Friday, 14 November 2014

The Green Bubble - are we heading for another crash ?

London financier warns of impending Green Bubble 

In an earlier blog, I showed that there are clear signs of an energy bubble in Ireland. In the above video, Per Wimmer speaks about an international green bubble. With banks leveraging up to 80% of the green industry, are our banks once again over-exposed to an over subsidized sector ?

We have around 2,000MW of wind energy in Ireland and it costs around €1 million to install a MW of wind. So that works out at a total capital cost of €2 billion. My own investigation into company accounts in Ireland shows that the 80% leveraging figure applies in Ireland too. This means Irish and EU banks are exposed to €1.6 billion in loans to the wind industry in Ireland**. The means to repay these loans is entirely dependent on REFIT, PSO and the other subsidies for wind energy which the consumer pays through electricity bills that are among the highest in Europe.
There are so many similarities between the green bubble and the credit bubble that it's almost scary - Per Wimmer
Investors in property were able to avail of a myriad of tax reliefs throughout the housing boom and once again investors in wind energy can also receive tax relief in the form of EII (Employment and Investment Initiative).  The housing boom was characterized by disproportionately high property prices and the green boom is likewise characterized by our disproportionate high electricity prices. There was a strong reluctance from commentators and the media to report independently and fairly on the housing boom. We can also see a very similar Group Think mentality with regards to wind energy.

Another interesting similarity is the lack of regulation. We have an energy regulator who is powerless to prevent the high electricity prices and green subsidies / levies, unlike in the UK where he can at least hold energy companies to account. And whilst the lobby groups main complaint during the boom was "too much financial regulation", in an Irish Wind Farmers Association / AIB document titled 2020 Energy Finance, it is stated that "to unlock more [wind energy] funding we need to remove regulatory barriers".

The only attraction for banks is the guaranteed income from wind energy in the form of subsidies, but how long realistically can households and industry keep funding this ?  As Per Wimmer points out, this is hardly sustainable green energy. In the latest PSO Levy Decision Paper, the regulator pointed out that cheap gas prices resulted in a lower wholesale price. But what will happen when the price of gas rises in tandem with the rise in wind energy subsidies in the next few years ?

Are we going to see another financial collapse or will we keep feeding the beast ?

**An engineer has since contacted me saying that the cost of the installation of 1MW of wind works out at around €2 million per MW as there are costs of building roads up mountains, grid connection costs etc. This cost is higher than that of say, Germany, where developers are building wind farms in populated areas where infrastructure is not a problem. However, in Ireland wind farms are being built in remote regions to avail of higher wind speeds.

So this puts the total cost at € 4 billion. But if one were to include contracted wind farms then it works out at double this. According to the most recent update from ESB Networks, there are 2,000MW of wind due to be connected in the coming years :

The finance for these projects is been raised at the present, so should be included in the final figure. This puts the total capital cost at € 8 billion, with Irish/EU banks exposed to € 6.4 billion in loans to a sector that must be kept afloat by long term unsustainable subsidies in the form of REFIT. Surely, as ESB pointed out in their recent submission on the Green Paper, these subsidies are not sustainable for a mature technology such as wind energy ? So you have to ask the question: are the banks really expecting these loans to be repaid ?

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