"Green Growth" Puts Climate Spending In Focus
Author: Gerard Wynn - Analysis
LONDON - The United States, Europe and other nations will spend about $100 billion on projects to fight climate change under economic stimulus plans, raising questions about how much support the industry needs.
Spending money through a recession to boost jobs is well established, but the long term value-for-money of current support for clean energy is questioned.
Political and business leaders have called for "green growth" spending over the next two to three years to boost fossil fuel alternatives and cut carbon emissions, and create jobs and help a sector wilting in the downturn.
Many energy alternatives including wind and solar are not yet cost-competitive with fossil fuels, and so need incentives.
"The fiscal stimulus simplifies things. It says -- let's not worry about cost efficiency but get things moving ... give the money to somebody making something we want," said Nick Mabey, head of the London-based environment group E3G.
But in the longer term European supports need to be more transparent, Mabey said, arguing that suppliers should bid to produce low-carbon electricity, as in some parts of the United States, rather than get fixed price support as now.
"If we're trying to push a big transformation you want it to be cost-effective."
"The (European) system just makes everything untransparent and gives lots of opportunities for people to get excess profits. It doesn't seem the best bargain for the consumer or the government."
An additional question is just how much government help electricity producers, for example, need to produce low-carbon power, rather than invest off their balance sheet.
The EU will force all west European utilities from 2013 to pay for every ton of carbon emissions, a strong driver for them to invest now in wind power, for example.
But utilities argue that the economics of offshore wind projects, in particular, are finely balanced as a result of lower oil and gas prices. Exactly how much support they need is difficult to predict.
"This is simply arm-wrestling with the government over who pays what," said Michael Liebreich, head of researchers New Energy Finance.
"The problem we've got is that calculations (of support) were done at energy prices probably higher than current prices, and they've gone back and said this project is now marginal."
"Why not use this opportunity to get 200 million of tax breaks (under a fiscal stimulus)?"
One area that public investment is needed is in power grids and other networks to connect new, renewable sources of energy.
"The argument of value for money can only be pushed to a certain level, for example you need significant investment in new infrastructure," said HSBC analyst Joaquim de Lima.
The United States is expected this month to agree about $75 billion spending on climate change related projects. European countries have proposed about 10 billion euros ($13.03 billion), and other countries have similar plans.
Asset managers are especially excited about Obama's initiative, because this is a policy shift in a country where huge private sector funds have barely invested in listed clean energy companies to date, fund managers say.
But it is not just public equity financing that clean energy companies need. Bank lending is a key plank of project financing and has come to a standstill.
Falling oil prices have not helped. One of the cheapest forms of alternative energy, onshore wind, is competitive at a $55 oil price -- estimates investors Impax Asset Management -- far above Thursday's price of $40.
Zero growth in investment in climate-related companies is expected this year, at about $150 billion, compared with 60 percent annual growth from 2006-07, say New Energy Finance.
That assumes a pick-up later this year. Growth could be faster if the Obama administration pushed through a federal minimum standard for producing renewable energy.
Less investment will mean fewer installations. Solar power will not match its breakneck 55 percent annual growth of the past five years, said Citi analysts. Wind power growth may fall to about 20 percent from nearly 30 percent last year, estimated New Energy Finance.
A bright spot from the recession will be falling equipment prices. A lack of project finance now is flipping kit shortages into over-capacity in the wind industry and a glut of solar panels.
Solar-grade silicon prices will fall by more than 30 percent and wind turbine prices by up to 15 this year, according to New Energy Finance. That will hurt manufacturers but aid developers and operators -- now top picks for investors.