Funds play down effect of green cuts

Fund managers are playing down the investment impact of cuts in state subsidies for low-carbon forms of energy. Governments worldwide are reducing spending on alternative energy projects as fiscal restraint takes hold.

Vicki Bakhshi
Vicki Bakhshi

In America the Climate Bill, which promised broad investment in green technology, was recently de­feated. Britain’s coalition government has earmarked £34m of savings in its initial £6.2 billion of cuts from a reduction in spending on low-carbon projects. More cuts are likely to follow.

Spanish politicians are considering lowering solar subsidies by about 30%. Such subsidies have long been extolled as a benefit of investing in renewable energy companies.

Vicki Bakhshi, an associate director on F&C’s governance and sustainable investment team, says that tighter state budgets are a concern for the renewables sector and demand in the European and American markets fell in 2009.

“However, more capacity was added on the renewable side than for conventional energy, so this is still a major investment opportunity des­pite a fall in demand,” she says.

“In recent years the cost of a solar module has fallen by around half, so it is appropriate to reduce subsidies in line with this,” she adds. (article continues below)

“What investors dislike is when governments cut already-promised tariffs, as proposed in Spain, which can affect investment decisions that have already been made.”

Simon Webber, the manager of the Schroder Global Climate Change fund, boos­ted his renewable exposure this year on the view that prices are bottoming. He also sees falling subsidies as a natural process, but admits that Germany cutting its generous solar subsidies this year depressed sentiment in the sector.

In general, Webber expects austerity polices to shift the focus of spending on green technology towards shorter-term projects.

“With long-term solar and nuc­lear power projects, spending in the coming austerity period may move to easier ways of cutting emissions, such as LED lighting and better fuel efficiency with green cars,” he says.

Roberto Cominotto, the manager of the Julius Baer Energy Transition fund at Swiss & Global Asset Management, says the market is over-concerned about subsidy cuts.

“Over the past two years, the prices for solar modules have fallen by 50%,” he says. “This has led to a situation where the profitability of solar projects has risen to unsustainable levels, so governments had to react by cutting subsidies by more than originally planned. This should be seen as positive not negative.”