While the global consensus on the importance of transitioning to renewable energy sources grows, financial hurdles remain a significant barrier in the transition from fossil fuels to less damaging energy generation. An example of this is the recent failed offshore wind turbine contract auction, due to concerns about the strike price for the sale of the electricity, which many thought made the schemes non-viable.

The renewable energy sector, which includes solar, wind and biomass (among others) has witnessed exponential growth in the last decade. Nevertheless, various financial (and practical) challenges inhibit its full potential. In what follows I have had a look at some of the key financial difficulties facing the renewable energy sector.

As with any significant infrastructure projects, there are high barriers to entry with extensive initial capital costs. Although the operational costs can be relatively low and the energy produced can be very cheap, the initial cost can deters investors, especially in developing countries where capital is scarcer. Even where there are progressive capital systems, investors may decide that the £200m needed to build a 20MW biomass plant is too risky and deploy the capital elsewhere.

Governments around the world play a crucial role in promoting renewable energy through subsidies, tax breaks, and grants. However, the policy landscape can be unpredictable. Changes in government or shifts in policy direction can result in the withdrawal of support or the introduction of unfavourable policies, creating uncertainty for investors and energy producers alike. The role of the government clearly drove the issues in relation to the wind auction referred to above. I am currently dealing with a biomass site and having spoken to a number of interested parties I know that there is general concern in the market that further changes may make certain biomass stations uneconomical in the near future.

Despite the environmental concerns surrounding fossil fuels, their market prices can sometimes be more competitive than renewables. This price advantage, coupled with existing infrastructure for fossil fuels, can make renewables less attractive from a purely economic perspective. However, as demonstrated by the conflict in Ukraine, although gas remains a key part of most countries’ energy mix, it can be subject to significant price variability depending on geopolitical events.

I have been involved with a few biomass stations and at least one of these had been designed to include certain cutting-edge gasification techniques. Unfortunately, one of the issues was that the technology did not appear to be sufficiently stable at the time of the station build. With the renewable energy sector still evolving, there's a risk associated with investing in technology that is either speculative or soon to become obsolete. When so much capital is required in these projects, it clearly requires significant confidence in both the build type of these projects and the subsequent cash flows.

One of the big issues for renewable sources like solar and wind is that they are intermittent, meaning they don't produce energy all the time. Two ways of dealing with this are either geographical spread or investment in energy storage solutions, such as batteries. The geographical spread of windfarms is clearly feasible, but a country needs to have distinct areas that have sufficient relative variability to compensate for each other. On the other hand, the current technology for large-scale energy storage is still under development, and the costs associated with these technologies can be prohibitive. Most large-scale batteries can only hold a reserve that lasts a couple of hours. Intermittent supply means intermittent income which clearly effects the rate of return of a project and deploying sufficient capital to mitigate this may simply not be feasible.

An ongoing problem at the moment in the UK is that the National Grid is not equipped to handle the influx of renewable energy. We currently have power stations coming online, but are not able to connect to the Grid due to upgrades which may not be finished by the mid-2030s. This means capital is locked up without rates of return being earned.

Finally, while not directly a financial issue, public perception can influence financial aspects of renewable projects. If a community opposes a wind farm or solar installation, for example, the project can face delays, legal challenges, and increased costs. This has been evident in the UK where all major parties (including those that have the greenest agendas) having blocked various renewable projects. Under these circumstances it is possible to see why investors may be reluctant to outlay cash that may be subject to the whims of local politics.

While the promise of a cleaner, more sustainable energy future is alluring, the journey to achieving it is fraught with financial challenges. Addressing these issues requires a concerted effort from both the public and private sectors. Having been involved in a few to date, it is clear that timely restructuring advice can be critical given the various challenges that can present themselves.