Renewables investors identify policy design as primary risk factor

10 February 2016, Brussels – Investors consider policy design to be the most significant uncertainty associated with renewable projects, resulting in higher capital costs as well as growing gaps between EU Member States, a study has found.

The DiaCore project, funded by the Executive Agency for Small and Medium Enterprises (EASME), estimated the cost of capital for onshore wind projects across the EU28. They discovered that the weighted average cost of capital varied considerably, from 3.5% in Germany to above 11% in parts of Southern and Eastern Europe. The cost of capital can significantly influence the viability of a project, with renewable schemes requiring large up front investments.

In Germany, where the ‘Energiewende’ has provided a supportive framework for renewables, investments are considered relatively low risk and this is reflected in a reduced cost of capital. In most North-Western Member States, where cost of capital was 7% or lower, there was also a good financial base for onshore wind, the study found.

However, this is not the case in many other Members, where unstable policies, such as sudden retroactive changes in incentives, heighten risk for investors. The increased cost of capital is commonly transferred to energy consumers or tax payers, or may block a project altogether.

“There is a growing gap among EU Member States on the financing of renewable energy projects. From the very start of a project, project developers in the EU do not face the same financing conditions,” explained David de Jager of Ecofys.

The study outlined how the replication of best practices from Germany could reduce the total weighted average cost of capital in the EU28 from 8% to 6%. A number of additional policies were recommended to mitigate risk, for instance by providing clarity on grid procedures and processes, implementing long-term stable policy schemes, improving structure and quality of the public administrative system and providing financial risk-sharing.

The press release and full report are available on the DiaCore website.

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