Low carbon price may stunt investment in wind, sun

LONDON (Reuters) - Falling prices for European carbon emissions permits could stunt investment in the renewable energy sector both within and outside Europe, but the credit crunch continues to have a greater impact.

An employee works at the Ernesto Che Guevara factory in Pinar del Rio October 22, 2008. REUTERS/Enrique De La Osa

Renewable energy’s rapid growth has been slowed by the credit crunch and financial crisis: energy projects depend on debt finance which is now in short supply and more costly.

A falling carbon price could worsen the economics of renewable energy further, as falling demand for carbon emissions permits in a deepening recession pulls down carbon prices, benefiting fossil fuels.

“If the price goes too low, we won’t get investment in the kind of infrastructure we want to see. You might be more tempted to invest in a coal-fired power plant if you thought the carbon price would stay at 15,” said Deutsche Bank analyst Mark Lewis.

The EU emissions trading scheme (ETS) forces businesses to buy carbon emissions permits which have halved in price since July to less than 15 euros last week, their lowest level since March 2007. They traded at 16 euros on Thursday.

Carbon prices can direct the daily operation of power generators, potentially encouraging them to switch to gas from higher carbon-emitting coal. In addition, they could drive longer term investments into low carbon sources of electricity.

So far their influence has been more on day-to-day decisions, especially given uncertainty about the future direction of carbon prices.

Analysts say that the credit crunch is the main drag now on investments -- “Solar or wind developers are not reviewing their investment plans because of the energy price, but because of problems securing financing,” said Michael McNamara, senior analyst at Jefferies bank.

The carbon price came bottom among factors utilities consider for low-carbon investments -- cost of capital, construction cost, planning consent and assumptions about fossil fuel prices all came higher, said a utilities analyst who declined to be named.

Utilities were assuming carbon prices would rise in the long-term, however, he added.


The EU launched its emissions trading scheme in 2005. The market imposes a cap on industrial carbon emissions but allows companies to offset these by funding cuts in the developing world instead, a cheaper option.

In that way the scheme can direct energy investments in both rich and poor countries. The ability to sell carbon credits is a major source of income for some renewable energy projects in developing countries.

“In places that rely on carbon credits to support new projects, such as China, India and Latin America, the fall in price will delay or possibly kill the marginal, less economically viable projects, but the credit crunch will still be the primary factor regarding growth,” said Tom Murley, head of renewable energy at private equity investors HgCapital.

Lower EU carbon prices can also weaken the incentive for renewable energy production in Europe.

In developed countries with open power markets, utilities pass on the cost of carbon emissions permits to the power price. That benefits renewable energy companies because they don’t have to buy carbon permits, but still cash in on the higher price of electricity -- and likewise they lose when carbon prices fall.

“These markets are working off the long-term cost of power which includes carbon. If the carbon price is halved, the cost of power will also fall, just as it will rise if pricing recovers,” said Murley.

Reporting by Nina Chestney; Editing by Gerard Wynn