Policy and investment in German renewable energy David Nelson Matthew Huxham Stefan Muench Brian O’Connell April 2016 A CPI Report April 2016 Policy and investment in German renewable energy Acknowledgements We would like to thank all experts who participated in the workshops and interviews for their valuable contribution to this study. We would also like to thank Kirsten Hasberg for her help with conducting and arranging several of these interviews. We thank CPI staff members Ruby Barcklay, Elysha Rom-Povolo, Maggie Young, Amira Hankin, Dan Storey and Tim Varga for guidance and support provided throughout the course of this project. The European Climate Foundation (ECF) provided financial support for the analysis carried out in this project. The report findings are those of the authors, and do not necessarily reflect the views of ECF. Descriptors Sector Renewable Energy Finance Region Germany Finance, low-carbon, renewable energy, electricity sector, electricity Keywords industry, investors, Energiewende Contact [email protected] About CPI Climate Policy Initiative works to improve the most important energy and land use policies around the world, with a particular focus on finance. An independent organization supported in part by a grant from the Open Society Foundations, CPI works in places that provide the most potential for policy impact including Brazil, China, Europe, India, Indonesia, and the United States. Our work helps nations grow while addressing increasingly scarce resources and climate risk. This is a complex challenge in which policy plays a crucial role. Copyright © 2016 Climate Policy Initiative www.climatepolicyinitiative.org All rights reserved. CPI welcomes the use of its material for noncommercial purposes, such as policy discussions or educational activities, under a Creative Commons Attribution-NonCommercial- ShareAlike 3.0 Unported License. For commercial use, please contact [email protected]. A CPI Report II April 2016 Policy and investment in German renewable energy Executive summary The relationship between finance and policy stands at Our analysis indicates that, provided an appropriate the centre of Germany’s twin objectives of reaching policy framework is in place, there is more than renewable energy deployment targets and doing so sufficient capital available to meet German renewable cost effectively. With the renewable energy industry energy targets, but that a mix of investors is needed maturing, and calls growing for improving the cost to meet Germany’s objectives at lowest cost. To meet competitiveness of renewable energy policy, German deployment goals most cost-effectively in the medium policymakers and investors must continue to improve term, Germany must meet the challenge of creating their understanding of how policy can influence the electricity system flexibility to facilitate integration of potential investment pool, and how policy can drive a renewable energy without imposing unmanageable robust and low-cost mix of investors and investment to risks on renewable energy investors. underpin the continued development of a cost-effective low-carbon energy system. Climate Policy Initiative More generally, for investors we find that the most examined the availability of capital for renewable relevant near-to-medium-term policy decisions regard energy, the cost-effectiveness of different mixes of incentive auction design, end user participation, capital and investors used in meeting Germany’s support design and long-term targets. However, for medium and long-term deployment goals, and the the medium-to-long-term development of investment, potential impact of policies on this mix of investment. issues including curtailment policy and energy market design will become increasingly important and merit immediate attention. Table 1: Overview of policy issues POLICY ISSUE RECOMMENDATIONS OR FINDINGS QUANTITATIVE FINDINGS • Frequent, predictable bid rounds reduce risks and costs • Small investors fear complex and costly bid processes • A gap between auction rounds causing a 12-month delay in INCENTIVE • Exemptions for smaller projects or simplified bidding an offshore development can increase bid prices by 21% or AUCTION DESIGN processes are needed to preserve Germany’s diverse more if delay expectations are reflected in bids investor base • Shortening revenue support from 20 years to 15 years could • Stable and reliable support schemes over longer periods increase energy costs 15-18% depending on the technology SUPPORT allow higher leverage and reduce average energy costs • Linking revenue support to inflation could decrease energy DESIGN • Indexing support to inflation could attract some institutional costs by 18-20% in real terms, depending on institutional investors and