Will Europe’s Renewable Energy Pullback Continue?

There has been a sharp drop in investments going into renewable energy on much of the continent

While Europe invested heavily in renewable energy in the early part of this decade—the continent represented 45 percent of the the world’s global clean energy investment in 2010—2015 saw a sharp reversal.

Investments in clean energy in 2015 were $58B, a decrease of more than 50 percent from 2014, according to Bloomberg New Energy Finance. During a recent roundtable discussion, Hamish Mackenzie, a managing director and head of infrastructure for alternatives at Deutsche Asset Management, says that investments in renewables continue in the aftermath of the financial crisis, but that “investor confidence has eroded in some markets.”

Some subsidies for solar and wind have been pulled back in parts of Europe, and there’s more capital flowing into offshore wind projects, Mackenzie says. Germany and France have both had steep declines in funding for renewable projects since 2014, with Germany dropping its investments by 42 percent to $10.6B. The U.K., however, increased its allocations to renewables by 24 percent from 2014 to 2015.

One related area of the energy sector that has seen consistent investment in Europe is the utility and transmission infrastructure that connects to renewables.

“Renewables also require some form of backup generation or storage,” explains Mackenzie, referring to an auxiliary option if the sun is not shining or the wind is not blowing.

Solar and wind power projects still require large investments, despite falling prices, including a 30 percent drop in solar panel cost in recent years, he says. There has also been an effort to decentralize power distribution, with solar panels mounted on rooftops providing homes and businesses with an independent power source.

According to the Europe Infrastructure Strategic Outlook 2016 report from Deutsche Asset Management, the European energy sector as a whole will be challenged this year, driven by the long-term structural shift from electricity generation toward renewables, sluggish energy demand growth, and weak energy prices.

Other trends in renewables from the report:

• – In Western Europe, a push towards energy efficiency has already taken place in the industrial sector and is increasing in the residential sector.
• – Low energy prices, resulting from sluggish demand and overcapacity due to growing renewables market share, will continue to put thermal generation under pressure.
• – Climate change policies will continue to support renewables, particularly in Germany, France, and U.K., where legally binding targets for electricity consumption generated by renewables by 2020 have yet to be reached.

After taking all of these factors into account, the report also offers some strategic recommendations:

• – Continued growth is forecasted for renewables in 2016, and investors should focus on France, Germany, and the U.K. The pipeline of opportunities is expected to be sustained by those binding renewable targets for 2020.
• – With valuations supported by high investor demand, those investors should focus on acquiring assets in the ready-to-build or late-stage development phase, where return prospects are higher and where the technologies are proven.
• – Onshore wind and photovoltaic energy generation are top investment picks.