Move to alternative energy stuck in the starting blocksArmin Sandhövel, CEO of Allianz Climate Solutions GmbH explains why investors are finding it difficult to back new alternative energy infrastructure.
Armin Sandhövel: Allianz's primary concern is its customers. It is responsible for offering products on the market that are competitive and promise returns. To say that this implies a public-sector mission would be taking things too far. Nevertheless, our expertise in the field of insurance and investment means that we can make a key contribution to the energy revolution.
On the insurance side of things, we were addressing the issues of renewable energy and infrastructure long before politicians started proclaiming the energy revolution. Allianz entities across the globe have been insuring renewable energy for years, promoting the development of new technology.
Our wealth of experience has been growing at the same time. The expertise that, for example, Allianz Global Corporate & Specialty and Allianz Deutschland AG have in the offshore segment can help energy producers and policymakers to reduce risks.
Within this context, Allianz Board of Management member Clem Booth recently spoke of a risk partnership, which will definitely be necessary if we want to provide large-scale insurance.
What does a "risk partnership" mean?
A risk partnership means that, especially in the initial stages of a project, the government should provide certain guarantees so that the financial industry can invest as a second step. In summary, it is about distributing the risks that arise, for example, if the expansion of power supply lines for offshore wind farms is delayed.
The uncertainty is due mainly to an EU regulation which states that you cannot invest in power generation facilities and in network infrastructure at the same time. The regulation is based on the principle of ‘unbundling’, i.e. separating the different business areas of a company.
But a regulation that was designed to prevent monopolies among energy producers is now also posing an obstacle to financial investors and, as a result, a barrier to faster structural expansion. This explains why Allianz has a very good portfolio containing some generation facilities—mainly wind and solar farms—on the one hand but is prevented, due to a law with highly unspecific wording, from investing in the network infrastructure.
So you are calling for greater legal certainty?
Exactly. After all, without a greater commitment on the part of the financial industry, it is difficult to imagine who will be able to fund the large-scale restructuring of the energy network at a time when federal states and municipal authorities are short of cash. Even banks are currently withdrawing a huge amount of money from many fields of business.
Has a solution to this problem already been identified?
All of the parties involved have recognized that the energy revolution will not come about all by itself. We have to collaborate more closely. The supervisory authorities are aware of this as well.
The imminent Solvency II insurance regulations [at EU level] could make infrastructure investments less attractive for insurers. Something that was originally intended as a means of reducing risks makes the outlook for long-term investments less rosy at the same time. And these investments are precisely what is needed for a successful energy revolution.
If the regulatory issues, such as the issue of unbundling, could be clarified, there would be absolutely nothing restraining a company like Allianz from investing in energy networks and storage facilities and, at the same time, in the further expansion of the energy generation portfolio.
Another high-profile and highly interesting area is renewable energy funds. Allianz plans to launch closed-end investment funds focusing on renewable energy in the near future.
These funds are to be aimed at institutional investors that do not want to set up their own portfolios with five or six investments, but instead would rather join forces with other investors and invest in a diversified portfolio, via a fund, so that they can benefit from the expertise of the investment professionals at Allianz Global Investors and Allianz Climate Solutions.
Given the extent to which things are interlinked at EU level, it is worth asking whether a national energy revolution is possible at all?
One could ask an even more radical question: how much sense does a purely national energy revolution make when stronger social and political integration in the EU is being discussed, especially against the backdrop of the euro crisis?
The energy industry forms the basis for Europe's economy. So we have to forge much closer links at EU level as far as energy is concerned.
After all, it is not as if we do not have enough energy in Europe. It is more a question of distribution than generation. This also means importing electricity from neighboring countries in order to ensure sufficient supplies, for example during periods of severe winter weather. Because without this security, support for the energy revolution would soon dwindle.
Will Germany manage to achieve its energy revolution?
I am sure that we will manage it. Germany boasts not only the technology and first-class engineers, but also the necessary project managers. All in all, I'd say that we are rather well organized.
When it comes to the timeframe for implementation, however, I am not quite so sure. But I do not think it is important whether the energy revolution comes in 2020 or 2025. What is important is that we lay the right foundations now. This also means breaking with the illusion that none of it will cost a penny. The large-scale restructuring of the energy industry implies a complete transformation of our industrial society.
But the effort will ultimately be worth it. Take consumers, for example, who will then be able to feed the power they generate into the grid at competitive prices without the need for any subsidies. The only thing we need to get right are the incentives. The solar energy segment is ideal in this respect. Anyone can mount a solar power facility on their roof. Sometimes the systems will be damaged and will have to be repaired. This benefits small traders as well.
In this sense, the energy revolution, with its decentralized energy generation strategy, will also provide an employment initiative for the coming decades.