Bank on Fundamentals, Not Government Subsidies

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The German Minister of the Environment Peter Altmaier

Three pieces of news that recently caught our eye have focused our attention on the distinction between risk that originates in the normal business cycle, and regulatory risk that originates in the murky machinations of governments and politicians.

1) The United States renewed the PTC tax credit for wind at the beginning of 2013

2) China continues to stride ahead with the installation of further wind capacity, with analysts predicting wind to become 15% of total installed capacity by 2030

But on the flip side of the coin…

3) The German Environment minister proposed at the end of January to freeze the domestic renewable surcharge in 2014 and cap any increase in future at 2.5% p.a., possibly including a retrospective  levy on existing renewable energy power plants.

What’s common between these three scenarios?  Political and regulatory tinkering with the renewables sector.  Quelle surprise!

The US PTC tax credit was extended for just one year as part of a wider political crisis around the fiscal cliff that was resolved at the 11th hour as the new year ticked by.  The Chinese government has been under pressure to increase investments in alternative energy and saw an opportunity to boost domestic manufacturing by focusing its attention on wind installation.  And Germany is coming up to an election in September.

The renewables and alternative energy market has always been more susceptible than other sectors to regulatory risk.  The tendency of governments to weigh into our markets, usually with the best of intentions to boost the sector in general or even to promote particular technologies, can turn into a minefield for even the best-connected market observer.  When retrospective elements are introduced it gets even worse – without grandfathering of previous levels of subsidies, uncertainty will prevail and even the most rock solid business plan could be undermined in future years.

With our experience in this sector, we have long been of the opinion that investing on the basis of regulatory attractiveness is a mug’s game.  What looks like a great deal now can so quickly turn on a dime if governments, ministers or even local councils decide to use alternative energy as a political football.

That’s why the only answer to this issue is to focus on the technology.  Investing in best in breed technology that works and is backed up by good management and a good business model will succeed whether or not subsidies are in or out, up or down.  True, regulatory changes can seriously affect a business – but it’s a dangerous game to base your investments on the faithfulness of governments.  They will disappoint you every time.


Categories: Economic Indicators, Smart Grid, Uncategorized, Wind

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