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Chapter 4: Policy matters
Policy matters
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Investors will always look to local policy to influence their decisions, which puts pressure on governments to make their policy as appealing as possible. Germany is the developed nation offering the most favorable renewable energy policies, but what lessons does it offer countries where policies aren’t keeping up with the pace of change?
Key messages
01 For 60 percent of respondents, Germany’s policies are the most favorable among advanced economies for investment in renewables. This places Germany ahead of other countries by a wide margin, with the UK — which comes in second — cited by only 23 percent.
02 The US is the country with the least favorable policies among advanced economies for promoting investment in renewable energy, according to 43 percent of respondents. This should come as no surprise, given the current administration’s recent actions, such as withdrawal from the Paris Agreement.
03 According to 41 percent of respondents, subsidies are the most important measure for driving investment in renewables. Both tax incentives (32 percent) and direct investment (27 percent) were also highlighted.
Germany is the clear winner among advanced economies when it comes to promoting investment in renewable energy, according to 60 percent of respondents.
“The German government and its long-term support for renewables is what got them where they are today,” says the finance director of an Indian utility. “In this sector, it’s extremely important to have government support and Germany has that.”
Germany has supported renewable technologies through its Energiewende policy framework for more than 7 years. However, KPMG in Germany’s Annette Schmitt says that investors should take heed of the changing subsidy landscape: “Strike prices and tenders across all technologies are coming down, so it is a much tougher market these days. Everyone who is playing in the German market, or wants to play in the German market, has to think about how to respond.”
The UK’s policy regarding renewables has faced significant challenges in recent years, from changes in government to currency pressures following the EU referendum, but for the most part it has been driven by economics.
For example, the government’s Clean Growth Strategy, unveiled in October 2017, “sets out proposals for decarbonizing all sectors of the UK economy through the 2020s” and “how the whole country can benefit from low carbon opportunities, while meeting national and international commitments to tackle climate change.” 36
This approach has already produced solid returns for renewables in the UK. Offshore wind costs, for example, have halved, reaching GBP58 for every megawatt-hour of electricity produced according to the latest auction for support contracts. This lowers costs to the consumers supporting those contracts via their energy bills and opens the door to more investment.
The Clean Growth Strategy also allocates GBP557 million in funds for the next auctions for less-established renewable electricity projects, no doubt hoping to duplicate the success of offshore.
From an investor perspective, this is all good news, aligning business opportunities with renewable development — and the survey reflects this, with 23 percent of respondents saying the UK is the advanced economy with the most favorable policies after Germany.
Canada is flagged as having renewablefriendly investment policies by just 7 percent of respondents but this could rise as the country continues to update its renewable energy policy.
“Canada has considered making itself a sustainable nation in the future,” says the strategy head of a German oil and gas company. “The decision has strong backing from the current political leadership, which has made a serious effort to transform their power generation and consumption by laying down a very supportive policy framework.”
France, while fourth on the survey’s favorable policy list, was cited by only 3 percent of respondents. Regulatory watersheds — such as authorization hurdles and the length of the development periods — may be a factor, according to KPMG in France’s Charles Abbey:”French authorities have provided consistent support to the development of renewables but certain regulatory hurdles have slowed
60%
23%
7%
CanadaUKGermany Source: KPMG and Acuris survey 3%
France 2% 2% 2%
US Italy Australia 1%
Japan
down the development of renewables compared to Germany and the UK. But now, with climate change matters high on the agenda of the new government, there are encouraging and renewed commitments: refreshed commitment to solar with regular upcoming 500MW biannual tenders; the offshore wind sector nearing the end of development phase with construction of first the GW getting closer; installed onshore wind capacity almost reaching 12GW; interesting initiatives on the floating offshore segment; and real potential for biomass from agricultural waste.”
