Where the Wind Blows: Renewables in Europe

Here, too, all is not well. The renewables industry exploded in Spain over the past 10 years with the help of the government, which capped power prices and heavily subsidized the sector. Investors from all over the world flocked to take part in its growth, as the favorable environment promised healthy returns.

Years of austerity spurred by the debt crisis are causing the government to rethink its policies—retroactively. In mid-February, the Spanish parliament passed legislation that cut subsidies for renewables; that came on top of a law that taxed power generation but had an outsize impact on renewables. There are, according to Fitch, “at least four negative implications as a consequence of the approval of this royal decree: an uncertain future for renewable projects; legal claims against the government’s decision; a weakening of the investment environment; and increased policy risk.” And Spain is not alone. Those legal claims are already being pursued: international investors from the U.S., the United Arab Emirates, Germany and Japan, among others, are filing suit against the Spanish government under the internationally ratified Energy Charter Treaty, which binds members to rules on energy and arbitration.

“[Southern renewables] are under pressure,” writes Federico Gronda, an analyst at Fitch. “Fitch Ratings differentiates between renewable projects in Northern Europe, for which the outlook is stable, and projects in Southern Europe, for which the outlook is negative. Southern European projects are exposed to the risk of the imposition of tax increases and additional operating requirements, as recently observed in Spain and Italy.”

The renewables champion, appropriately enough, is in the north. Iceland gets 100% of its electricity needs from renewables. Geothermal contributes 25%, accounting for some 87% of the country’s needs for heat and hot water, while large hydro takes care of the other 75%. Together, the two sources make up 87% of Iceland’s needs not just for electricity, but also for heat and transportation.

Generation is accomplished in an efficient way, too, with its low and stable electricity cost attracting aluminum smelters, and the ore as well, to its shores—which, in turn, benefits its economy. In fact, President Ólafur Ragnar Grímsson has credited Iceland’s clean energy with helping the country to emerge from its financial meltdown in 2008.

Grimsson pointed out as far back as a 2011 Poptech conference speech that reliable sources of renewable energy offer protection against spikes in the cost of fossil fuel. Not only that, but the country has drawn substantial business investments, not just from the aforementioned aluminum smelters, but also from companies looking for locations to build data centers. And those investments have drawn others, enabling Iceland to recover far more quickly than it might have otherwise.

Consultant McKinsey & Co. has counseled Iceland to take it a step further and export renewable power to Europe as a means to sustain its recovery and build growth. And Iceland is exploring the possibility of doing exactly that; it approached Britain last year about the possibility of an underwater power cable to Scotland that could provide the island nation with as much power as a typical nuclear reactor.