Financing renewable
energy projects is big business in Europe and one often supported
by public funds. Grant Collinson gets the lowdown on the regulatory
status of this fashionable industry from specialist lawyer Rebecca
Williams, partner with Addleshaw Goddard

Grant Collinson: To what extent is renewable equipment
finance reliant on government subsidies for revenue?

Rebecca Williams: Subsidies have been important
to make investment in renewable energy equipment economically
viable and continued support in the form of subsidies is a means of
encouraging further private-sector investment in the renewable
energy market, which is vital if governments are to achieve their
energy sector goals and meet EU carbon reduction targets.

As the renewable energy
market develops, stakeholders are using a balance between subsidies
and private finance, with some stakeholders using private finance
to supplement subsidies.

The increasingly
competitive pricing of renewable equipment created by an increase
in established manufacturers is helping to reduce the capital costs
of renewable projects and in turn reduce the reliance on subsidies.
But we are a long way from parity across most of the major
technologies meaning that in most cases, without some form of
subsidy the investment would not and will not, in the immediate
future at least, be viable.

Government polices that
remove risk during the development and operational stage of
projects (e.g. improving national energy infrastructure and
removing regulatory and planning obstacles) could be an indirect
means of reducing reliance on subsidies by helping to remove
project risk and thereby making renewable finance more accessible
to developers.

Wind farm

GC: What is the
current situation regarding the relevant subsidies in the major
European markets of the UK, Germany, France, Italy, and the

RW: The
renewables market in continental Europe is very different to the UK
where the notion of subsidies, in particular for technologies such
as small solar, is relatively new compared to established subsidy
regimes such as those in Spain, Germany and Italy.

Nevertheless, austerity
measures and public expenditure cuts have had a similar effect
across the eurozone with many governments adjusting the levels of
subsidies to renewable projects. France and the UK have lowered
solar subsidies. Germany plans to eliminate subsidies for solar
panels by 2015, Italy may retroactively change subsidy models for
solar plants and Spain has announced it will end all subsidies to
renewable energy projects going forward.

However, subsidies are
still generally available across the major European markets, driven
by political pressure to reduce carbon emissions, although the
levels of subsidies vary greatly depending on the particular
country and the technology. Subsidies for wind power remain
relatively stable, with increased subsidies in Germany for
off-shore wind and minor reductions in the UK.

While the eurozone debt
crisis has resulted in restrictions in bank lending in the sector,
alternative finance is still available for renewable projects.
Examples include using bonds, and innovative finance structures
where repayments are financed with money from energy savings.
Smaller renewable projects are using a variety of funding
alternatives including community-based schemes such as Energyshare
and Solar School in the UK, where participants invest in
microgeneration and energy saving projects.

Asset financing of renewable energy by sector

GC: Has this
changed recently? If so, how, and what effect has it had on the
financing market?

Reductions in the levels of subsidies for certain renewable energy
technologies across the eurozone has had the short-term effect of
reducing investment in certain areas. This is noticeable in the
reduction of solar panel feed in tariffs, where large scale and
unplanned reductions have raised uncertainty in this area,
including making some projects unviable.

Going forward, increased
communications between policymakers, investors and stakeholders
will help to formulate sustainable subsidy models.

Investment in renewable
energy equipment across the range of renewable resources has
remained resilient, particularly in areas such as wind power where
subsidies have been relatively constant. As technology and
competition in the renewable energy sector continues and project
implementation costs decrease, subsidies should become less crucial
to the economics of schemes.

Where governments reduce
subsidies gradually, carefully and at the right time, this is less
likely to have a detrimental impact on the sector. Where changes to
support levels are not transparent and policy unpredictable, this
will continue to undermine confidence in the sector and growth will

GC: What other
challenges are there to providing finance in this asset

RW: Some
renewable energy technologies are well understood. Where this is
not the case, the lack of independent and standard assessment
information for renewable energy projects, particularly the absence
of historical data and awareness of sector-specific risks and
opportunities, can create challenges. A more standardised approach
would provide funders with the risk assessment tools to analyse the
likelihood of a project’s success and the realistic returns. But
funders have shown a willingness to understand the sector and its
peculiarities more and more.

