Germany Is Most Attractive Country For Renewable Energy Investment

Jan 5 2009 | 4:48pm ET

The U.S. has seen its position as the most attractive destination for investment in renewable energy nose dive, helping Germany move to joint first place, according to Ernst & Young’s latest Renewable energy country attractiveness indices.

The indices, which track and score global investment in renewable energy, also reveal that there has been a record reduction in the attractiveness of all 20 countries included for the first time since its creation five years ago.

Jonathan Johns, head of renewable energy at Ernst & Young says, "Although the financial crisis has negatively impacted the attractiveness of all countries in the indices, the U.S. has borne the brunt of the economic slowdown."

The economic situation in the U.S. has restricted access to finance and slowed the recycling of Production Tax Credits (PTC) and Investment Tax Credits (ITC), which allow corporates to gain tax breaks by purchasing credits from renewables developers.

“This has allowed Germany, almost by default, to take the position of most attractive destination for renewable investment alongside the US, largely as a result of its feed-in tariff making the German market more resilient,” Johns adds.

The UK moved one place to joint fifth in the All renewables index, sharing the position with Spain. The attractiveness of the UK was boosted by the UK Government’s announcement in its Pre Budget Report to extend the renewables obligation to 2037, as well as the enactment of the Energy and Planning Act 2008, which includes the establishment of a new feed-in tariff for small wind farm projects with up to 5 megawatt capacity.

U.S.’s Fall From Grace

Johns says that although the US attractiveness has been enhanced by the signing of the Energy Improvement and Extension Act – which includes the extension of production and investment tax credits for renewable technologies – the economic crisis has hit the industry hard.

The financial services industry was by far the biggest consumer of PTC and ITC, which have been the cornerstone of the industry’s success in the U.S. However, the volatility in the global financial markets has meant many of these institutions have been unable to purchase these credits, and this is preventing many investors in renewables projects from realizing the value of their investments.

A radical improvement in the effectiveness of the PTC will therefore be needed to restore the fortunes of the US industry.

“The path followed by the US is critical to the industry and measures announced by the impending Obama presidency will be keenly monitored. Worldwide growth of renewables is likely to continue, albeit at reduced levels, but if the US were to stall its plans there would be significant reverberations for the global industry,” adds Johns.

Germany Could Fall As Quickly As It Has Risen

As well as the attractive feed-in tariffs, Germany’s position at the top of the Indices has been boosted by the news that its Government has set out plans to build 33 offshore wind farms as part of its efforts to achieve 25 gigawatts from wind by 2030, but in practice investments maybe delayed.

“While the German Government has set out bold plans for energy generation from wind farms, the reality may turn out to be different as the financial crisis stems the flow of capital and funding,” says Johns.

Falling Pound Takes Wind Out Of UK’s Sails

While the UK’s position has been bolstered by the extension of the renewables obligation and the enactment of the Energy and Planning Act 2008, the UK industry is facing increasing cost pressures due to the decline of the pound versus the euro.

Johns says, “The falling value of the pound is making UK renewable projects increasingly expensive as imported technologies from Europe continue to rise as a result of the exchange rate. The declining price of oil is compounding the problem by reducing project revenues as wholesale energy prices fall, resulting in many projects becoming uneconomical. It is unlikely that falling commodity prices such as steel and copper will compensate enough.”

Across the globe, there is likely to be a raft of project cancellations and delays as industry players adopt a wait and see approach in relation to regulation and supply chain costs. In the meantime, Johns says that capital rich investors will take advantage.

“An interesting dynamic developing in the industry, and one to watch over the coming months, is the increase in partnerships and joint ventures between industry players and cash rich investors in these capital constrained times,” he concluded.

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