Europe risks missing its climate targets without greater regulatory certainty to encourage investment, according to experts. “Regulatory stability and clarity are a must to achieve the ambitious renewable growth targets set at EU [level],” says Rui Teixeira, Group Chief Finance Officer at the global energy company EDP. “These are capital-intensive and very long-term projects, [with] above 30 years useful life, so the investment decision relies on having a stable regulatory framework.”
Following energy price hikes prompted by Russia’s invasion of Ukraine, several European countries have considered imposing electricity generation windfall taxes that could serve as a disincentive for investment. A draft plan in Germany last November was said to put billions of euros of backing at risk.1 In Britain, RenewableUK, an industry body, warned a windfall tax announced as part of the government’s Autumn Statement “could severely deter investment in much-needed new renewable energy projects.”2
The EU, meanwhile, has agreed a €180 per MWh cap on the revenues due to inframarginal power generators such as wind and solar plants. “Although implementation of the revenue cap on inframarginal power generators isn’t until February [2023], already we see a patchwork of moves across Europe,” says Dries Acke, Policy Director at SolarPower Europe, which represents Europe’s solar sector. “It has created uncertain conditions for investors.”
Regulatory stability and clarity are a must to achieve the ambitious renewable growth targets set at EU level
The warnings come amid lacklustre results in European government power auctions. In Spain, an auction for 3.3GW of renewable energy capacity saw just 50MW being handed out after the government capped offers at a price that developers were not willing to accept.3 Germany’s latest solar-power auction also failed to live up to expectations, with only 609MW of 890MW being awarded.4
Acke said developers were eschewing government schemes and taking their chances on merchant markets. “We don’t necessarily see auction results like those seen in Spain and Germany as a signal of lowered performance for the sector,” he says. “Developers are simply selecting projects which sell their power on the free market on a merchant basis. This can sometimes be a more attractive option than auctions.”
Lack of confidence
However, lack of confidence in government programmes is of concern given the need to rapidly ramp up investment in energy transition infrastructure. “Europe has been under-investing in the electricity grid over the past few years,” says Pierre Tardieu, Chief Policy Officer at the industry association WindEurope. “Europe is investing more or less €40bn per year and it needs to be closer to somewhere between €66bn and €80bn.”
Teixeira says the main problem for the energy transition is not the availability of cash. “We have seen a significant amount of capital, mostly in the form of debt but also some equity in the early part of 2022, flowing into the energy transition,” he says.
Europe is investing more or less €40bn per year and it needs to be closer to somewhere between €66bn and €80bn
EDP alone issued €2.2bn in green bonds last year, Texeira adds. “EDP was a pioneer in this area with its first issuance in 2018. Since then, we have so far completed 13 green issuances, raising €9.8bn euros in total. The issue is not finding financing but the cost of it, which has increased significantly.”
Borrowing costs can be affected by regulatory uncertainty as lenders price in the risk of changes to the profitability of projects. “In moments when urgent intervention may be needed, particular care is required,” Teixeira warns. “We understand temporary measures to cap power prices and to protect consumers, but unrealised profits by generators cannot be clawed back, as clearly stated by the EU Council Emergency Regulation on High Prices. Yet this is happening in countries such as Romania or Poland.”
Taxing unrealised profits
Regulators in such markets “are disregarding the fact that prudent investors may have already sold their energy at low prices through hedges done well before 2021,” Teixeira says. “Since those hedges are not being properly accounted, producers are being taxed for unrealised profits and recording losses for every MWh they produce. This not only leaves affected companies with less cash available to invest, but also discourages investors from accelerating renewables installations.”
Acke at SolarPower Europe says an upcoming EU market design review “will be an opportunity to reinforce a stable regulatory framework that accelerates investments in renewables and flexibility.” In addition, he says, “it’s imperative that the [inframarginal power generation] cap ends as planned in February 2024.”
“There is a commitment from policymakers and the industry to deliver 2030 targets and bring its value to consumers [through] lower energy costs, security of supply and a greener Europe,” concludes Teixeira. “The energy sector, including EDP, is striving to be part of the solution, while ensuring that the climate emergency is being properly addressed through the deployment of renewable technologies. Companies, governments and civil society need to work hand in hand in promoting a stable environment in which we must not lose track of long-term decarbonisation targets.”
