January is traditionally a time when we think about fresh starts and making the coming year better than the old one. It’s the time when diet books, quit-smoking services and recruitment companies are at their busiest. And this year, in the renewables sector, it’s also time for a positive change.
2015 saw investment decline in the UK as the last few subsidies and tax breaks ended for a lot of solar and wind (and of course, global emissions kept rising), but 2016 will be different. The outlook is more positive than its been in years.
This is because the last-minute COP21 Paris agreement opened up huge scope for commercially viable carbon reduction projects. In the preceding year, only the very top end of projects got the green light. In 2015, we noticed that to attract the kind of investment attention renewables used to get (back in the old tax-break and feed-in tariff era), renewable projects needed gold-plated credentials. If a project didn’t have rock solid power purchase agreements with reliable counterparties, or some sort of generous incentive attached, they struggled to get the backing they deserved.
But post-Paris, it’s a whole new ballgame. Carbon trading is back at the centre of the mechanisms that will drive investment, again. We’ve been anticipating this development because it’s the only way to drive investment into developing economies and choke of the biggest source of rising carbon emissions. This is good news for investors, because it means carbon emission reductions registered with the UNFCC Clean Development Mechanism will rise in value. COP 21 has dramatically changed the commercial potential for renewable investments of all shapes and sizes, especially in developing economies where they are needed the most.
Looking at the big picture, 1Mw of installed capacity in Chile will produce about 1000 CERs per year. When you accredit these projects via the UNFCC, generally you get 21 years worth of credits. Based on the fact carbon prices have started to see more upwards movement and speculation. It’s a pretty safe bet that, as the COP 21 gets into gear in over the next few years, the carbon price will rise significantly. Renewable energy investments will benefit from effective carbon markets with futures running for 7-10 years, which means developers and financiers can hedge the price of emissions reductions going forwards.
Put simply, the Paris agreement has stabilised the ability to finance renewables, providing a solid outlook that will encourage investors and lenders alike.
We’re predicting 2016 will spawn a broad range of new renewable projects, commercial carbon abatement initiatives and energy efficiency investments, world wide. And the nature of the new Paris accords means money will be flowing into projects that are environmentally attractive and don’t need subsidies or gold-plated PPA credentials to make commercial sense. This will, in all likelihood, mean a flow of carbon-reducing investment capital away from the developed world and to the developing world. And provided you know how to exploit carbon pricing mechanisms, the real prospect of index linking finance to carbon reductions.
It’s not just good news for the planet, it’s particularly good news for 350, too. As we’re actively seeking partners in our three main areas of interest – Chile, Mexico and India – this makes our work more attractive for investors. It also means we’ll be scaling our work with institutional investors and infrastructure funds who have, like us, got ahead of the game and anticipated that the smartest renewable money will be spent on the highest carbon reducing projects.
Happy New Year!
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