Political uncertainty makes investors and developers nervous, especially with an asset class like renewables that has historically been dependent upon government support to make it viable.
However, one renewable energy technology that still seems to have broad political support is offshore wind power.
Europe is leading the way in the construction of wind farms in water. Of the 11.7GW of global offshore wind capacity installed as at 2015, 11GW was installed in Europe and the remaining 700MW in Asia-Pacific, mostly in China.
The vast majority of offshore wind capacity in Europe is found in the UK and Germany, with just over 5GW and 3GW installed respectively at 2015.
Investment in any form of energy generation, including offshore wind, is currently very difficult due to extremely low wholesale power prices.
According to Macquarie Research, baseload power prices in the UK fell by 26 per cent in 2015 and by 5 per cent since the start of October 2015. Macquarie has also reduced its power price forecast from £45.6 MWh to £38.6 MWh.
This price level is insufficient to attract the large initial capital outlay required for most energy infrastructure projects.
Therefore, some price support is necessary for European countries such as the UK to build the infrastructure needed to replace power plants that are shutting down - either due to age or, in the case of coal, environmental legislation.
Mark Dooley, Macquarie Capital Head of Infrastructure, Utilities and Renewables in Europe, says that at the moment, investments cannot occur without government intervention.
“Market price risk is so difficult for investors at the moment, that you need some sort of price underpinning, like the Contract For Difference (CFD) in the UK, and the Feed-in Tariff (FIT) in Germany,” says Dooley.
Under the CFD scheme, the government pays the difference between the strike price and the wholesale cost of electricity. If the cost of electricity exceeds the strike price, the generator must then pay back the extra revenue to the government.
This long-term, inflation-indexed revenue stream is precisely the kind of stable cash flow favoured by the fastest growing source of equity and debt for European infrastructure: institutional investors.
Pension funds, sovereign wealth funds and insurers that invest in infrastructure have typically been attracted to assets such as regulated utilities and availability-based Public Private Partnerships (PPPs) that have fixed payments over a long-term period – up to 30 years in the case of some PPPs.
However, as more institutional investors enter the infrastructure space – either on the equity or debt side – less conventional assets such as offshore wind become more attractive, explains Dooley.
“The traditional centre of what infrastructure investors like to look at, for example utilities and transmission in strong European markets, are seeing fewer assets and more money chasing them,” says Dooley.