Tuesday, 7 April 2009

Everyone loves clean energy. Now to pay for it.

It's hard to find anyone who doesn't like the idea of clean, sustainable, renewable energy. We need a lot more of it, to help turn Britain into a low carbon economy and to make the country less dependent on imported supplies of gas.

But here’s the rub. Having a clean energy future depends on stable targets and credible policies. It also needs money, and lots of it. A lot of energy companies, big and small, will need to invest in wind farms, tidal power, photovoltaics and other clean energy sources. Now the banking crisis and the recession are hitting the clean energy sector hard.

The EU Renewable Energy Directive gives the UK a target for 15 per cent of energy to come from renewable sources by 2020. The commercial and technology reality is that electricity, rather than heat or transport, will have to account for most of the new renewable energy. So the UK has a de facto target for about 35 per cent of electricity to come from renewables by 2020, compared to 5 per cent now. That figure has always looked daunting, not least because the government’s Renewables Advisory Board estimates that £100 billion worth of capital investment will be needed over the next decade to achieve the 2020 target.

But new investment in renewable energy seems to be grinding to a halt. The Renewable Energy Association has just published a new survey showing that more than three quarters of Britain's green energy companies are facing major financial difficulties in gaining access to loans and investment money.

This is just the latest bit of grim news. Last year, BP opted out of the British renewables market because it anticipated low returns and said it was going to concentrate its alternative energy business on wind and solar in the US. Royal Dutch Shell pulled out of the London Array, a £3 billion wind-farm in the Thames estuary. In March, Shell announced that it will no longer invest in renewable technologies such as wind, solar and hydropower “because they are not economic." And Iberdrola Renewables, the world’s biggest investor in wind power, decided to cut its investment in Britain by £300 million (more than 40 per cent). Big energy companies like Centrica and EDF are looking again at their British renewables projects. The UK’s renewable energy targets look harder to achieve than ever.

An article in this week’s Economist picks up the main reasons why investors are getting out of renewables: lower oil and gas prices, sagging demand for energy and a shortage of credit, as well as particular problems in Britain, not least the falling pound. It goes on:

“Convinced that these are short-term problems, fans of renewables want government cash to see projects through the tough times. But there are longer term reasons for Britain’s comparative sluggishness.”

These include the “unwieldy” subsidy regime (the Renewables Obligation) and local opposition that often bogs windfarm projects down in the planning pipeline.

What the article doesn’t explain is hoqthese longer-term issues can be addressed. The subsidy regime can be improved by the use of feed-in tariffs, which offer a simple fixed payment for every unit of renewable energy generated. This solution was pioneered in Germany, which has now over 10 times the wind energy capacity of the UK. After a lot of parliamentary pressure (including from the Liberal Democrats), the government agreed last year to bring in feed-in tariffs, for small-scale renewables. Planning law reform is politically harder yet further changes may be unavoidable if we are serious about meeting the clean electricity target.

Moreover, there is a case for using a government-funded “green stimulus” package, for instance to help bridge the gap between the ending of current support measures – like the Low Carbon Building Programme and the introduction of feed-in tariffs (expected in 2010). The REA, for instance, puts the figure for short term measures at £625m.

Just don’t hold your breath. Despite all its rhetoric, the government has, so far, devoted just 7 per cent of its fiscal stimulus measures to environmental solutions, according to HSBC. This is one of the lowest levels in the developed world. There is now a huge hole in the UK public finances, meaning that we are unlikely to see the sort of stimulus package needed to keep up with other countries. And other low-carbon solutions, such as energy efficiency measures, have a claim that is at least as strong as that of the renewables sector [see here, for further details].

The other big question, also glossed over by The Economist, is about how to finance renewable energy developments. Neither the level of public borrowing nor the “longer-term issues” absolve the Labour government of its responsibilities in this regard. Gordon Brown and co could follow the example of their Irish counterparts, who have required each bank that they have recapitalised to introduce a €100m fund to support environment friendly investment and innovations in clean energy.

Other interesting new ideas are emerging. One such comes from James Cameron, of Climate Change Capital, who has called on the government to issue "climate bonds", similar to the war bonds used during WW2. These could be ring-fenced for green solutions, or linked to specific energy projects.

The government needs to take these suggestions further, and quickly. But their record on clean energy is not encouraging. The Economist quotes Andrew Simms of the New Economics Foundation as suggesting that the Labour government has simply lost interest in renewable energy – at the same time as falling in love with nuclear. Sadly, that may prove to be correct.

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