Businesses worldwide are getting behind the move to cleaner energy systems. But a significant minority of investors remains wary of shifting regulations, according to research published in May by Ashurst, an international law firm.

The firm’s Powering Change: Energy in Transition report, based on a poll of more than 2,000 business leaders across the G20 bloc of nations, found 88 percent of companies have pivoted their investment strategies toward low-carbon energy in the last year.

Much of this was in response to tougher government stances on climate change and decarbonization, said Antony Skinner, global co-head of power and utilities for Ashurst.

However, 31 percent of respondents said that a lack of government support poses a significant barrier to low-carbon investment. In many cases, Skinner said, this support was related to having stable regulatory frameworks.

“Consistency and certainty, for any investment, [are] a really important element,” said Skinner.

This appears to be more important even than maintaining subsidy schemes in the long term since many investors are likely willing to bet on the gradual removal of subsidies, provided it happens in a predictable way.

U-turns linger over solar and wind markets

Given recent experience, it is perhaps unsurprising that one in three investors see government support as a challenge. There are numerous examples worldwide of governments shoring up renewables development at one point and then abruptly withdrawing support later on.

The U.K., for example, blocked onshore wind subsidies in 2017, leading to an 80 percent drop in new projects, and scrapped residential solar feed-in tariffs in April 2019, causing installations to fall by 94 percent. This March, ministers said onshore wind might opt for contracts for difference.

Australian government policy has been similarly inconsistent. An early leader in renewables adoption, in recent years the national administration has largely left it to individual states to foster wind and solar projects, even as the country has been battered by heat waves and drought

“There’s been an uptake in renewable development in Australia, in spite of rather than because of government support,” Skinner said.

Other high-profile instances of flip-flopping governments are those of Saudi Arabia, which has repeatedly failed to follow up on big promises for solar, and Spain, where the retrospective axing of a poorly devised feed-in tariff scheme led to an almost decade-long hiatus in plant installations.

Skinner said he had heard the risk return for investments in Spain “went up 100 basis points overnight because they had no longer any certainty or confidence that, if the government wanted to, it would change its mind on something.”

Renewables take the merchant road to recovery

Tellingly, while renewable energy is now booming again in Spain, many plants are being built on a merchant basis, reflecting lingering mistrust in the government. It’s a similar story in Italy, which also reneged on an early subsidy scheme.

Going it alone is only an option in liberalized energy markets, though. In developing markets where there is usually a single, state-owned offtaker, investor appetite will largely depend on the nature of the state.

In Dubai, for example, developers EDF and JinkoSolar have managed to set a new record-low price for solar “because you’re selling to the Emirates government, which obviously has a very strong credit rating, and the load factor is very high,” said Skinner. “In the U.K., bizarrely, you’re taking a much higher risk.”

Perhaps because of this, there does not appear to be a strong correlation between G20 market liberalization and investor concern with the government.

Although the Ashurst study found political support was of greatest concern in China, where it was cited by 46 percent of respondents, the second-highest level was in India, with 43 percent. Conversely, government support was of least concern in Turkey and Indonesia.

Gerard Reid, co-founder and partner at renewables corporate finance advisory firm Alexa Capital, agreed with Ashurst’s central finding that corporations are increasingly keen to support clean energy. “But I would not say government support remains a challenge,” he said.

“You just have to look at the amount of subsidies that have been thrown about. I think the challenge is the unwillingness of governments to remove regulatory hurdles that support fossil fuels and incumbent business models.”