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2016
Report
Title
The impact of risks in renewable energy investments and the role of smart policies
Title Supplement
Final report
Abstract
The European Union has set itself a binding target of ""at least"" 20% renewable energy in final energy consumption by 2020. To meet this target, considerable investments are required. Total annual investments are estimated at e60-70 billion per year. These investments will have to come from investors, bankers and equity providers. In contrast to investments in conventional electricity generation, investments in renewable energy sources (RES), such as wind and solar power, require large upfront investments, but low working/operating capital. Most investments are to be made upfront, before the system becomes operational. From an investor's perspective, this means that the overall investment risks increases. To compensate for this risk, investors require a higher rate of return on their investments, leading to increased cost of capital for RES investments. Before investing in a renewable energy project, investors indeed perform a risk analysis to decide whether to invest or not. If investors perceive an investment as risky, they will demand a higher fee for making capital available. The cost of this compensation - the cost of capital - must be paid from the revenues of the projects and, thus, directly influences the cost structure of the project. If the investment is perceived as risky, the cost of capital increases. Due to the capital-intensiveness of renewable energy projects, the cost of capital is a crucial element in every renewable energy investment decision and can significantly influence the business case of a project. To address these risks and, thus, lower the cost of capital, RES policies are designed to create more certainty in revenues and expenditures of RES projects. In case policies fail to address uncertainties, the increased cost of capital might cause a decrease in the number of RES projects actually realised, as only highly profitable projects will be implemented. This makes the cost of capital a crucial and decisive factor for RES investments and, subsequently, for meeting the EU 2020 RES target. The DiaCore project aims at providing an estimation of the current cost of capital for wind onshore projects across the EU and assessing the impact of policy design changes on cost of capital. According to our findings, the Weighted Average Cost of Capital (WACC) significantly varied across EU Member States between 3.5% in Germany and 12% in Greece for onshore wind projects in 2014.
Author(s)