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Jake Burnyeat is a market analyst
in the Renewable Energy Group
and a key author of the Country
Attractiveness Indices. He has an
excellent understanding of the
complex regulatory, economic
and technological drivers of the
renewable energy industry and
has advised significant players on
these risks.
Jonathan Johns is Head of the
Renewable Energy Group at Ernst &
Young. He is a chartered tax
practitioner and has widespread
experience of venture capital and
structured and corporate finance.
He has advised on renewable
transactions with a value in excess
of US$1 billion.
16
Industry Outlook
Countr y Attractiveness and Finance Trends in the European Renewable
Energy Market
Although Europe can claim 70% of the worldwide
installed wind capacity to date, European developers
are currently struggling to secure wind turbines. This is
due to an on-going development boom in the US that
accounted for one-fifth of the global wind megawatts
(MW) being installed in 2005, starving Europe of
supply. Small project developers have been particularly
badly hit, whilst larger developers have been making
bulk advance orders to secure supply.
Increasing turbine costs, largely due to the supply
shortage, plus rising steel price and higher premiums
charged for engineering, procurement and
construction contract risk have contributed to delays
in the offshore programmes in the UK and Germany.
Turbine supply is drawn to the US rather than Europe
by the large project sizes and low development costs,
yet manufacturers have been slow to establish produc-
tion capacity in the US due to a lack of long-term
regulatory security. As new markets take off elsewhere
worldwide, competition for turbines will increase
unless the capacity of both turbine manufacturers and
key component suppliers expands to meet demand.
Leading European Markets
The Ernst & Young Renewable Energy Country
Attractiveness Indices are released quarterly and have been
compiled since 2003. The indices provide scores for
national renewable energy markets based on a set of
general market and technology specific parameters.
The All Renewables Index (ARI) includes onshore and
offshore wind, solar, biomass and other technologies.
Technologies are weighted reflecting investor activity
and market size, resulting in a strong emphasis being
placed on wind. The indices cover 20 markets, 15 of
which are European. The ARI and specific wind
scores for 10 of these 15 are set out in Table 1 and
commentary on the leading markets is provided below.
Spain
With one exception, Spain has held the top position in
the ARI since the Ernst & Young Country Attractiveness
Indices were first released in 2003. Spain’s regulatory
a report by
J o n a t h a n J o h n s and J a k e B u r n y e a t
Renewable Energy Group, Ernst & Young
and market conditions offer both investor security and
the potential for high returns, with generators now able
to switch between a market-based and feed-in tariff
option. Strong gigawatt (GW) annual growth is being
maintained with 1,764MW added in 2005, bringing
the total to over 10GW. Around 90% of Spain’s wind
power is now under the ‘market option’, where
generators receive the pool price plus a subsidy. Sub-
stantial upside has been generated on investments, due
to high power prices caused by a prolonged drought
restricting the supply of hydro power and carbon
penalties driving up fossil fuel power prices. While
development rates are high, competition for assets is
also high and foreign trade buyers have apparently paid
inflated prices for Spanish assets. Competition between
debt providers is also squeezing debt service cover
margins and loan pricings to levels that are pushing
some banks to look elsewhere for returns.
Favourable conditions in Spain have been helped
with the creation of strong national champions such
as Iberdrola, Acciona and Gamesa.
Germany
Germany has maintained a position in the top four of
the ARI since the indices began. Despite concerns that
the wind power market was reaching saturation,
development momentum is being sustained with new
sites being developed in eastern Germany and around
1,800MW being added in 2005. An attractive feed-in
tariff compensates for relatively low wind speeds.
Germany also boasts some of the largest grid-
connected solar projects worldwide and a strong
manufacturing industry.
In the short term, Germany remains an attractive
market for investment in project equity and a
number of international infrastructure funds and
utilities are active in the market.
Some longer term uncertainty for future projects has
been created by the electoral change. However, the
new government has stated that the framework of the
Renewable Energy Sources Act will remain in place
and that Germany is committed to achieving its 2010
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Countr y Attractiveness and Finance Trends in the European Renewable Energy Market

Table 1: Ernst & Young Country Attractiveness Indices, Europe Top 10, Winter 2006

Country Ernst & Young Ernst & Young Total wind 2005 Wind 2004 Wind
All Renewables index Wind Index installed end capacity Capacity
2005 (MW)* added (MW)* added (MW)*
Spain 69 69 10,027 1,764 2,065
Germany 63 63 18,428 1,808 2,037
UK 61 62 1,353 446 240
Italy 57 58 1,717 452 221
France 56 57 757 367 138
Portugal 56 57 1,022 500 226
The Netherlands 55 57 1,219 154 197
Ireland 54 57 496 157 148
Sweden 51 51 500 58 43
Greece 51 53 573 100 90
*European Wind Energy Association (EWEA)

