Disaster, not policy, likelier carbon price boost

01 Feb 2012 05:34 PM

A shock event which irreversibly alters climate is more likely to force a sustained rise in carbon prices to levels high enough to spur clean technology investment than the prospect of concerted government action, said a corporate finance manager.

Prices for European Union carbon permits lost about half their value last year, falling to record lows of under 7 euros ($9) a tonne, due to an oversupplied market and eurozone economy concerns.

Politicians and energy firms have called for intervention in the EU's emissions trading scheme to prop up the price, arguing it is far too low to stimulate investment in low-carbon technologies.

"I can see a carbon price way higher (than current levels) but it will need governments collectively to put in place policies, regulations and rules to enable that change," Gareth Hughes, founder of UK-based corporate finance and advisory firm Beetle Capital Partners LLP, said in an interview.

"Or we will have, which is more likely, some severe shocks along the way will result in a more rapid need for change which will drive the price up more aggressively," he added.

A sudden collapse of the Antarctic ice sheet would cause substantial sea level rise which would likely prompt intense political will for cleaner energy sources and drive up the carbon price, Hughes said.

Similarly, a major threat to the world's energy security could have a similar result.

Last year, Japan's tsunami and subsequent nuclear crisis drove up carbon prices as investors anticipated much greater demand for coal, gas and renewables as several countries retreated from nuclear plans.

"I believe in carbon markets. At some point market pricing will reflect what is required to make investments move to low-carbon economies," Hughes said, citing estimates of 80-100 euros a tonne which could support carbon capture and storage.

Beetle Capital Partners provides corporate finance and advisory services to companies and funds across sectors such as agriculture and forestry, clean technology, clean energy infrastructure, water and waste.

The firm has raised about 30 million euros for its clients in the past 12 to 18 months, who range from sovereign wealth funds to high net worth individuals, Hughes said. 

DEMAND 

Over the next two years, the firm is helping to raise $500 million for a Canadian agriculture firm, 125 million euros for a Polish wind fund and 50-100 million euros for a Belgian biomass firm. It is also helping to raise a few million euros for water purification projects in Africa.

Such schemes are part of an expanded form of U.N.-offset projects which reward clean energy investments in poor nations.

Called programme of activities, or PoA, the scheme allows a large number of identical projects across a region or country to be bundled together and can result in a large number of emissions reductions and therefore carbon credits.

"There is certainly demand for those credits although they are more complex to structure and manage," Hughes said.

Beetle Capital Partners is also interested in REDD+, a scheme which rewards private investors with carbon credits when they pay poor countries to halt the destruction of tropical forests but the market is too nascent for significant gains now.

"There are significant challenges around the frameworks and the biggest question is: what do those markets look like, where is the demand? We are watching REDD+ carefully and see it is a critical part of the overall architecture but we think it will take more time," he added. 

UNCERTAINTY

Despite "sustained growth" in clean tech investment, lingering uncertainty around regulation and subsidies in Europe is hindering some private sector investment, Hughes said.

Global clean energy investment hit a record $260 billion last year, according to estimates last month, despite some bankruptcies and weak share prices.

"There is growing scepticism about political will and support from governments to provide the certainty investors need to commit to long-term structures," Hughes said.

Last month, the UK government tried to tackle continuing uncertainty over domestic solar subsidy cuts by setting a new date for introducing lower tariffs.

In Europe, several nations like Spain, Italy, Germany and Greece have made or are making renewables subsidy cuts.

"For renewable energy, investors want to see they can invest today for 20-25 years and have certainty the regulatory framework will be in place for that period. Depending on the jurisidiction, if you can get unlevered index-linked, fixed-income type returns of 7-9 percent that's good," Hughes said.

"But there is uncertainty in the market and a weakening of the commitment in the narrative here and in the United States.

President Obama's watered down commitment to renewables and position on shale gas and other fossil fuels sends very negative and confusing messages," he added.

Beetle Capital also advises firms on deals and aims to step up that activity as a trend of consolidation across the renewables sector continues.

The firm advised Banco Santander on the sale of a photovoltaic plant to Munich Re last year.

"As large banks look at their balance sheets, I expect quite a few of their assets in these sectors will be analysed at very closely over the next 12-18 months," he said.

"Institutional investors are interested in making significant investments but they currently need to have support mechanisms in place to give them the confidence to do that. They would like to have something that is more bond-like in terms of quality of security and tenor."

By Nina Chestney - nina.chestney@thomsonreuters.com