Private equity and corporate spend must be an increasingly organic vehicle for cleantech investment
26 September 2011, Electricity, Nuclear, Solar, Wind
The European Commission estimates that meeting the EU's environmental targets will require investment in excess of E50bn a year over the next decade; nearly triple the amount the bloc is currently projected to spend. In the face of such a massive need - which will ultimately be levied against customers' bills - and a depressed economic outlook, the question of where the money will come from seems more controversial than ever.
Colossal levels of finance are required in many different forms, spread across the entire clean technology (cleantech) value chain. Development in the cleantech market is always linked to political risks and to the difficulties of balancing risk and reward in the financing of nascent and comparatively unproven technologies. Investors are thus rightly concerned about the scale and the diversity of funds needed to finance the shift to a low-carbon economy.
Renewed market turmoil in 2011 has exacerbated an already difficult situation by lowering electricity demand forecasts and price expectations in an energy market which is currently oversupplied. In many ways, this weakens the business case for clean energy new build. The economic downturn has taken its toll on energy infrastructure investment initiatives, particularly across the cleantech sector, as risk-averse investors retreat to safe havens. However, worsening economic conditions have also brought about a shift in political priorities, favoring budgetary restraint over fresh spending on environmental issues.
In the coming years, the private investment community will deliver a fair proportion of the required cleantech investment on the back of the many supportive policy and legislative measures adopted in Europe over the past decade. However, markets and energy companies acting on their own will not raise sufficient diversified capital to deliver Europe's exacting environmental ambitions, hence repeated investor calls for more transparent and stable policy making that addresses supply- and demand-side limitations.
Delays in obtaining the necessary environmental and construction permits are partly to blame for the often slow deployment of clean energy technologies, but the difficulty in accessing finance and the lack of adequate risk-mitigating instruments - particularly for projects with high long-term benefits but low short-term commercial justification - remain the largest obstacles.
As investor returns decline, the appeal of a growth market such as cleantech cannot be underestimated. The troika of energy independence, security of supply, and environmental issues means that the cleantech sector - characterized today by its structural diversity in terms of technologies, players, and geographic regions - can do little other than flourish in the long term, regardless of short-term state and local subsidy cutbacks. The $64bn question in investment circles thus becomes: how can corporate and private equity sectors successfully engage with cleantech over the longer term and bridge a very real investment gap?
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