Brexit and Incentives Shift Renewable-Energy Investment in Europe

Sunlight at the Custard Factory in Birmingham City, England
Sunlight falls between buildings in Birmingham City, England.

Emily Connor

The landscape of renewable energy investment in Europe and the UK is in transition, driven by changes in programs and incentives. European Union targets require member countries to produce 20 percent of its energy from renewable sources by 2020. According to the European Commission, the bloc was on track to meet those targets as of June 2015.

The 2030 goals for the bloc, which will be reviewed before being finalized, include a goal of producing 27 percent of its energy from renewables by 2030. The proposed goals also contain an ultimate goal of reducing carbon emissions by 40 percent compared to 1990 levels. Some argue these targets are not aggressive enough. But the current financing in Europe and UK is stalling due to changes in investor preferences and programs supporting renewable projects.  

Brexit, the UK's decision about exiting the European Union, also changes the scenario.

Shifts in Investment and Tariffs

According to Roberto Labastida, senior research analyst at Navigant Research, a market research and consulting team that provides analysis of global clean technology markets, the shift in the renewable energy investment space is the result of a series of factors.

“There is no one single impediment, it is more getting access to the market. In the past, you could build the project and get the feed in tariff.  It is not a money problem – it is a structural problem,” Labastida said.

The feed-in tariff system helped fuel a boom in renewable energy investment and development in Europe from 2005 to 2012. As more renewables came online, however, the costs became high for slowing European economies.

“Demand for energy has been flat or falling for the past few years, obviously compounded by the economic crisis. This has the effect of increasing the impact of the new renewables into the power system,” Labastida said.

Under the German Energiewende (Energy Transition), the country’s feed-in tariff program gave renewables priority on the grid. Importantly, investors were promised sufficient compensation to provide a return on their investment regardless of electricity prices. This helped make renewable energy projects a relatively low-risk proposition for investors. 

Due in part to the success of the program, Germany experienced a recent glut of power from renewable sources coming online. This stressed power grids and led to calls to limit new capacity. Countries are now moving to a competitive bidding process for projects which allows renewables to compete in the market. But this offers fewer guarantees to investors.

According to Labastida, investors funding renewable projects are also changing their behavior as hedge funds move out of the space. They are seeking more risk and higher returns that capital-intensive renewables projects often do not offer. Instead, utilities have been taking projects onto their own balance sheets. Meanwhile, individual investments into the sector have increased.

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2030 Targets and Brexit Impacts

Mark Sommerfeld, policy analyst at the UK-based Renewable Energy Association, runs the organization’s finance forum. He said the 2020 European targets had tangible benefits for renewable-energy investment.

“The targets were very important and provided a strong message this was the direction the European Union and government were going,” Sommerfeld said. Given the Brexit decision, the UK was still looking to meet obligations under the 2020 and 2030 targets. But the impetus to meet them may have diminished.

The uncertainty introduced into the European and British economy following the June Brexit decision has impacted investment in the UK overall. While it is too early in the process to see potential impacts, Labastida said, “Investors like security – and for the first time, that is hard to get in the UK generally.”

Sommerfeld said one of the strongest signals the UK government could send to the market would be to implement a strong, definitive energy policy. He said national policy “has been slightly wishy-washy the past eight months.”

Challenges in Financing

Both Sommerfeld and Labastida said they have seen an interest from investors in energy storage projects, sometimes in passing over riskier generation projects.

“Risk premium around projects has increased,” Sommerfeld said. “Investors are wary about getting their return on investment back in a reasonable amount of time. And certainly that has a knock-on effect for those less-developed energy technologies –  advanced combustion, gasification. [These are] fancy ways of using waste to produce energy that aren’t quite at commercial scale yet. The risk premium is very high. We are unlikely to see those projects go ahead.”

Speaking on impediments facing renewable investment in Europe and the UK, Labastida said, “I wouldn’t say there is one factor. In the past, you could go and build the project and get the feed-in tariff in any country. Now you have to tender and compete with other developers.”

Such transitions may be necessary in the overall shift to renewable energy, Labastida said. “Europe is in a transition mode and it’s not necessarily bad for the continent – it just may be bad for investors.”

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