Power perspectives

As investors search the globe for growth sectors in the midst of a widespread economic downturn, the renewable energy business is proving a promising proposition.

The fDi Intelligence crossborder inward investment database (produced by The Banker’s sister publication, fDi) and investor tracking tool has identified the top global investors in the field of renewable energy and gathered their views on the future of the industry as well as their own expansion plans.

The one thing all the companies agree on is that future growth of the sector is assured. The development in the past 30 years of renewable energy has coincided with a corresponding scramble for the world’s existing carbon energy resources. And although investment in carbon resources continues, several factors, including the need to manage climate change, energy security and soaring oil prices, are set to ensure strong future growth in the renewable energy business.

In fact, investment in renewables saw a steep rise last year according to the United Nations Environment Programme, reaching a reported $146.8bn invested worldwide, compared with $91.5bn the previous year.

But renewable energy encompasses many types of power generation, and selecting which sub-sectors and locations to invest in as the industry develops is not always straightforward. Energy generation technologies, such as wind, solar, wave and biomass, are all methods being used today but the companies that were interviewed all agreed wind power generation is the most important in terms of capacity and return on investment.

Although the renewable energy sector’s development started in Europe which – according to fDi’s Renewable Energy Investment Competitiveness Indices – is still the leading region for solar panel production, the US is now the leader in wind turbine production. But Europe is not far behind and is expected to see a boost in wind power investment following the EU’s move to mandate the increased use of renewable energy across the continent by 2020. Other countries have set targets in renewable energy, including China’s commitment to 15% renewable energy by 2020, indicating the sector’s future importance within the global business community.

Vivienne Cox, head of gas power and renewables, BP

BP is the world’s biggest cross-border investor in renewable energy, both in terms of capital value and number of projects. Although the company’s greatest renewable energy focus is on wind power, BP has a 30-year history of investing in renewable energies such as solar.

Head of gas power and renewable energy Vivienne Cox says the development of the wind energy industry is helped by an increasing number of governments prepared to make financial and regulatory changes in order to support the industry. “The Indian government, for example, is now setting up special economic zones with tax breaks and support through planning permission for renewable energy suppliers into the electricity grid,” says Ms Cox.

She adds that the main driver in location selection is government support, and future global hubs will require a combination of natural resource and government assistance. “Wind energy will only make an economic return if governments are prepared to provide financial support,” she says. When trading one country off against another, BP also looks at policy support, planning approval processes, local partners and the level of corruption and bribery which may lead to code of conduct issues, says Ms Cox.

Although European and US companies dominate the sector, competition from developing economies is on the horizon. “We’re beginning to see new competitors particularly coming out of developing economies, such as Indian firm Suzlon and Chinese solar companies,” says Ms Cox.

BP is fast expanding its global operations and has a big presence in the US as well as Spain, the Philippines, China and Portugal. BP’s investment does not include a great deal in Europe. “By the time we decided to enter the wind market, Europe was done,” says Ms Cox. “Most of our investment is in North America, but we’re increasingly seeing opportunities in north Africa, China and India,” she adds.

Although BP is firmly committed to the future of renewable energy, with a planned investment of $1.5bn in 2008, Ms Cox sees a talent pool shortfall as the critical barrier to the sector’s development in the next five to 10 years. “We’re already seeing it in the oil, gas and mining sectors; everyone is looking for the same engineers.” A lack of skills investment for many years means the human capital to feed the growth demands of the sector is simply not available. “It is ironic in a way that the biggest constraint to the sector is getting hold of project managers, engineers and construction companies,” she says.

German power company E.ON group has allocated 10% of its investment plan in the next three years to ren­ewables; that is $9.4bn between now and 2010. Frank Mastiaux, head of future renewables and climate protection at E.ON, is based in Düsseldorf, where the company is headquartered. Although Mr Mastiaux’s group is 50-strong in Germany, he has 500 employees positioned across all of E.ON’s renewable energy global sites, with the biggest team in the UK.

Other locations include Toronto, Chicago and Austin in North America, Madrid, Düsseldorf and Munich in Europe, as well as an outpost in Kuala Lumpur, Malaysia. “This is a very decentralised business and there is no point in managing the business from one location,” says Mr Mastiaux.

According to Mr Mastiaux, a good investment requires the right physical surroundings, good regulatory framework ensuring grid access and efficient business processing. But above all, the right kind of government subsidy to support the investment is critical. “There are factors that have to be in the right place before you have even considered your own capabilities,” he says.

There are several very different subsidy models and it is almost a philosophical debate as to which one is the best, says Mr Mastiaux. “Some of them give you a high level of certainty, which is helpful when you want to kick-start your investment but may become a free lunch over time, diminishing the real incentive for technology improvements,” he says, adding: “The UK system of green certificates where you are exposed to the market, for example, drives both efficiency and technology improvements even though it is less certain for those who invest; it is a difficult subject.”

