Magazine article Risk Management

Under the Sun: The Politics of Solar Investment

Magazine article Risk Management

Under the Sun: The Politics of Solar Investment

Article excerpt

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In certain parts of the world, the sun will always be shining. Unfortunately for solar energy developers, that is about the only thing of which they can be certain. Everything else depends upon technology, weather, people and government, and those four variables--especially the last two--are far from predictable. by Charlie Richardson

Currently, global solar energy production is booming. A good indicator of the solar industry's manufacturing strength can be drawn from the recent InterSolar conference in Germany, which saw visitor numbers top 50,000, up roughly 60% from 2007. Another promising sign is a planned 750-megawatt solar generation facility called SES Solar Two--the largest plant proposal in the world--that will provide electricity for approximately 500,000 homes in the San Diego region. The facility will be located on 6,500 acres of Mojave Desert land with construction expected to begin in late 2009.

The recent upsurge in demand for new solar installations is being driven by a gold-rush mentality fuelled on tax credits and financial incentives, with investors hoping for a repeat of the recent boom experienced by the wind sector, which has seen spectacular growth in the last two to three years after overcoming the technological hurdles of the 1990s.

As the search for green energy becomes ever more intense, nations throughout the world have developed a wide variety of financial incentives to encourage everyone from the homeowner to the project finance company to invest in solar energy. These legislative and tax-credit incentives are often short-lived, however, and tend to fuel a scramble for capital, making investments for manufacturers riskier and potentially increasing power generators' losses when downtime problems occur.

One of the best known and most successful incentives are "feed-in tariffs," a concept perfected by German authorities and now being widely adopted by markets in Spain, the United States, Greece and Portugal. Typically the feed-in tariff operates so that customers of large utility firms receive a fixed price for the surplus energy that their renewable resource generates over a fixed period, and for every unit of energy it produces, the local government provides an additional revenue stream as an incentive. Essentially, it is a kickback to spur investment into a technology that, while not yet competitive in the market, is still something the government deems a socially positive development worthy of encouragement.

At a UK Parliament House of Lords' debate on the forthcoming Energy Bill, Lord Jones, the minister of State for Business, Enterprise & Regulatory Reform, said that there are 500 different types of tariffs around the world with 150 added every year. And in Germany, for example, tariffs example will have cost the government almost 70 billion [euro] between 2000 and 2012. The rub, however, is that in many locations these tariffs remain temporary and manufacturers and investors have no way of knowing whether the next assembly of elected officials will continue the previous incentives.

In conventional circumstances, a manufacturer's decision to invest in a new factory or new machinery is based on their calculation of customer demand. …

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