Germany’s commitment to shift its energy portfolio – using renewable energy for 80 percent of its electricity demand by 2050—carries with it a massive economic challenge. Some of the areas in which investments are needed for a successful energy transition bear high risk for investors.
When we examined the risk-return profile of individual sectors, most of the areas needing investment should see returns of between 4.5 to 6.5 percent, with low to medium risk. Conventional generation and storage as well as offshore wind farms are exceptions. Especially wind farms have the potential to generate above-average returns of up to ten percent.
Nevertheless, conventional generation and storage, as well as wind farms, also bear the highest risk for investors. The investment attractiveness of the conventional generation and storage sector, for instance, has deteriorated significantly. In the past, the risks were moderate and returns were high. In recent years, however, profits shrank considerably because of falling wholesale prices.
A comparison of the risk-return profile of the investment areas with the willingness of investor groups to take risks reveals that investments in conventional generation and storage are not attractive for any of the market players. Only traditional utility companies are investing in this sector today. And those investment decisions, made when the market environment was entirely different, cannot be reversed for the most part. Nevertheless, due to the broad range of activities and the desired effects on the portfolio, numerous utilities are extremely active in almost all areas of the energy market today.
This post is the second of a three-part series on the challenge of Germany’s energy transition. Read part one here; part three will be released soon on the Sustainability Blog.
Learn more about Oliver Wyman’s Energy practice: http://www.oliverwyman.com/what-we-do/energy.html
You can also leaf through the all new Oliver Wyman Energy Journal: http://www.oliverwyman.com/insights/publications/2014/nov/energy-journal-vol-1.html
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