The investment required to meet the UK’s 2020 renewable energy targets is likely to be below £40 billion ($65 billion), not the “intimidatingly large” £200 billion often cited, according to a report out today. However, much of that capital is likely to be needed between 2013 and 2015, which “could pose financing challenges”.
Mountains or molehills?, by London-based advisory firm Paradigm Change Capital Partners, aims to take a what it says is a “pragmatic view” of the anticipated development of renewable energy technologies by 2020.
It says that while 30GW of additional capacity would be required to meet the government’s most ambitious renewable energy target, at a cost of £79 billion, the UK’s binding commitments – under the 2008 Climate Change Act and the EU’s 2009 renewable energy directive – could be met with just 19GW of extra capacity, costing £51 billion.
Moreover, the report estimates that around £14.5 billion of capital has already been committed, reducing this figure to £36.6 billion, which drops further when the likely recycling of capital is taken into account.
“The overarching concern, therefore, is related not so much to the total volume of capital required, but to the timing and concentration of this requirement,” the report says.
The report estimates that around £19.6 billion will be required between 2013 and 2015, given the assumption that the current Renewables Obligation Certificate (ROC) support regime for onshore and offshore wind will remain in place (‘grandfathered’) until 2017, and the timing of finance needed for projects.
It warns that “there are a limited number of investors who understand this space – particularly newer technologies such as offshore wind – and are willing to commit large sums to its construction. With the anticipated spike in capital demand occurring with such a short lead time (2013), there is some doubt as to the number of new investors who will have come up to speed sufficiently to invest in this capital intensive and somewhat unproven technology.”
It therefore calls for the government to “smooth out” this spike through the “extension of the ROC grandfathering, or through the rapid introduction of a new equally attractive regime”.
If that is done and supply chain issues are addressed, “we do not see a serious challenge by these investors to supply the capital required.”
However, the report “flag[s] a warning sign for the years following 2020 and out to 2050. Post 2020, in particular, will be where the majority of the most challenging low-carbon projects are executed. It is expected that offshore wind will move into significantly deeper waters, [carbon capture and storage] will potentially come online, with nuclear to pick up pace. All three of these technologies are hugely capital intensive, are in some instances still unproven and have unknown cost structures. The 2020 target is met with the low hanging fruit, however post 2020 is the true challenge, one which we will be actively investigating to determine when and where there might be capital constraints.”
The report was produced in association with law firm Norton Rose.
By. Mark Nicholls
Source: Environmental Finance