The cost of developing renewables projects varies significantly between different European countries. In 2014 the weighted average cost of capital (WACC) for onshore wind ranged from 3.5% in Germany to 12% in Greece.
The reason – the risks for investors, primarily the generic country risk, but also the policy-induced risk.
These facts should be self-evident, but they have now been quantified for the first time in the DiaCore project. The project, funded by the EC’s Executive Agency for Small and Medium Enterprises (EASME), was set up to assess and facilitate convergence of renewables policy across the EU.
The project was carried out by a consortium including Ecofys, Fraunhofer ISI, eclareon, National Technical University of Athens (EPU-NTUA), Technical University of Vienna (TU Wien), and the Lithuanian Energy Institute (LEI).
Costs of onshore wind
The project was driven by the capital intensive nature of renewables, which require large upfront investments and hence carry a higher investment risk. To meet the EU 2020 target of at least 20% renewables by 2020, annual investments of €60-70 billion are needed from investors, bankers and equity providers.
The study found that for onshore wind projects in 2014, the cost of equity, i.e. the remuneration for equity providers, ranged between 6% in Germany and more than 15% in Estonia, Greece, Latvia, Lithuania, Romania and Slovenia. The cost of debt, i.e. the remuneration for debt providers - such as banks - for making capital available, varied between 1.8% in Germany and 12.6% in Greece.
“There is a growing gap among EU member states on the financing of renewable energy projects,” commented Ecofys principal consultant David de Jager. “From the very start of a project, project developers in the EU do not face the same financing conditions. If an investment is risky, the cost of capital increases.”
These findings are clearly reflected in the developments taking place on the ground. Overall, wind had a good year in Europe in 2015 with a total of 12.8GW of new installations – of which 9.8GW was onshore wind, according to the European Wind Energy Association’s (EWEA) statistics. This was 14% up on 2014 and accounted for 44% of all new power installations. However, almost half of this capacity was installed in Germany, where the development costs are lowest. In the countries with the highest development costs there was little or no wind development.
Why does Germany come out on top?
The reason why Germany’s WACC is so low is explained in the study as because all factors of the WACC calculation are the most favourable, i.e. a lower risk premium and both costs of debt as well as equity being much lower than the other countries. Moreover, the relatively low-risk environment in Germany allows for a higher share of (lower) debts in the WACC, thereby further reducing the value. According to interviewees, another important reason is the fierce competition between banks that further reduces the cost of debt.
The findings also qualify the relevance of natural conditions. A notable conclusion is that markets with relatively mediocre wind conditions, such as Germany, can be financially much more interesting than markets with very good wind energy conditions, such as Spain or Portugal.
The project risks were identified in interviews with more than 110 banks and project developers in the EU.
The easiest, and most pressing, project risk to mitigate was found to pertain to policy design. An important part of the policy design is the support scheme to increase the cost-price competitiveness between renewable energy and fossil alternatives. In ten member states, policy design is ranked as the most important risk. Other risks frequently mentioned in the top-3 risk categories are administrative risks (including permit procedures), market design and regulatory risks (including energy strategies and market deregulation), and grid access risks. In member states where national governments introduced retroactive measures to support schemes (e.g. Czech Republic, Bulgaria, Slovenia, Spain), the risk of sudden policy change was ranked very high, too.
Using modelling the researchers found that if all countries would have the same renewable energy policy risk profile as the best in class, the EU member states could reduce the policy costs for onshore wind by more than 15%. A reduced country risk could lead to greater savings.