reduce expected lifetime costs investor appetite and how actual inflation evolves • Auction design and exemptions, end user consumption END USER • Over 25% of 2015 equity investment and half of 2020 options and support design should be tailored to continue PARTICIPATION potential equity investment comes from end users encouraging investment from all investor groups • Halving offshore wind targets would limit learning, • Reliable long-term targets incentivise investments in potentially increasing the cost of energy by 6% by 2020 LONG TERM project development and business processes that increase • Business process improvements drive cost reductions: From TARGETS competitiveness and reduce costs in the long term 2006-2014, non-module costs for PV systems fell 11.5% p.a. for large scale projects and 7.7% p.a. for rooftop solar. ENERGY MARKET • Current energy market design does not reflect the reality of • Current design could lead to zero or negative electricity DESIGN a renewable energy dominated system prices for more than 1000 hours per year by 2030 • Policymakers should consider alternatives to curtailment at • Current proposals for curtailment of production during times of negative prices including take-or-pay arrangements CURTAILMENT negative price hours could increase onshore wind bid prices or proportional curtailment by 17% in 2020, if no other flexibility measures are taken • Significant investment in system flexibility is required • Higher development costs could amplify any cost increases DEVELOPMENT resulting from incentive auction design and a lack of long- • Development costs for large projects like offshore wind can COSTS term targets; policy should seek to reduce development run to 50 million Euros or higher costs (i.e. pre-auction costs or costs of bids that fail) A CPI Report III April 2016 Policy and investment in German renewable energy Contents 1. OVERVIEW OF INVESTMENT AND POLICY ISSUES 1 1.1 The availability of investment capital to meet German renewable energy targets 2 1.2 Comparing the cost of renewable energy owned by different investors 3 1.3 Policy elements influencing the mix and cost of investors in renewable energy 4 1.4 Intermittency of renewable energy and economic curtailment 5 1.5 Incentive auction design and investor mix 8 2. UNDERSTANDING THE EXISTING GERMAN INVESTOR BASE 10 2.1 Utilities 10 2.2 Developers 11 2.3 Financial investors 12 2.4 End users 14 3. POTENTIAL CONTRIBUTION OF DIFFERENT INVESTMENT POOLS 16 3.1 Methodology 17 3.2 Short-term finance 21 3.3 Long-term debt 23 3.4 Long-term equity 26 4. IMPACT OF POLICIES ON INVESTOR DECISION MAKING 38 4.1 Introduction 38 4.2 Overview of policies affecting investment potential 38 4.3 Ten key policy areas are most relevant for the German energy transition 42 5. CONCLUSIONS AND POLICY IMPLICATIONS 70 5.1 Key considerations for policymakers 70 5.2 Technology perspective: different technologies require different policies to attract investors 70 5.3 Investor perspective: policy priorities differ for each investor group 73 5.4 Project life cycle perspective: the importance of key policy areas changes throughout the life cycle of projects 75 5.5 Long-term perspective: end user participation, incentive auction design, curtailment rules and especially energy market design will become increasingly important over the long-term 78 6. REFERENCES 80 A CPI Report IV April 2016 Policy and investment in German renewable energy 1. Overview of investment and policy issues Between 2005 and 2015, investors poured over €150 1. What pools of capital are potentially available to billion into renewable energy in Germany (Figure 1). invest in renewable energy in Germany and are Energy companies and utilities, households, farmers, these pools large enough to meet German policy energy co-operatives, municipalities, banks, and objectives? institutional investors all provided capital to renewable 2. What mix of capital and investors is likely to be energy projects, relying upon policy that provided both low-cost and efficient and most likely to meet reliable revenues, attractive returns and certainty. Since German renewable energy deployment targets? the cost of renewable energy was often higher than energy from more conventional energy sources, policy 3. How can policy enable both the right mix of was needed to plug the gap between renewable energy investment and ensure that this mix of investment costs and the prevailing market price for electricity. is achieved at a low cost for each individual investment source? Today, the cost of many forms of renewable energy has fallen to the point where the cost gap has virtually In this first chapter, we summarise our assessment of disappeared. Yet policy is still needed, not so much capital availability