Renewables investment risk rising with greater market exposure

Investors in renewable energy projects face greater risks than in the past as funding regimes across European markets shift away from an ‘invest and forget’ model.

Analysts at consultancy Poyry have said that investors are now increasingly exposed to wholesale market risk as assets mature and renewable subsidy arrangements shift away from fixed feed-in-tariffs to ‘top up tariffs’, meaning operators may have to set up trading operations to mitigate their exposure.

“European renewable energy markets have historically been a low risk investment proposition,” the report said. But “the point in time when they will cease to be eligible for support – and be forced to trade their power in the wholesale electricity – draws ever nearer”.

In addition, top-up tariffs – such as the UK government’s contracts for difference (CfD) system – expose investors to “significant balancing risks” risk because their revenue is determined based on the difference between the prevailing market price and the agreed upon ‘strike price’ for their technology.

“New projects funded under the ‘top-up’ schemes will be far more exposed to the market than their predecessors under the old FiT regime,” the report said.

“Operators will also have to actively manage these new risks by setting up trading operations or finding financial or physical trading counterparties and then implementing risk management strategies,” said Phil Hare from Pöyry Management Consulting.

“The virtually risk free environment of FiT schemes, where investors could invest and forget, will cease to exist,” he added.