Opinion: Subsidies for wind are coming to an end and the industry should embrace it

Subsidies have helped launch the energy transition but the industry should welcome the end of them, argues Bob Psaradellis

Bob Psaradellis explores the opportunities for wind in a post-subsidy world
Bob Psaradellis explores the opportunities for wind in a post-subsidy world

Subsidies have demonstrated that government support is necessary to promote new technologies into an existing market. But subsidies are coming to an end – and this is a good thing. The post-subsidy renewables environment should be viewed with even more enthusiasm and anticipation, as a confident and mature market brings investors the opportunity for risk adjusted returns and more supportive public opinion.

Subsidies have achieved the role of accelerating the commercialisation of wind power and they were necessary, initially, to provide assurance that upfront capital investment would deliver stable returns.

The design of the support mechanisms for the early deployment for renewables differed according to each country’s specific public appetite for subsidy. Essentially, different governments made different political calculations. In Germany, and in other nations in Europe, renewables were considered by policy makers to be much more accepted as a consumer good, creating a willingness to pay more directly through bills and socialise the extra cost.

Now, the falling cost of wind technology, innovative corporate offtake agreements, competitive auctions and reliable returns - despite wholesale market volatility - have provided investors with the evidence needed to assure them of the viability of projects free from support from taxpayer. It’s positive that the support systems reflected the appetite of the electorate at the time, but the move away from subsidy regimes mean, at least in terms of policy design, de-politicising the way renewables are financed.

Varying progress for to merchant deals, but all heading in the same direction

Albeit at different paces, the confidence in the investor model in Europe has seen the market moving steadily from direct subsidies, like feed-in-tariff models, to quasi-market-driven subsidies, like contracts for difference. It’s telling that nowhere across Europe can you now get new direct subsidies. The Nordics have seen the quickest move away from the need for subsidies, but Iberia and the UK have followed suit with a range of flagship deals.

Increasing volume now depends on contract reliability, grid capacity and investors being able to finance long term deals

Now that wind projects are demonstrating they can rely on sourcing their own commercial finance, how do we increase the pace of deployment to achieve a cleaner, greener Europe as quickly as possible? The answer is three-fold:

1. Standardising legal frameworks for PPAs across Europe

Currently, there remain different legal frameworks governing PPA use, and varying degrees of bankability. This should be remedied to protect consumers and ensure finance can be secured as cost effectively as possible.

2. Very little policy intervention, other than work to improve grid connections and interconnected infrastructure.

With the maturing of debt markets, very little is needed in terms of price security to get projects off the ground, but what is halting progress is the grid and interconnection available to projects, to both get them onto the system as quickly as possible and get the energy in surplus to areas of need across Europe smoothly. We should be improving the interconnectedness across European countries and power markets, allowing them to balance demand and supply variations at the lowest cost to consumer.

3. A trend toward new sources of debt financing with long-term capital.

Since 2008, it’s been harder for banks to do long-term financing, but other finance providers have emerged, like pension funds, credit funds and insurance companies. Though banks aren’t incentivised to hold long positions on deals, a thriving alternative finance market has emerged. This needs to accelerate, with new pockets of debt financing emerging to meet the long-term, risk-adjusted demand for renewable finance.

The evolution of renewable finance presents a great opportunity to achieve attractive, risk-adjusted returns for an investor that has flexible capital and deep capability - that is, those who are able to manage risk and create value across the value chain, from construction, to power markets, to health and safety.

Subsidies were critical to maturing the renewable energy market, but as we move beyond subsidies, the market is healthier, more diverse and more resilient. Investors now have the confidence and capability to invest across different markets meaning the potential to scale renewable projects is greater than ever.

Subsidies have created the thriving market we see today, but the future holds a more dynamic, cost effective and larger renewables market based on market fundamentals.

Bob Psaradellis is president and CEO of Renewable Power Capital

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