Getting the green by going green: time to invest in alternative energy

AT THE last climate change summit, in Copenhagen in 2009, most world leaders felt duty bound to attend, including Barack Obama, who flew in for the last day. This year the summit is a lot closer for Obama, in Cancún, Mexico, but the President does not feel like making the trip. Neither, for that matter, does David Cameron.

Nonetheless, the problem of climate change has not gone away. And as BP’s disastrous Deepwater Horizon oil spill last summer demonstrated, conventional energies seem only to be getting more expensive and riskier to extract. Clean energy funds did relatively badly over the recession, but as the global economy recovers, might fund managers be wise to go green?

Some people certainly think so. Shaun Mays, the chief executive of Climate Change Capital – an environmental investment and advisory firm – argues that renewable energy investments should do very well over the next decade. In his view: “There are no doubts that renewables can be competitive. We have passed the tipping point now, and as the volume of investment increases, the learning process will keep pushing costs down”.

Mays accepts that the recession cut electricity prices a lot in many European countries, which hurt a lot of renewable energy producers. But as he observes: “Usually, the best time to invest is when it looks worst”. According to Mays, better monitoring and direction of electrical power will improve the efficiency of renewables, while economic recovery ought to increase electricity prices, helping renewables along.

POLITICAL RISK
It seems impossible to deny the importance of government support, however. One important motivator has been the adoption by many European countries of “feed-in tariffs”, which guarantee renewable energy producers a high price for their electricity.

Polaris Energy, a new private equity fund based in Luxembourg, is taking advantage of Italy’s feed-in tariff policy to build a solar plant in Southern Italy. According to its strategic advisor, Samuel Wilson, a combination of government support and maturing technology are “shifting momentum to Italy”. It is the guarantee of a 450 per cent price premium, together with generous bank funding, that is spurring investors to build solar panels in Italy.

Wilson is confident that the feed-in tariffs will last, providing stable revenues for the next twenty years – an enticing prospect for fund managers. But he accepts that there is definitely some political risk. “If [the Italian government] pulls the plug, then it will be difficult”, he says. Investors were spooked over the summer when Spain reduced its subsidies for wind and solar power.

Germany also recently scaled back its feed-in tariffs. Many large investors, and especially pension funds, will want to see a lot more regulatory stability before they commit more money.

According to Mays, when they do, they will find Britain a particularly enticing prospect, thanks to its “consistent, credible approach” to regulation. The government is due to unveil its new energy policies over the next fortnight. They are designed to put a floor underneath energy prices for low-carbon generators, probably through either feed-in tariffs or a carbon tax.

It seems undeniable that a dramatic investment in renewable energy infrastructure is underway. As the technology continues to improve, renewable energy generation is only going to get more competitive. But not all projects will succeed, and some will undoubtedly turn out to be government-subsidised follies. Much like political summits, the important thing is to know which to pay attention to and which to ignore.