and 2020 renewable energy targets (of 12.5% and 20%,
respectively). The level and rates of annual tariff
reductions enshrined within the EEG are scheduled to
be reviewed in 2007, with the new government
indicating that its future focus will be on re-powering,
offshore wind and encouraging development of the
transmission network. German champions are
concentrated around manufacturing, including
Enercon, Repower and Conergy. Most developers
have remained small in size, reflecting the traditional
develop and sell approach.
UK
At the end of 2004, the UK was joint first in the ARI
but has since dropped down to fourth. The UK has
been ranked highly on the grounds of its large
onshore and offshore wind development pipeline and
a green certificate market that offers attractive returns.
Despite 2005 being a record year for wind
development, it fell short of the GW annual growth
rate needed to meet the country’s 2010 targets. Grid
capacity remains the biggest issue facing the onshore
wind sector in the UK. The majority of the UK’s
onshore wind development pipeline is in Scotland and
much of this cannot go ahead until the Scottish grid is
upgraded to accommodate it. On the upside, high
prices are being commanded for green certificates in a
starved market.
Beyond wind, the UK’s biomass, biofuels and marine
renewables industries are achieving some significant
milestones: E.ON UK is to begin construction of the
UK’s largest biomass-only-fired power station this year
in Scotland; a renewable transport fuel obligation
(RTFO) of 5% of supply by 2010 is to boost the UK’s
biodiesel and bio-ethanol markets; and, in the marine
energy sector, where the UK is well placed to become
the world leader, Marine Current Turbines are to
deploy their 1MW ‘SeaGen’ device in N Ireland.
Table 2: Europe’s Position in the Global Wind
Market
Total wind 2005 Wind 2004 Wind
installed end Capacity Capacity
2005 (MW) added (MW) added (MW)
E&Y Europe 36,092 5,806 5,405
Top 10*
Europe* 40,811 6,315 5,774
World** 59,000 12,000 8,000
E&Y = Ernst & Young; MW = megawatts.
*European Wind Energy Association (EWEA) **German Wind Energy Association
(GWEA) (to nearest gigawatts).
Italy
Italy has recently jumped up the indices due to an
improvement in regulatory conditions. Whilst the
Italian green certificate mechanism has offered high
prices for green power for some time, a lack of
forward price certainty previously made financing
difficult. However, at the end of 2005, the period
ahead for which future reference prices for green
certificates are given was extended from just one year
to eight years. This decreases the forward price
uncertainty and provides a missing link that makes
Italy a potentially attractive market. Italy is the largest
of the ‘mid-sized’ wind markets in Europe, with
strong growth in 2005 bringing the current total to
1,717MW. Growth prospects look good, large
(50MW+) projects are being developed and foreign
investors and lenders are active in the market.
Portugal
Portugal’s wind market is growing rapidly, doubling
in 2005 from just over 500MW to 1,022MW. This
growth is expected to continue, with licences for a
further 3,250MW above the current capacity already
granted and a further 1,000MW of licences due to be
granted early in 2006. The large scale of licences
issued has led to a consortium approach being

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Industry Outlook
adopted by developers and manufacturers.
France
France is attracting foreign investment, for example
through international power sector players
establishing joint ventures with French developers.
The country has excellent wind resources and an
attractive tariff; however, planning remains an issue.
Despite the 12MW size limit on wind projects being
removed, the government has yet to allocate the
promised development zones for wind power.
France has an official renewable energy target of
10GW by 2010. Installation rates increased in 2005,
but the country has a long way to go from its current
total installed wind capacity of 757MW.
Investment Trends
Interest in the renewable energy sector continues to
grow from both equity and debt providers for the
following broad reasons:
As new markets take off elsewhere worldwide, competition
for turbines will increase unless the capacity of both
turbine manufacturers and key component
suppliers expands to meet demand.
• growing confidence in the national governments’
commitment to increasing renewable energy
capacity;
• energy shortages and robust underlying power
prices;
• growing understanding of the resource,
construction and operating risks, particularly in
the wind sector;
• increasing market/portfolio/project sizes and
improving quality of counter-parties; and
• generally liquid financial markets and a shortage of
investment opportunities.
As a result, the costs of equity and debt are reducing,
with both markets undergoing change. Furthermore,
subject to gaining comfort with national market offtake
regimes and regulatory environments, finance
providers are increasingly appraising opportunities on a
transnational basis, although separate national markets
and technologies may have substantially differing
18
finance terms – particularly debt markets.
Equity Finance and Mergers and
Acquisitions
Broadly speaking, equity finance and merger and
acquisitions activity in the renewable energy sector
falls into two categories:
• technology or supply chain transactions; and
• investment in renewable energy assets, which may
consist of development capital, e.g. taking a stake
in a project developer, or project capital (acquiring
projects that have been developed and are either
ready for construction or have been constructed).
Debt Finance
In markets where sufficient project revenues can be
guaranteed through a long-term power purchase
agreement, appetite for debt in wind power projects
is strong and competition between banks is squeezing
lenders’ margins. One result has been an increasing
interest in alternative technologies and a willingness
to consider more innovative structures and aggressive
lending terms.
Whilst banks may be increasingly willing to consider
new renewable energy technologies, their
requirements must remain stringent. Bank
requirements can influence many aspects of project
development – from technology and fuel supply choice
to ownership structures. Early involvement of financial
advisors and/or potential lenders in project decision-
making can significantly improve project returns in the
long run. This was recently demonstrated in the UK
when the £180 million Lakeside energy from waste
plant at Colnbrook, near Slough, secured a project
finance loan that allows flexibility in relation to the
sourcing of waste and power contracts.
A landmark debt transaction in the UK has seen the first
non-utility balance-sheet funding of an offshore wind
farm when RWE npower’s operational North Hoyle
project was sold into Beaufort Wind Limited (BWL),
which is supported by a £300m debt facility. ■
EUROPEAN RENEWABLE ENERGY REVIEW 2006
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With a dedicated team of

advisors, supported by an
international network of
specialists, Ernst & Young's
Renewable Energy Group
helps clients to maximise
value from renewable energy
activity.

For further information contact:

Jonathan Johns
Tel: +44 1392 284 300
E-mail: jjohns@uk.ey.com

www.ey.com/renewables
!@#