In addition, there are
challenges presented by renewable energy technology, particularly
the unpredictability during implementation and operational stages
where newer technologies are used. When operational problems occur,
this can result in output falling short of estimated levels and
insufficient income levels to cover the liability to funders. So it
becomes important that the parties involved work closely and put in
place measures to mitigate these risks.

Stakeholders and
investors are attempting to mitigate risks by employing
comprehensive risk management programmes. This may involve a
combination of insurance, cash collateral, performance bonds,
financial monitoring, and the use of equipment with a proven track
record. Even with these challenges, the possibility of high levels
of income when projects are successful is attracting investment,
particularly when income is supported by government subsidies.

GC: What assets
are being financed by asset finance and what assets, more strictly,
by project finance?

RW: Smaller
renewable and community microgeneration projects tend to use asset
finance over a medium term, with larger renewable energy projects
using a hybrid of asset and project finance over medium to longer

The approach to financing
assets has to be adaptable to suit renewable equipment,
consequently there are a variety of approaches. Funders on larger
and more complex projects tend to be involved with the development
and operation of the scheme, preferring a project finance approach
where they are able to take a more holistic approach with security
over project contracts, income streams and support from

GC: If there is a
split in the type of finance, how is that split mirrored by a split
across the type of lessors – bank-owned/independent,

Rebecca Williams, Addleshaw Goddard

There is no particular profile of finance provider involved in
renewable transactions. Larger transactions tend to attract
traditional asset finance funders who are familiar with funding
income streams and the management of assets.

As renewable projects
increase in size and complexity, consortiums of stakeholders and
funders pooling operational and finance resources may become more
common. There will be opportunities in the market for finance
providers with renewable energy expertise, particularly for
companies who can provide integrated offerings of finance and
technology. There may be an increase in refinancing of renewable
energy projects where funders buy into developments at a later
stage, after the more risky implementation stages are complete.

This may become more
prevalent where small, independent stakeholders and funders
implement projects at the development stages (as was commonplace up
to a few years ago in the wind sector), and pass these to larger
investors at a later date. Funders may also refinance large-scale
projects on successful completion and operation using capital
market instruments.

GC: What assets
or projects being financed are classed in renewable finance by your
definition and how does that change from lessor to lessor or
jurisdiction to jurisdiction?

RW: The
classification of assets as renewable is relatively standard across
funders and jurisdictions. The major assets being namely wind
(on-shore and off-shore), marine (wave and tidal), solar, anaerobic
digestion and biomass.

In some jurisdictions,
certain types of asset may be more established than others, and
represent a better and more cost-effective investment

This will depend on a
number of factors such as the climate and weather, availability of
resources and the relevant levels of subsidies for each asset. For
example, in Germany there has been a surge in on-shore and
off-shore wind activity, while in Portugal solar power is more

There are early signs
that stakeholders and funders will increasingly diversify in the
types of asset they fund and which jurisdiction they invest in to
mitigate against regulatory regime change and the risks in relation
to one asset type or jurisdiction.

GC: What are the
dominant projects or assets and do you see that changing in the
foreseeable future?

carbon reduction targets will not be met without large-scale
developments. But microgeneration will also be part of the mix for
as long as subsidies exist and beyond that time if the cost of
implementation is less than potential savings.

As one of the key
deadlines for carbon reduction comes closer (i.e. 2020), the
renewable energy market as a whole should see increased activity
and growth.

The risks associated with
using newer technologies reduces the attractiveness of investment
in these areas at the moment. Although this is countered by the
attractive subsidy levels for those same technologies. Sustainable
growth should continue where assets have proven technology track
records, such as on-shore wind, solar and, increasingly, anaerobic
digestion and other biomass projects.

Expansion in the scale of
off-shore wind projects and their complexity is already evident in
Denmark and Germany. The sector is likely to see demand for finance
in respect of new forms of existing technology, such as ultra low
wind turbines and solar towers.

As barriers to renewable projects are reduced, e.g. planning
issues, and there are improved connections to the grid, there may
well be an increase in microgeneration. This could be from
community schemes or small businesses attempting to benefit from
energy savings generated from solar, wind turbine, biomass and
waste to energy developments.