Question: What can be deduced from RWE's plans to cut its investment in renewable energy?
Ben Warren, head of environmental finance, Ernst and Young
Moves like this should be seen in the wider context of utilities looking to reduce capital spending. This goes beyond simply funding core activity and cutting funding for non-core activity to include a more rigorous overhaul of where and how capital is allocated altogether. And that's where the option to use external or third party capital comes in.
As institutional investors, such as retail funds and capital debt market, become increasingly drawn to the renewables sector, this creates competition that in turn drives down the cost to fund the construction and operation of new renewables assets.
As a result, it can be cheaper and easier for a utility to use third party capital to invest in renewables rather than thermal generation, or even to fund the cost of smart meter roll out.
Feng Zhao, director of wind energy FTI Consulting
Driven by regional and national targets for renewables, most of European utilities have established their ambitious goals for renewables capacity and have expanded their wind project development pipelines either by acquiring projects from other developers in the industry or by investing in new projects in the past ten years.
The global recession following the financial crisis of late 2008 and the austerity measures caused by sovereign debt crisis in Eurozone, however, have not only reduced their appetite for adding to development, but also forced some of them to divest non-core wind project asset and reset their near-term or mid-term targets as well. Therefore, the recent slash in renewables investment by RWE is part of a recent trend observed in the wind industry.
In Europe, major utilities are continuously suffered from the low wholesale electricity prices triggered by overcapacity in generation and sluggish demand across the continent. Subsequently, their investment in wind was negatively impacted by capital constraints caused by the decline in earnings.
Since wind developments remain an attractive investment and the pressure on utilities to incorporate renewables in their supply mix is growing, their investment in wind energy is still expected to grow. In order to back their investment in new onshore and offshore wind projects, in fact, offloading wind project assets (100% stakes or partially in most cases) to release capital to back their investment has become a mainstream strategy adopted by European utilities including E.ON, RWE and Dong Energy over the past two years.
With more institutional investors and financial investors looking for stable long-term yields in the wind sector and utilities still facing a drain on their cash resources, such a trend is likely to continue.