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Is Renewable Energy Still A Green Investment?

By Javier Amantegui
Posted: 15th June 2012 09:10


It is no news that development of renewable energy has been largely fuelled by the 1992 UN Convention on Climate Change that gave birth to the Kyoto Protocol, in force since 2005.  The objective of the Protocol was for 37 industrialised countries and the European community to reduce greenhouse gas emissions – to an average of five per cent against 1990 levels over the five-year period 2008-2012 – and increase the use of renewable energy.  The implementation of such objectives by a number of the listed countries resulted in substantive governmental support to new forms of energy by way of a variety of subsidies, privileged tariffs and other aids.

However, there are two main threats to developed countries' continued support for renewable energy.  The wave of economic downturn generated at the end of 2008 with the crisis of the global financial system hit almost all worlds developed countries severely in 2010 and 2011 and seems not to have run its course yet.  In fact, latest estimates by the International Monetary Fund (IMF) predict slow GDP growth for 2012 and 2013 in the United States, the Euro zone, Japan, as well as other regions.  Additionally, there is a certain level of saturation in some of the countries that have been more supportive of green energy, which has been the case in certain EU countries.  According to recent research by PwC, approximately 43% of the renewable power capacity worldwide is attributed to the European Union.  In 2009, renewable energy sources already accounted for 62% of new electricity generation capacity installed in the EU, comprising 17GW out of a total of 27.5GW.  Hence, it is not clear whether developed countries will be able to maintain the same level of commitment of previous years: renewable energies are expensive and it appears there is not the same need to develop green energy projects as before.    

At the same time, we are witnessing circumstances that may favour a new age of expansion in renewable energy, which is expected to triple by 2035.  In this context, the Conference of the Parties to the UN Convention on Climate Change held in Durban in December 2011 agreed to set a second commitment period under the Kyoto Protocol that will begin on 1 January 2013 and end either at the end of 2017 or 2020.  So far, all developed country governments and 48 developing countries affirmed their emission reduction pledges up to 2020. 

Separately from this, a group of countries composed of emerging and developing nations have been showing an impressive sustained growth in the last few years that is highly unlikely to diminish in the short term (statistics from the IMF show GDP growth throughout 2012 to 2017 of approximately 8% for China, 7% for India, 4% for Russia, and between 3% to 4% for Brazil for example).  It is precisely such growth that is causing emerging and developing economies to review their energy policy as both their consumption of power and contribution to the contamination of the earth are due to reach worrying levels.  In fact, it is expected that by 2035, non-OECD countries will account for 2/3 of the world primary energy demand, mainly due to predictions of increases of 274% and 175% in electricity consumption in India and China, respectively.  At the same time, countries such as China lead the ranking of biggest CO2 emitters, accounting for 25.4% of the total global CO2 emissions in 2009 and with expectations that by 2035, 58% of the global increase in such emissions will come from China alone.

In light of the above, the purpose of this article is to reflect on the two abovementioned trends and on what sort of opportunities for
investment in renewable energy assets they may create.

Developed Economies

Under the 2009 Renewables Directive, EU Member States agreed collectively to generate 20% of EU energy through renewable resources by 2020.  As a result, each Member State needed to submit a National Renewable Energy Plan to the European Commission by June 2010 demonstrating how these targets would be met.  Based on the early forecasts, there is reason to be optimistic as overall, Member States expect to meet the 20% renewable target, with the main proportion sourced from wind, biomass and hydro. 

Notwithstanding this, the path to 2020 shows a different situation at present with some countries having moderated the level of support for renewable energy, others where the support is not that high or being high is currently under review and a third group of Member States offering substantial aids to clean energy.  Within the first and second group, several Member States have cut back their schemes.  In Spain, for example, solar and wind power targets were met early and the right to receive feed-in tariffs has been limited.  In Germany and in France similar measures to decrease feed-in tariffs for photovoltaic installations are already in force, whereas Poland keeps supporting the sector through incentives such as green certificates.  On the other hand, in the United Kingdom, a major package of proposed reforms to the energy market has been proposed, which includes a new feed-in tariff system expected to take effect from 2013.