In February 2008, German energy firm RWE established operating company RWE Innogy for its renewable energy business. Although hydro­electric power accounted for about half the RWE Innogy generation when the operating company was launched, the focus, going forward, is on wind power, says chief operating officer Kevin McCullough.

With the company’s focus on Europe, most of Innogy’s onshore wind power plants are located in the UK and Germany. “Although, some of the more eastern European states, such as the Czech Republic, Poland and Hungary, are looking favourable both economically and in terms of natural conditions,” says Mr McCullough.

Although onshore is an area that RWE will continue to develop, Mr McCullough believes the exponential growth area will be in offshore wind power generation. The company is building its second offshore wind farm at Rhyl Slats off the north coast of Wales. The 90-megawatt (MW) plant is awaiting governmental approval and will be followed by an even larger 750MW scheme off the coast of Wales. “You are looking at a massive step up in megawatts compared with onshore because offshore wind quality is more powerful, uninterrupted and captured on bigger surface areas,” says Mr McCullough.

The firm’s strong UK presence reflects the country’s favourable renewable energy obligation. But perhaps the biggest draw is that of all the landmass and seascape of western Europe, 40% of available wind lies within the UK and its surrounding waters, says Mr McCullough. “But as far as challenges go, planning permission is the absolute Achilles heel of the UK renewable energy market; it is among the hardest, if not the hardest location for planning permission.” Planning decisions take so long that one of RWE’s projects has been awaiting determination since December 2005, says Mr McCullough.

Another challenge is a lag in supply of specialist turbines for UK wind conditions, which is forcing prices up although Mr McCullough says suppliers are starting to address the shortage.

French firm EDF’s renewable energy activities are developed through its subsidiary, EDF Energies Nouvelles. The company plans to invest more than $4.7bn by 2010 in renewable energy, to achieve a 3000MW hours capacity by 2011, for which wind power will be the main contributor.

Energies Nouvelles has a strong presence in the US and in nine European countries, including France, Italy, the UK, Greece and Portugal. David Corchia, CEO of EDF Energies Nouvelles, says wind energy growth differs in each country, making a diversified international presence necessary. “In Germany, growth is continuous but slowing down. In Portugal, growth is extremely strong, but this will calm down given the size of the country and its installed capacity,” he says. Mr Corchia sees the strongest growth potential in France and the UK, where he predicts growth will be strong for at least eight to 10 years.

The US, by contrast, is at the beginning stages, where for the next five years it will be comparable with Europe. “But looking ahead to 10 years from now, the US will keep accelerating to surpass western Europe,” predicts Mr Corchia.

EDF Energies Nouvelles is also developing in new territories, primarily in Canada, Mexico, eastern Europe, China and India. China has potential for more than 5000MW a year, equivalent to the US. “But we’re going forward carefully with China, because wind energy is a local business; you have to be a local company. You have to be from the neighbourhood,” says Mr Corchia.

EDF Energies Nouvelles’ growth strategy is chiefly based on expansion in wind energy but its second investment priority, solar energy, also holds growth potential. “I strongly believe photovoltaic solar power may become an even bigger market than wind because its development and growth is no longer supported solely by Germany but also by France, Spain, Italy and Greece, as well as by certain US states and some Canadian provinces,” says Mr Corchia.

The cost of solar electricity is still high but has much potential, he says: “We’re helping to create an industry that will provide economically competitive solutions in the long run but to do so, political decision-makers must provide financial support and visibility.”

Both wind and solar development depend on an optimised supply strategy for turbines or panels, to face rising costs in the wind segment, and to overcome the shortage of silicon in solar activity. “In the wind segment, we started building our portfolio in 2000, well ahead of many other players and have secured our supply in turbines by signing contracts with several manufacturers, such as GE, Vestas or Repower, covering our needs up to 2010,” says Mr Corchia.

Finnish company Fortum is the Nordic region’s biggest investor in hydropower. The company primarily operates in Finland, Sweden and Norway but is looking to eventually expand into eastern Europe, says chief executive Mikael Lillius.

“We would like to see more investment in hydropower but we have very strong environmental restrictions on building and that is a concern,” he says. Biomass also has its challenges as the industry is in direct competition with one of the financial backbones of the Nordic region: the paper and pulp industry. “If governments want to support biomass in a big way, the energy firms then compete with the forest industry for the same raw materials on different terms and conditions; it is a very delicate balance,” he says. The answer is that one should leave all options open and have a broad portfolio in renewable energy sources, adds Mr Lillius.

In the same way, he believes the recent EU renewable energy targets have created inconsistencies. “On the one hand we are seeing a shift towards a harmonised EU power and gas market but the target for renewables is country-based, and in this regard we are moving backwards towards fragmentation with a high risk of countries competing under different support schemes,” he says. Mr Lillius believes that renewable energy will play a growing role in the future but harmonised support schemes are required to achieve EU targets.