Environmental Investment Partners: EU subsidies are the wind in their sails

By Aleksander Nowacki

Environmental Investment Partners (EIP), a small venture capital firm focused on the environmental industry, is looking to set up a new fund to provide mezzanine finance for renewable energy projects. Market insiders point out, however, that the prospects of market development are dependent entirely on the favorable regulatory environment, and inflows of EU structural funds and growth could yet be stifled due to the high costs of renewable energy.

The European Bank for Reconstruction and Development (EBRD) estimates that the inflow of EU structural funds into this country will generate some E2 billion (zł.9.2 billion) in bankable wind-energy projects in the coming years. Adam de Sola Pool, EIP chief investment officer, says that perhaps a quarter of that sum is a more realistic figure but "if we can get 10 percent of that market, we will be doing very nicely."

Jerzy Szymczak, energy analyst at the Boston Consulting Group (BCG), points out that these estimates are based on the EU's "very ambitious targets", according to which more than 22 percent of all energy should come from renewable sources. "To achieve this, renewable technologies will (have to) benefit from a continuous flow of subsidies" which would create "space for financial institutions that can help facilitate the process." He cautions, however, that renewables have "clear limitations from a free market viewpoint" and are significantly more expensive.

As a result, he says, potential investors should be prepared for possible changes in the regulatory environment, which could lead to boom-and-bust cycles as periods of undercapacity alternate with overcapacity. For now, however, the industry is incapable of meeting even the relatively modest target of 2.5 percent of energy coming from renewable sources set by the domestic law. Renewables cover no more than 1.8 percent of sales volumes at the moment. He sees, therefore, combined cycle gas turbines as the most promising of the "clean" technologies.

EIP is, however, looking to focus exclusively on renewables, and wind energy in particular, as its chief investor is a German company with an interest in renewable energy business in Germany. Szymczak points out that the company's interest in expansion on this country's market is likely dictated by a desire to create demand for its equipment.

Pool says that the energy sector is a relatively risk-free segment of the environmental industry as law enforcement in this area is easier to measure: "Most governments in the region do an awful job of environmental law enforcement," he says. "That is less of a risk when it comes to wind energy."

Antoni Słomiany, chief executive officer at SFW Energia, notes that the risk of a changed legal environment in the near future appears slim, making the renewable energy market one of the safest bets in the industry.

"We cannot provide venture-capital returns," Pool says. "Minimum risk is what we can offer our investors." The fund, which will provide 10-25 percent of finance for EU-subsidies projects, is set to be officially launched at a renewables conference in Germany in June of next year.