Certainty in uncertain times?

The world currently faces some unique challenges.  Much has been written about the global economic downturn, but the global economy also faces two other related challenges.  Until now, most countries have relied on fossil fuels to power their economies.  However, these are finite resources, and increasing demand for energy is driving up the price of fossil fuels in the long term.  Burning fossil fuels also has the effect of causing global climate change, which has the potential to wreak far more economic havoc than the “credit crunch”.

Against this background, investors may well be forgiven for being pessimistic about finding sound investments delivering solid rates of return.  However, challenges also present opportunities, and in creating policies to combat global climate change and reduce its dependence on fossil fuels the European Union has created an attractive environment for investment in energy infrastructure, clean technologies and renewable energy.  This article explores the main areas of EU energy policy in relation to the opportunities it provides for investment, and considers the incentives available at both EU and Member State level (using the UK as an example) to stimulate such investment.

The EU Dimension

The priorities of EU energy policy are to secure the EU’s energy supply of oil, natural gas and electricity, and to increase the use of energy supplied from renewable sources.  To facilitate this, the EU has sought to establish an EU-wide energy market, and to develop the infrastructure required to support the market.

In order to secure the EU’s energy supply from fossil fuels, Member States are required to maintain minimum reserve levels and capacity for oil, natural gas and electricity.  They are also required to continuously renew transmission and distribution networks, and to facilitate investment in the development of new generating capacity.  To reduce dependence on fossil fuels and greenhouse gas emissions, renewable energy must be incorporated into the mix of energy sources.  The EU has recently agreed a new Directive on renewable energy, which sets a legally-binding target of 20 percent of the EU’s overall energy consumption to come from renewable sources by 2020.  Member States are set individual targets – for example the UK’s target is for 15 percent of its energy to come from renewable sources by 2020.

EU-wide targets provide a policy framework for investment across Europe in a variety of new technologies and infrastructure projects. The European Commission has calculated that 12 percent of the EU’s energy should be coming from wind power generation by 2020 in order to meet the 20 percent target, and the International Energy Agency expects 862GW of wind power generating capacity to be built across the EU during the period 2005-2030, requiring investment of $925 billion in new generation capacity, $137 billion in transmission infrastructure and $429 billion in distribution grids. 

This sector may provide an attractive environment for investors, and the first quarter of 2009 has already seen a number of wind energy investments – Ampere Equity Fund acquiring ownership of a wind farm in Spremberg, eastern Germany; and Spanish investment fund Taiga Mistral allocating €160 million for potential development of wind farms in Romania over the next four years.  Such investments demonstrate the confidence which private equity funds are now placing in the renewables sector.
To stimulate investment in energy infrastructure in the face of difficult market conditions, in February this year the European Commission announced a €5 billion package of new investment, €3.98 billion of which will be directed toward key energy infrastructure projects.  All Member States will benefit from the package of measures, which will give rise to opportunities across the EU for new investment and public/private partnerships.  The package will provide €2.4 billion for gas and electricity infrastructure, €565 million for offshore wind energy and €1.05 billion for carbon capture and storage.  An additional €200 million is reserved for the Nabucco gas pipeline, which will bring natural gas from the Caspian Sea to the EU.  The funding will be provided through the European Investment Bank, which will co-finance up to half of the costs of gas and electricity infrastructure and offshore wind energy projects, and up to 80 percent of the costs of carbon capture and storage projects.  However, investors will need to move fast as the money has to be spent by 2012.

Investment incentives in the UK

The implementation by Member States of EU policies provides specific national opportunities for investment.  Opportunities in the UK are already emerging as the UK Government draws up policies to ensure it meets its EU targets, and massive private sector investment will be needed to assist in meeting these targets.  The UK Government has also set out to make the UK a global leader in clean technology and in tackling climate change, thereby creating arguably one of the most attractive environments for private investment in today’s economic climate.

The new EU Directive on renewable energy requires implementation and national action plans by 2010.  Unlike most other Member States, which have used feed-in tariffs to stimulate investment in renewable energy, the UK has opted for a market-based mechanism, the Renewables Obligation, which requires electricity suppliers to source increasing proportions of the electricity they supply from renewable sources or to suffer a buy-out penalty.  Until recently, the Renewables Obligation was technology neutral, in that it provided the same incentive regardless of the technology used, but it has recently been revised to provide greater incentives for investment in developing technologies such as offshore wind and biomass.  In this year’s Budget the UK Government announced further changes to the Renewables Obligation to provide even more incentives to invest in offshore wind projects.  This has produced immediate benefits, with the recent announcement of the go-ahead of the London Array wind farm in the Thames Estuary, which will be the world’s largest wind farm when completed.  The project has already attracted £2.2 billion of private sector investment.

A criticism frequently made of the UK is that its planning system is a disincentive to investment in major infrastructure projects.  However, last year the Government introduced a new Planning Act which is intended to speed up the process of consenting major infrastructure projects, thereby increasing certainty for developers and investors, and avoiding costly delays. The new Planning Act has also provided a boost for the nuclear industry, which is likely to see significant growth over the coming years as the UK seeks to replace its ageing fleet of nuclear and coal-fired power stations.

Conclusions

Worldwide investment in renewable energy more than doubled from 2004 to 2006.  Although levels of investment have fallen back since then, EU energy and climate change policies have ensured that energy infrastructure in general and renewable energy in particular have become even more politically significant and economically incentivised sectors in the EU, meaning that they are likely to provide investment opportunities for many years to come.  In this current uncertain economic climate, energy infrastructure has become one of the areas in which investors may find some slim elements of certainty.

Angus Evers and Duncan Field are partners in the Energy & Infrastructure Group at international law firm SJ Berwin LLP.