Bloomberg New Energy Finance - Week In Review

This Week In Review was sent on Tuesday 29 July.

UK PAYMENTS FOR RENEWABLES AND GERMAN LAW CHANGES GET EU NOD

The UK emerged from the EU state aid inquisition last week with its electricity market reforms in the clear. With the European Commission’s stamp of approval, Britain is now able to provide wind farms and solar and biomass plants with deals known as contracts for difference (CfD), which encourage investments by guaranteeing payments for 15 years. 

The government in London will underwrite about 80% of power demand through capacity-market payments to fossil-fuel-fired power plants and to nuclear reactors, in return for ensuring electricity is provided when needed. By doing this, the country is aiming to ensure that the lights stay on while boosting the proportion of power it gets from renewables such as wind and solar.  

Following the nod from the Commission, the government promptly announced the draft budget for the first CfD allocation round to be held in October. Pot 1 technologies, which include onshore wind and PV, will compete for GBP 50m per year in support payments to top up the power price. The Department of Energy & Climate Change intends to follow this with another GBP 50m budget for a potential second allocation round in autumn 2015. 

According to an Analyst Reaction titled UK fog clears for first CfD round, biomass left out published 24 July, Bloomberg New Energy Finance expects most onshore wind projects to opt for the outgoing Renewables Obligation support mechanism, which remains open to them until 2017. This could leave some room for PV projects in the CfD allocation round. Having said that, many solar developers are likely to try to squeeze into the RO before they risk being shut out of it next year. 

What the CfD means for solar in comparison with wind is discussed in more detail in the Q3 2014 Global PV Market Outlook. In the note, BNEF analysts write: “For solar, the finalised feed-in tariff CfD is much worse than the primary outline delivered in December, as solar will now have to compete in auctions on price with other 'Group 1' mature technologies like onshore wind, and in the UK's cloudy climate solar will lose.” 

Meanwhile, in Germany, where the European Commission has approved the final changes to its renewable energy law, or EEG, the commercial rooftop and utility segments have had their policy support reduced with the introduction of an auto-consumption tax. Despite this, the economics of auto-consumption for households is favourable and BNEF expects installations in the 10kW-and-lesser segment to increase, particularly as retail electricity prices for residential consumers increase. 

In policy in other countries, Italy continues to deliver blows to investor confidence with retroactive measures affecting operational PV plants. Spain may also see little activity too, with investor confidence at a low after a series of retroactive changes. Canadian policy may be friendlier to solar, the only problem being that the country is not very sunny. 

Nevertheless, a stronger second half awaits the global PV market. According to the note, the expected capacity addition for 2014 will be up by several gigawatts, to 45GW-49.6GW. The main drivers and uncertainties are in Japan, which is picking up more strongly than previously expected and is now likely to build 10.3-11.9GW in 2014, and in China, likely to build some 12-14GW this year. 

In an interview on Bloomberg TV, Bloomberg New Energy Finance’s Jenny Chase talks about how solar affordability is pushing energy to new heights. “It’s not even it’s going to, it does,” she says on whether it will make economic sense even if subsidies were to be stripped from 2016 onwards. “Solar systems have gotten so cheap that there are fairly significant parts of the world where people are just building these things, forget subsidy,” she adds. 

Global public market investment in solar in Q2 was $1.8bn

Global public market investment in solar in Q2 was $1.8bn

Q&A of the week

Bond ‘infrastructure’ to aid clean energy, SEB says

Green bonds are not just a fashionable label for companies and banks to use in their fundraising from institutions such as insurers and pension funds, they are also creating the infrastructure to make possible the deployment of new money to clean energy and environmental projects.

So said Christopher Flensborg, regarded as the ‘father of the green bond’ and head of sustainable products at Skandinaviska Enskilda Banken, one of the leading underwriters in this new and burgeoning market, in an interview.

Research from Bloomberg New Energy Finance this summer found that there had already been USD 16.6bn worth of green bond issuance worldwide in the first five months of 2014, and predicted that the total could reach USD 40bn if interest continues at the same rate. That would be nearly three times 2013’s record of USD 14bn.

Among USD 2.7bn of green bond issues so far this year in which SEB has been a key intermediary have been USD 220m from Swedish hygiene and forest company Svenska Cellulosa, and USD 300m from Export Development Canada.

Q: How would you describe the level of interest in green bonds now?

A: The interest is very, very broad. People did not know about green bonds five years ago, but they do now. A lot of people are looking at it and analysing the right way to get involved. It is still a large niche, but the entrance of KfW may take it a bit further towards the mainstream. Some of the milestones were State Street Global Advisors’ creation of their green bond strategy in 2011, followed by Zurich Financial’s decision to do it on a strategic level and to put out an external mandate. That forced managers to take a look at green bonds and what their future might be. BlackRock got the mandate from Zurich and started to implement it, pushing the banks to come out with more issuance. Then there was the creation of the Green Bond Principles by 13 banks, with a governance board to refine the framework and create standards over the next three to five years. Meanwhile, investors are realising a lot of trends in society related to climate risks. They see the C40 group of cities addressing the challenges that urbanisation is causing to infrastructure, to water quality, the waste of heat, the waste of energy in transport. The result is that cities are going in with new requirements for their suppliers to meet, and those will change financial values. Green bonds enable investors and issuers to exchange views on these trends.

Q: One criticism of green bonds is over ‘additionality’. Some utilities and banks that were investing heavily in clean energy, funded from normal sources, are now issuing green bonds to finance clean energy. Yet, there is no guarantee that the net result will be increased investment.

A: It is very important to look at the long-term goal. Ideally…

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