidy cuts relating to projects there. A lawyer for Silver Ridge declined to comment on details of the case. Italy’s energy ministry declined to comment on its subsidy cuts.
