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UK renewables increasingly a "safe haven" for venture capitalists, expert says

UK-based renewable energy projects are increasingly providing a "safe haven" to venture capitalists (VCs) nervous about trading conditions in the eurozone, an expert has said.29 Oct 2012

However energy law expert Ian McCarlie of Pinsent Masons, the law firm behind, warned that increased regulatory uncertainty as a result of ongoing Government reform could start to discourage investors from backing UK projects.

"Increased regulatory uncertainty and market reform could easily deter investors who will deploy their capital to other markets – capital can easily travel," he said. "We need to remember that this is a global competition: yes, the UK may retain attractiveness comparative to Europe, but investors also have the option to look at projects with significant scale in Asia Pacific, Africa and the Middle East. We can't afford to rest on our laurels."

McCarlie was speaking as new figures from alternative investments data provider Prequin showed that UK-based VC-backed renewable energy deals were on track to break last year's record figures, while the average value of deals had doubled during 2012. A total of £267.3 million has been invested from 19 deals so far this year, a figure which is already far higher than the £162.2m committed as part of 23 deals last year.

At the same time the figures, analysed by Pinsent Masons, showed that the number of similar deals on continental Europe had fallen despite commitments to increased use of clean technology from countries like Germany following the Fukushima nuclear accident in Japan.

The investment funds market showed a similar increase in UK-based projects and decrease in continental European schemes, according to the figures. The number of funds targeted at investment in UK-based clean technology assets which have reached financial close so far this year is already higher than last year's total. At the same time, the number of closed funds targeted at European assets has fallen compared to 2011 figures.

According to the figures, the emphasis this year had been on higher quality deals, McCarlie said.

"Last year the talk was of private equity 'war chest' existing for investment in renewables and clean tech, and to some extend that has been borne out," he said. "2011 proved a record year with seven PE-backed buyout deals worth almost $1 billion closing in the UK. However, that was almost certainly a high water mark. There has been a retrenchment, and we are instead seeing VC being equally as active as in the previous year in terms of deals, but paying more on average to get into the game."

McCarlie warned that proposed changes to the system of financial support offered by the Government to renewable energy developers from 2017 could influence investors' choices, particularly as many of the details of the new support mechanisms were yet to be confirmed.

The Government's draft Energy Bill (307-page / 1.9MB PDF) proposes replacing the current Renewables Obligation, which offers banded support to reflect the changing costs of different technologies over time, with a new system of feed-in tariffs with contracts for difference (FiTs CfDs). These will offer producers of low carbon power a fixed price for energy supplied to the National Grid, with payments made with reference to a technology-dependent 'strike price' and a market reference price.

In its report on the draft Bill, published in July, the House of Commons' Climate Change Committee warned that the Treasury's refusal to underwrite the new CfDs could affect the success of the new subsidy. Having the Government, with its AAA credit rating, guarantee these contracts rather than spreading the cost between energy companies would reduce the investment risk on projects with high up-front capital costs, the Committee said.

A new version of the Bill is due to be published later this year. Earlier this month, Energy Secretary Ed Davey told industry figures at a CBI conference that the new draft would contain additional powers for the Government, designed to provide the certainty that investors were looking for.