Going Cold Turkey: Renewables without Subsidies

That is the new reality facing many renewable energy players in Europe as the consequences of the Greek meltdown’s impact on the Euro hits home.  We had a taste of this last year as Spain and then Germany cut its feed-in-tariffs in a pique because the money intended as a subsidy to create jobs at home was siphoned off to China for wind turbines and PV panels.

The Greek-induced panic that Feed in tariff subsidies would be cut is coming on the heels of a new International Energy Agencies (IEA) report that solar power could represent up to 20% to 25% of global electricity production by 2050. The new IEA studies: the solar Photovoltaic (PV) and Concentrating Solar Power (CSP) tout the role that solar can play in improving  energy security while reducing CO2 emissions by six billion tonnes per year by 2050. IEA expects that combined PV and CSP could generate 9 000 Terawatt hours of power in 2050.

The problem is that is a lot of subsidies in the face of a Euro meltdown and something must give. The worry for investors in renewable energy is that just when the momentum is building for growth in solar market share those subsidies are at risk.  Germany’s parliament cut subsidies for new solar projects by 16% on May 6th as it grappled with the cost of the Euro problems and the bailout of Greece.[1] Others are expected to follow suit with Italian subsidies expected to be cut at least 30%.  Worse, Spain may cut subsidies on existing projects which were promised government support for the life of their projects.  It turns out it might be a short life.

Currency Consequences

Adding to the renewable energy woes are the fall in the value of the Euro undermines the profits of companies not based in Europe who are being forced to write down their foreign exchange losses as the Euro drops.  Some fo the biggest players in the world are being hit hard by this including the Chinese.  Bloomberg reports that profits at Yingli Green Energy Holdings are expected to fall 42% and Suntech Power would fall 79% if the Euro average $1.25 in exchange value for 2010.

Funding Fallout

The uncertainty over the government subsidies for renewable energy is having a chilling effect on new project financing in Europe and elsewhere.  Renovalia Energy and Grupo T-Solar Global were forced to postponed their IPOs and are searching for replacement financing of about half a billion dollars to keep their projects alive.[2] Since almost all these deals depend upon the assurances of the governments that the subsidy support will continue, speculation about reductions in subsidy support has a chilling impact on project development. [3]

One benchmark of this risky market is the 43% fall from its 2010 high for the Claymore Global Solar Index (TAN).  Uncertainty is a bad thing for investors in any sector but the prospects of having the subsidy rug pulled out from under a 25 year invest in a wind or solar energy project that requires government subsidies to be profitable is spooking the market.

So what?

The renewable energy sector is learning the hard way that no business model that is dependent upon subsidies is sustainable.  And no policy dependent upon fickle politicians seeking to cover their own re-election can withstand the need for change.

The demand for solar energy and wind power is high and both are nearing grid parity in production costs but profits are being hammered as the subsidies are reduced and increasingly at risk in the uncertain global economy.

Wake up call for solar energy and wind that sustainability means living off your own ingenuity and not the government dole.  The drivers for clean energy for large utility and corporate players is not changing but the fierce pressures to reduce cost and secure financing means that the consolidation of the sector is about to go into warp speed and the role of utilities as builders of power plants is likely to be renewed as they rush in to build the renewable energy capacity needed to satisfy their regulatory objective and build their rate base as well.

[1] http://theenergycollective.com/TheEnergyCollective/23342

[2] http://www.newenergyworldnetwork.com/renewable-energy-news/by_technology/solar-by_technology-new-news/spanish-renewable-energy-company-renovalia-shelves-ipo-due-to-stock-market-losses.html

[3] http://www.businessgreen.com/business-green/news/2257741/germany-italy-hint-delays-feed