Renewable Energy Investments on the Rise in the EU

There has to-date, however, been a widespread belief that many of these targets will not be met. Reports earlier this year highlighted that with current implementation measures at the national level, the EU will not meet its target, but achieve only about 9-to-10 percent instead of 12 percent. The European Commission has estimated that additional investments of at least $1.6 billion per year until 2010 are required to achieve the 12 percent target.

The estimated yearly investment figure is certainly an eye opener, but there are signs that renewable energy investments are on the rise. Previously, many investors had been wary of making substantial renewable investments because government and regulatory support had often seemed uncertain and the cost of renewables had been viewed by some investors as prohibitive. However, these concerns are slowly being addressed and on top of this other factors such as higher oil and gas prices, further political initiatives to reduce CO₂ emissions and increasing fears about energy security are driving the renewable market.

This growth is underlined in recent research from UK-based group Norwich Union. Its team that manages Norwich Union's Sustainable Future funds emphasises that one major growth area is wind energy. It adds that onshore wind is now competitive with gas-generated electricity, and fears about security of supply, reduced CO₂ emissions and low input costs have driven the sector, which grew 45 percent in 2005, with 31 percent yearly growth since 2000.

Other areas highlighted were biofuels, wave power, solar and fuel cells. Figures for the latter were particularly striking, with Norwich Union stating that $3.7 billion has been allocated in the United States to fuel cell research over the next 10 years and U.S. demand is estimated to reach $1.1 billion by 2008. However, it did add that few companies currently make money from fuel cells and it is difficult for investors to appraise the technology.

In fact, Norwich Union offers both pros and cons for all five technologies highlighted. The downside risks are obviously integral to any investment decision, but then many might ask the question: is this not the same for all energy options? In the case of renewables, some technologies are more developed, some are more cost effective than others, some fit better in certain parts of the world and as Norwich Union stresses, "investors should remember that renewable stocks are highly volatile and should be part of a diversified portfolio."

Going forward, however, Norwich Union is very upbeat about the renewable market. "We believe the renewable energy market will grow faster than the market in general over the next 20 years as governments try to increase security of supply and reduce the environmental impacts of power generation," says Peter Michaelis, manager of the Norwich Union UK Ethical fund and Norwich Union Sustainable Future UK Growth fund.

Elsewhere, BlackRock's New Energy Fund, a Luxembourg-based fund that invests in renewable energy companies, has grown from $17.4 million to $2.6 billion over the past three years, according to an October report in the International Herald Tribune . The fund invests in 60 to 80 stocks selected from a field of about 550 alternative energy shares worldwide. Top holdings include Denmark-based Vestas Wind Systems A/S, the world's biggest wind-turbine maker, Bonn-based Solarworld AG, Germany's second-largest solar energy company, and Illinois-based Archer-Daniels-Midland Co., the world's largest manufacturer of ethanol.

Other funds that invest in renewable energy companies include the New Alternatives Fund, the first environmental mutual fund that began operations in 1982, the Winslow Green Growth Fund and in September this year former U.S. President Bill Clinton announced the creation of a $1 billion investment fund devoted to renewable energy . According to reports, Clinton said the new Green Fund would focus on creating jobs, lessening pollution, and helping to reduce global warming while getting returns on capital invested.

At the government level, a number of fund initiatives are also being pushed. For example, the European Commission has recently proposed a 100 million global risk capital fund for developing countries to boost energy efficiency and renewables. The Commission said that The Global Energy Efficiency and Renewable Energy Fund (GEEREF) will accelerate the transfer, development and deployment of environmentally sound technologies and it intends to kick-start the fund with a contribution of up to 80 million over the next four years. It expects that financing from other public and private sources will take funding to at least 100 million and it hopes to mobilise additional risk capital of at least 300 million and possibly up to 1 billion in the longer term.

Elsewhere in Europe, the Norwegian government has recently set up a 20 billion Norwegian crowns ($3.24 billion) fund to promote renewable energy. The size of the fund implies that efforts in promoting renewables and energy efficiency will be more than doubled. And in the UK, the government has committed to provide 50 percent of the core funding for a new Energy Technologies Institute, which aims to support research into green energy technologies. EDF Energy, Shell, BP, E.ON UK and Scottish and Southern Energy have already announced their intention to be involved. Given that the government is prepared to provide 500 million, there is the potential for a 1 billion Institute over 10 years.

There is certainly much movement on the renewable energy investment front in the EU, but it is interesting to note that according to recent analysis from consultants Ernst & Young, the United States has become the most attractive place to invest in renewable energy. This is based on a more supportive policy framework, with particular reference to California. "New legislation in California and unprecedented state support for renewables provides a long-term incentive to investors and shows a deep level of commitment from one of the largest economies in the world," says Jonathan Johns, UK-based head of renewable energy at Ernst & Young.

It is also interesting to note that the growth in green energy hedge funds has been very much focused on the United States, though interest in these funds is also now accelerating elsewhere. According to the Energy Hedge Fund Center, there are now more than 30 green energy hedge funds in the United States specialising in environmental equities, carbon credits and emissions markets. Yet the Center does point out that in this market taking on the regulatory risk takes some degree of both government policy and market knowledge to be successful. It recommends "investor beware" since emerging markets have all the attendant risks.

There is still much debate as to how the development of the sector plays out. It means many questions and uncertainties exist. Nevertheless, given the increase in renewable funds, the International Energy Agency (IEA) predicting that by 2030 global energy demand will increase by 50 percent and with climate change and energy security increasingly to the fore, there is no doubting that opportunities also abound. This is underlined by New Energy Finance, a research firm in London that predicts the renewable energy sector will grow from a $25 billion to a $100 billion industry worldwide over the next decade. It will be interesting to see how this figure looks in 2016.