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REFF calls for extra policy muscle

Ash Raj and Stephan Nielsen

The 9th annual Renewable Energy Finance Forum (REFF) was held recently at the Park Plaza Riverbank Hotel in London. The consensus of opinion pointed to some muscular challenges ahead for clean energy.

It was appropriate that the best metaphor for the challenge facing the world's clean energy sector concerned body-building. The person who uttered it was from the US State that boasts Arnold Schwarzenegger as its Governor.

John Geesman, Commissioner of the California Energy Commission, told delegates at REFF in London, “lifting the deadweight of the energy system is like bench-pressing 800 pounds every day!”

In general, the two-day Forum featured optimism on the part of suppliers and investors, but concern remains about whether Governments are yet doing enough to stimulate the growth of renewable energy generation.

Oliver Schaefer, policy director of the European Renewable Energy Council, and chairman of the opening session, said that Governments needed to draw up comprehensive climate change policy frameworks if they are to improve the environment for investment, and at the same time achieve their emissions reduction and renewable energy goals.

In response, German Environment Minister Matthias Machnig insisted that policy makers were not trying to wriggle out of meeting renewable energy targets. “We are not questioning the renewable target itself, just how best to implement it,” he said.

At the second session of the first morning, chaired by New Energy Finance chairman and ceo Michael Liebreich, there was widespread confidence about the availability of finance for companies and renewable energy projects.

Read Gomm, managing director of London-based financial advisors Lexicon Partners, said high levels of investment in the sector were being driven by high oil prices, the increasing scale of renewable energy projects and Government-backed initiatives and incentive mechanisms.

Virgin Green Fund's Shai Weiss was confident of continued growth in early stage and venture capital funding; expansion and growth capital; and project finance. M&A activity has however declined recently, he said.

Director of investment banking at Credit Suisse, Robert Mansley, reported that the marketplace is becoming more competitive due to the presence of long-term, multinational players who have deep pockets and are able to do larger deals. Mortimer Menzel of Augusta & Company, a UK merchant bank to European middle market companies, agreed. “There is too much money chasing too few quality deals,” he said. And Menzel added, “fewer deals have closed successfully recently, because deals are complex and challenging, and sellers (mainly developers) are unused to demands and high sophistication.”

Biomass and biogas

In the Forum stream on biomass and biogas, the audience heard how – despite misgivings about the mergers and acquisitions market voiced in some quarters – consolidation was “inevitable”. Almost all speakers on the panel echoed similar sentiments and agreed that the major impediment to the growth of the industry was scarcity of feedstock.

Senior executive at Ernst & Young, Simon Wannop, observed that Utility-scale projects with a capacity of greater than 50MW were becoming increasingly common, and that the market would double in capacity over the next three years.

Philip New, president of BP Global Biofuels, questioned whether many of the smaller biofuels producers will be able to sustain themselves for much longer. Looking ahead, New said he believes that issues of sustainability in terms of energy and CO2 input will remain and that there will be a gradual – rather than sudden transition – to the 2nd generation of biofuels.

Tanja Cuppen, the global head of corporate finance at Rabobank International, expressed concerns over the future of biodiesel feedstock supply. She said constraints in the availability of land for rapeseed production, and volatility in prices of vegetable oil, meant that few biodiesel projects were financially viable. In addition, any hope of a quick switch to new technology is unlikely, as she does not think that 2nd generation feedstocks and processes – from jatropha or biomass-to-liquids – are likely to be available on a commercial scale before 2015.

Caroline Midgley, LMC International's head of Biofuels, spoke about price dynamics and the impact of policy in the EU ethanol market. She said that today, EU ethanol prices reflected the cost of imports from Brazil, and that this would continue as long as the EU had a supply deficit. She was, however, quite certain that mandates would define minimum and maximum prices, where the minimum is the EU supply price and the maximum is the buy-out price. With regard to development, she said that the EU would remain in deficit for at least two to three years if mandates stimulated demand.

Carbon issues

A networking breakfast on the second day was kicked off with personal introductions from all attendees, followed by coffee and a flurry of card swapping, as project developers sought out the newly-revealed bankers and investors.

Halldor Thorgeirsson, director of sustainable development mechanisms at the UNFCCC, said that CER revenue has little impact on a typical renewable energy project's IRR, adding “no one does CDM projects just for carbon finance”. This view was parroted by Tom Delay, ceo for the Carbon Trust, who said that the UK's Renewable Obligation Certificates (ROCs) will generate 6 times more revenue than the uplift in the wholesale price of electricity, due to carbon credits earned under the CDM or JI initiatives.

Delay emphasised the importance of the UK Renewables Obligation in bringing down the costs of new technologies over time, and the role of carbon finance as a means of making proven technologies viable. “Once technologies are mature, the carbon price should be sufficient to drive low carbon investment and innovation support can be withdrawn,” he said.

A session on Western Europe saw ample green certificate bashing from the Spanish. Santander and power firm Iberdrola both propounded the benefits of straightforward Feed-in-Tariffs (FiTs) over Green Certificates, which, they said, add the risk of volatility and administrative costs to investment calculations. Iberdrola cited EU data saying the countries with the most effective forms of support are Denmark, Spain and Germany, all of which have FiTs.

The general consensus in the Central & Eastern Europe session was that there is a wall of finance trying to enter Eastern Europe, but a shortfall of suitable projects to invest in. The situation is exacerbated by poor regulation and inconsistent renewable energy legislation. Mike Rand, principal banker at the European Bank for Reconstruction and Development, said that his organisation was playing a role in ironing out these policy issues. He also asserted that impending de-commissioning of nuclear and thermal capacity could help open up the region to renewable energy development.

Michael White, managing partner at Enercap Capital Partners, said the region was lagging behind Western Europe but that new-found national support for the renewable energy industry was driving change. If FiTs and Quota Obligations are introduced, White estimates that as much as €10bn (US$14bn) could be invested by 2010. He picked out the Czech Republic, Hungary, Poland, Slovakia and Romania as the most attractive countries for investment, adding that he thought wind and biomass would attract most investment, with waste-to-energy also showing potential.

About the authors:

Ash Raj and Stephan Nielsen work for New Energy Finance.

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