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Weighing up investment options in European energy markets

Following the debt crisis in Europe, several countries have made significant changes to their incentive mechanisms for renewable energy projects – and a number of other countries are debating following suit. These developments change the fundamentals of the business cases for renewable energy investments and create massive uncertainty for many players in the sector.

Decision-makers will have to place far greater emphasis on the strategic, regulatory and economic analysis of projects and investments if they want to continue to be successful. Consideration of political risk is now just as important as fundamental economics given the degree to which government support is vital in setting out an energy investment thesis.

To prepare, business leaders should take note of the following key points:

Use regulatory changes and incentive schemes to create competitive advantage

According to our Energy Investment Map analysis, the increase of solar projects in the most attractive countries for solar investments over the last five years, such as Spain, Germany and Italy, is slowing down significantly due to tariff cuts or even the complete suspension of incentive schemes. Meanwhile wind power projects, mainly onshore, have overtaken photovoltaic projects from an economic perspective.

Denmark and Norway lead the field in terms of commitment to onshore wind, but wind is an increasingly important energy source for the UK where investment interest in offshore wind is now at world-leading levels. Recent comments from the Chairman and CEO of Spanish firm Iberdrola demonstrate its focus on
UK-sector investment ahead of Spain or Germany due to concerns over changes to the investment incentive regimes in these two countries.

Understand the implications of interconnection between electricity systems across European countries

A classic example of the implications of interconnection is found in the UK Energy Bill, introduced in November 2012. This Bill is designed to achieve low carbon generation targets while also addressing future security of supply risks. With an expected increase in intermittent generation, the UK plans to develop a significant and diverse mix of interconnected sources to minimise risk and ensure genuine security of supply in a low carbon future. 

Due in part to this interconnectedness, the debate is shifting to EU policy alignment and the impact of individual country policies in Europe overall. The ‘market coupling’ that integrates European power markets will encourage other European nations to consider policies similar to the UK’s or accept the consequences. These might include shifting power flows from the UK and a change to relative competitiveness between nations.

Changes to energy prices will create opportunities for new market entrants

For end-users, changes to incentive schemes for renewables in Europe have led to considerable price increases. These in turn are endangering the competitiveness of energy-intensive industries, which, in a global market, are unable to compete on price against those benefiting from cheap US gas supplies. Both consumers and companies will be looking to respond to these price rises by reducing energy consumption and by seeking out cheaper sources, creating new opportunities for energy companies in the process.

Our analysis provides the foundation for our renewable and conventional energy indices. These help investors identify technologies and locations where they might look to find investment opportunities that match their ambitions for return on investment and their appetite for risk.

To find out more about the insights we can provide into European energy markets, contact us now. 

Ron Norman
Energy and utilities
contact us now
Liz Parminter
Energy and utilities
contact us now

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