The expansion of Green energy is costing billions. The strain on utilities is so heavy that they threaten to fall away as capital providers. Other investors are needed – but that is easier said than done.
The German energy transition has cost more than 100 billion euros so far. It has hit large and small electricity suppliers with force and put traditional business models in question. But 15 years after the start of the transition of the power sector with the aim of renewable, low-carbon generation, experts are asking themselves an anxious question: is the energy transition running out of money?
Quite possible, is the answer that the German section of the World Energy Council and the consultants from Roland Berger provide. In an unpublished study they come to this conclusion: “The necessary equity funds for the expansion of the network infrastructure and offshore wind can probably be provided only with the participation of alternative and international investors. High risks however make it questionable whether the investment needs can be met at a sufficient capacity and speed.”
New investors must be found
It is not about small change. At least 280 billion euros would need to be invested in the next 15 years in order to promote the politically demanded goal of the transformation of the energy system: from wind turbines, biomass plants and solar power plants to local, regional and national electricity distribution networks to large offshore wind farms. This calculation already includes “sustained political support”. Otherwise, it could get even more expensive.
The traditional energy companies – whether they be public utilities or large corporations – are no longer reliable. “Many traditional utilities, which previously financed investments in the electricity sector, mainly through their shareholders’ equity, are today with their backs to the wall,” says Uwe Franke, president of the German section of the World Energy Council, a global association of energy companies. He previously ran the business of BP Europe. Franke says, private and municipal suppliers lacked the investment funds. Therefore, new investors would have to be found to ensure “the energy transition and the security of supply.”
The prerequisites for this will vary. Money for photovoltaic systems, wind turbines on land and for biomass is there. “The necessary funds can still be provided by banks, households and project planners in the future”, according to the Berger study. In addition, the state could possibly easily help out with incentives.
“High risk and market entry barriers” and a “significantly tighter situation” are however applying to investments in offshore wind farms and networks. In 2012 two-thirds of offshore capacity were located in the hands of utilities, which had invested between one and 2 billion euros per wind farm. Here a greater commitment of other investors would be needed in the future. But that is easier said than done: “The high risk of investing in offshore wind farms, however, contradicts the risk profile of institutional investors.” Not least because laws and capital market regulations make the business hard for investors.
When it comes to the distribution networks, weakened public utilities are faced with a significant need for investment. Investors are additionally deterred by structural reasons: the fragmentation in 900 network operators and the trend towards re-municipalisation. For the expansion of the distribution networks, the German Energy Agency estimates costs from 28 to 43 billion euros by 2040.
Required equity questionable
For the transmission systems that transport electricity over long distances double-digit billion investments are needed too. Given the high amounts, it is questionable whether Tennet, Amprion, 50Hertz and Transnet BW “can muster the necessary capital resources on their own.” Funds and institutional investors could be discouraged by the associated risks of major projects like network expansion such as delays in approvals and construction. The current big resistance of the state of Bavaria against the network expansion could be included here.
According to the study, the utilities get under pressure from two sides. On one hand, many lack the capital for green energy investments. At the same time, big investors entered the market, driven by low interest rates and searching for attractive investments. Utilities could therefore lose their role as financiers and owners of installations and networks. At the same time its role as operators will be questioned by specialized project engineers and possibly soon also by equipment manufacturers.
Utilities should be more flexible, understand themselves more as a mediators and think in terms of cooperation. They could take the roles of fund initiators, fund service providers and financial investors. A business model opens at the interface of project developers and investors. “But this transition will not happen automatically,” says Franke. Utilities would have to change and understand the “energy transition as a capital transition”.
Translation Philip Mueller