In the US, the situation is not entirely clear.  The country has not adhered to the Kyoto Protocol yet and there is no such thing as a "national energy plan".  Even though US renewable generation has benefited from subsidies, incentives and set-aside programs in the past, some of these incentives have either already expired (e.g.  the renewable energy loan guarantees granted by the US Department of Energy loan and section 1603 tax grants) or will do so shortly (e.g. the Production Tax Credit (PTC) is scheduled to expire at the end of 2012) in certain states.  Besides, there is increasing pressure from key stakeholders in the sector against the higher cost of green power.  Therefore, it is likely that most of the opportunities in the US market will be in those states that are keeping the Renewable Portfolio Standards (RPS) program in force.   

Emerging & Developing Countries

The situation in the emerging and developing countries is slightly different and shows new opportunities for investors.  China, for example, sees the development of the renewable energy sector as a strategic goal.  Unlike other sectors, there are not many restrictions to foreign investment in the renewable energy market.  Besides, the amendment to the Renewable Energy Law in 2009, the promulgation of rules on funding and pricing and the incorporation of a development fund focused on renewable energies also indicate a firm commitment from the Chinese government to the sector. 

In Latin America, the trends vary significantly from country to country.  Overall, most of these countries are aware of the importance of green power and are in the process of changing their policies to support the development of the renewable energy market.  In Mexico, for instance, there is a project to create a development fund for renewable projects, funded with public resources to be applied as guarantees or financial aid to these projects and that will form part of the annual budget of the country.  Colombia is also studying the implementation of incentives for wind power, although apparently no formal measures have been implemented yet. 

In the case of Brazil, and also due to its commitment to reduce CO2 emissions, the amount of investment expected to be required is to exceed USD120 billion according to Brazil's Energy Research Company (EPE).  In light of the increase in consumption and the need to change the energy matrix – as the country's major source, i.e. big hydros, are starting to be considered as conventional energy – new incentives to the sector are to be implemented, which will also contribute to foster investment opportunities in the medium-term.  In fact, the National Energy Agency (ANEEL) recently approved a regulation that establishes, among other benefits, that solar power plants of up to 30MW will benefit from a significant discount on the tariffs for the use of the transmission and distribution systems.  In addition, the Brazilian Government is also currently analysing a proposal to create a specific incentive plan for solar plant projects with the aim of reducing the tax burden on solar panels and other equipment, as well as defining goals as to the percentage of energy that should be generated from this source and other incentives. 


Looking ahead, there are still significant opportunities in the renewable energy market.  Such opportunities will depend on the maturity and level of consolidation of the market in question and we can see two different trends depending on whether we are referring to the developed countries or the emerging economies.   

As to the developed countries, the review of the current framework and measures to be implemented in the short-term will have an impact on the deal origination process, particularly in nations in which the renewable energy sector is already saturated or that are suffering from general economic problems.  In such scenario, it would be reasonable to expect more brownfield than greenfield deals, which also point towards a trend of consolidation and restructuring transactions, although we may not disregard the need for capital injections of fresh money in certain projects.  Furthermore, even if there are still investment opportunities there, it would be reasonable to assume that they will probably offer lower returns than before. 

On the other hand, the growth perspectives and early stage of maturity of green power in emerging countries open a new range of opportunities for investors, especially for greenfield projects.  China seems like the place to be and Brazil will probably be in the same position shortly, together with other Latin American countries.

To sum up, the perspectives are not bad at all.  The changes to the framework in the EU and the need for development in certain emerging economies will require key-stakeholders to diversify their portfolio around the globe and contribute to increase deal origination in the sector.  Such need of diversification and the uncertainties as to the applicable framework in each given country or region will also require further diligence from investors and, in such context, that they rely on good and sound legal advice – particularly on regulatory aspects to identify existing aid and incentives and potential changes to the framework, for better or for worse – becomes even more important.

Javier Amanteguiis a partner in the corporate department of Clifford Chance Madrid. He joined Clifford Chance in 1995 and became partner in 2001. He specialises in cross-border M&A and energy and infrastructure transactions. Javier forms part of the Latin America desk of Clifford Chance and has worked for many of the leading utilities and infrastructure funds active in the European and South American markets.

Javier can be contacted by calling +34 91 590 75 00 or alternatively via email at

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