Policy obstacles The US has the least favorable policies among advanced economies for promoting investment in renewable energy, according to 43 percent of respondents. Japan is highlighted as unfavorable by 30 percent, while 13 percent point to Australia and 8 percent say France. “The US has blocked progress of companies expanding in renewable energy by blocking the development of different programs. Projects that were operational were stopped and the tax benefits provided by the government were reduced. This has stalled the growth of renewable energy,” says the chief corporate development officer of a US-based renewable developer. Japan — which introduced a FIT system to encourage renewable generation in the wake of the Fukushima nuclear disaster — is also one of the countries highlighted as having the least favorable policies for promoting investment. The principal of a Hong Kong-based fund says: “Japan is slowly targeting renewables, but it has not completely taken the steps to make capital available for the development of these renewable energies. There is a need to invest in the development of new
43%
30%
13%
8%
US Japan Australia
Source: KPMG and Acuris survey France 4%
Italy 1%
UK 1%
Canada
Ted Surette, KPMG Australia
Learn more about the energy industry from Ted Surette by visiting kpmg.com/energy.
fields and investors need to be given incentives to push up the development and production of renewables.”
Another country considered to have unstable energy policies is Australia: “The current lack of long-term policy certainty is the biggest blocker,” says Ted Surette, a partner with KPMG Australia. “There have been multiple changes in policy over the past 10 to 15 years. The industry, the federal government and most market participants in Australia are all of the view that we need a nationwide energy policy that brings together federal and state requirements. This is the number one issue facing the country right now.”
Investment drivers Which pro-renewable government policies are most effective? According to respondents, 41 percent say subsidies are the most important measure for driving investment in the sector, 32 percent cite tax incentives while 27 percent favor direct investment. “Subsidies give companies the initial boost to develop and grow and they increase the value of a deal, which is beneficial in attracting investors to a project,” says the chief corporate development officer of a US-based renewable developer. “By giving grants, the government can provide companies with the capital backing they need to expand and invest in renewables. The cost of renewable energy is high and companies need capital to help them acquire renewable assets.”
Climate discord? The decision by the current US administration to withdraw from the 2015 Paris Climate Agreement has produced a mixed reaction in terms of respondents' appetite for acquisitions. “Although America is the second largest market for renewable energy, its withdrawal from the Paris Agreement and a few changes in its policy for renewables has had no major impact on M&A activity in the country,” says the executive director of a Chinabased independent power producer. “The renewable energy sector is huge and that wouldn’t cause any setback to our interest in the US market.”
However, the CFO of a German renewable developer is less sanguine: “The message that was conveyed was that the US won’t be backing up renewable energy. That’s a concern for us, as we have already invested in the US and this affects our acquisition plans that we had for the US.”
More than half of respondents (54 percent) say it has had no effect, while 41 percent report that they have moderately less appetite for acquisitions. Only 5 percent say they have substantially less appetite.
Under the hammer According to 40 percent of respondents, the most important impact of the current transition towards auction-based support regimes and away from FITs is an increased risk that certain projects with low prices are never built. Twenty-one percent of respondents say this will prompt even more consolidation among developers in the sector, while 19 percent say a continuous decrease in strike price is most important. “The transition to an auction-based support regime is a problem because it puts risks on certain projects with very low prices,” says the chief investment officer of a UK-based fund. “This may result in these assets not being built, which is a problem, because it affects growth overall. It also places supply chain risks on companies transferring
Which of the following government policies is most important for driving investment into renewable energy?
41%
32%
27%
Subsidies Tax incentives Direct investment
Source: KPMG and Acuris survey
How has US withdrawal from the Paris Agreement affected your appetite to make acquisitions in renewable energy?
54%
41%
5%
No impact on appetite for acquisitions Moderately less appetite for acquisitions Substantially less appetite for acquisitions
Source: KPMG and Acuris survey
In your view, what will be the most important impact of the current transition towards auction-based support regimes from FITs?
40%
21%
19%
13%
7%
Increased risk that certain projects with low prices are never built Consolidation in the sector among developers
Source: KPMG and Acuris survey Continuous decrease in strike price Stabilization of price Impact on the supply chain including risk of default for certain players
energy, leading to lower earnings and in some cases even losses.”
The consolidation predicted by more than one in five respondents is seen as positive by some but for others this generates more uncertainty: “The transition is not any easy one and has led to consolidation among developers because they have been hard hit: generating profits for them has become difficult and getting access to capital is tough. This has forced developers to work together to reduce costs. It has also increased risks for projects that are about to be completed or must be started,” says the CEO of a German renewables developer. The prospect of a continuous decrease in strike price is also a concern. The executive vice president of a French independent power producer points out that “the reduced strike price is good for investors but is proving to be bad for companies like ours, which depend on these schemes to raise capital on our behalf.” He adds that there is also a certain amount of risk for players in the distribution of technologies.
