Who is going to pick up the check?

According Mastiaux Frank, head of the Division Renewables of the German energy company E. on, wind energy, but also other forms of alternative energy, has finally outgrown the experimental phase and is now on the brink of industrial production. This is a good thing, because Europe is on the verge of massive and sustained investments in energy.

Political decision making
In the next decade, the European energy sector is expected to invest approximately EUR 1,000 billion. Where is all this money going to and why is it so much? The sector is facing a series of political agreements that date back to the first half of 2007. In the winter of 2006, European politicians had to face some unpleasant facts. Europe was vulnerable in its energy supply, because it depended on the good mood of the largest gas supplier, Russia. In Brussels, political leaders then decided that, by 2020, approximately 20% of the energy needed should consist of renewable energy. At the same time, politicians decided that in the same period CO2 emissions should decrease 20% from the base year 1990. This in itself is a challenge, but that's not all. Large parts of the current infrastructure are outdated and need renewal and modernization. Politics have set the agenda for the next ten years, but it is up to the private sectorto ’cough up the necessary green’. This same sector, however, is having a hard time because of the credit crisis. Demand has fallen and the funding is under pressure. The private sector of the five largest countries in the EU will have to invest EUR 80 billion annually over the next ten year, but for the current year the ticker stops at EUR 54 billion.


Doubting shareholders
After 2010 it seems things will brighten up a little, because the credit markets appear to be thawing/relaxing. Nevertheless, companies in the sector have to re-invest every euro earned into the company. And this is the reason why many shareholders are not so happy these days. They are questioning the extent of investment needed and doubting the feasibility of the targets. Their hesitation and doubts are understandable. If the sector wants to turn all these plans into reality, these utilities will account for one quarter of all capital investment of the whole private sector of Europe. The doubts of the investors are reflected in the development of the FTSE Europe Utilities Index. That is far short of the FTSE Europe Index. In their quest for capital, bankers are now knocking on the doors of Sovereign Wealth Funds from countries like China and Abu Dhabi, but they also address companies like Google, that have an interest in renewable energy


The consumer pays the bill
Yet it is questionable whether this way of working will eventually pay off. Critics see an important role for governments. Governments should vouch for long-term revenues, thus attracting pensions funds and other long-term investors. Some forms of guarantees and subsidies are already being offered. Governments, for example, have guaranteed prices of renewable electricity. The customer pays this form of subsidization in the form of a premium on their bills. There is a downside to this. Increased investments would mean increased subsidies, paid by the consumer. In the UK, consumers will face increases in their electricity bills of up to 60%. At the same time, these citizens are facing increased taxes and budget deficits. It is hard to convince the electorate of this. Your average citizen still feels enthusiasm for green energy, but it is hard to say at what cost. It will probably take a while until a new energy bill in the United States is passed. This means that Europe will not be able to share the costs of all investments with the Americans. Politicians may claim that their objectives remain intact, but the questions is whether the European citizen are willing to pick up the check.


Source:
The Financial Times, The power bill arrives. February 3, 2010