CPI study shows that policymakers need to maintain a mix of investors and address market design issues to attract the investment needed to reach renewable deployment targets cost-effectively
London / Berlin: More than 30 billion euros a year could be available for investment in the expansion of renewable energy capacity in Germany — more than twice the amount required to finance the addition of 7.4 GW of new solar PV and wind capacity per year to 2020 — as long as the country shifts policy effectively to deal with the next phase of the energy transition. So shows analysis in a new report from Climate Policy Initiative (CPI) carried out with support from the European Climate Foundation.
Policy must encourage the right mix of investors including utilities, developers, banks, pension funds, and large and small energy consumers in order to attract investment at the lowest possible cost. Particular care must be taken with the design of auctions that were first introduced last year for ground-mounted solar photovoltaic systems as they may discourage small investors because of their high complexity.
According to CPI, small investors like private households, farmers or energy cooperatives could invest up to 8 billion euros per year, around half of the total investment required to reach Germany’s expansion targets to 2020. As this group of investors often demand a lower return on their capital, the cost of the energy transition could rise if policy changes restrict their future participation in the market.
Other challenges could also restrict the amount and increase the cost of investment available after 2020. CPI finds that, if the current set of policies remains in place, by 2030 the number of negative electricity price hours per year could increase tenfold from the current 100 to 1,000. In this scenario, the current agreement on state aid between the German government and European Union, which prohibits revenue support during times of prolonged negative prices, would increase revenue risk for investors who would demand higher returns in compensation. This could increase by nearly 20% the cost of supporting an onshore wind farm starting construction in 2020.
CPI highlights several alternatives to current market rules that reduce the risk to investors associated with negative prices and hence, the potential cost to the consumer of the energy transition.
David Nelson, Executive Director, CPI Energy Finance and lead author of the report said: “There is more than enough capital available to cost effectively meet 2020 targets for renewables provided policy continues to encourage a mix of investors. Exemptions from renewable auctions or simplified bidding processes can help small investors, for example, to stay in the game. Beyond 2020, creating greater electricity system flexibility through demand-side measures and improved energy market design can prevent the imposition of unmanageable risks on renewable energy investors and keep costs low.”
Dan Storey – Europe, International
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Elysha Rom-Povolo – US, International
Climate Policy Initiative (CPI) works to improve the most important energy and land use policies around the world, with a particular focus on finance. We support decision makers through in-depth analysis on what works and what does not.
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