EUROPE - Investors will not commit capital to low-carbon energy in the UK unless the government reduces the discount rate on green technologies by 2-3% within the next decade, according to Oxera, an economics thinktank.

In a report published this week, Oxera claims the UK government will fail to raise the £70m-75m (€78.7m-84.3m) required to meet its 2020 renewables target unless it can persuade investors of the business case for paying out on prohibitive capital and operating costs associated with high-risk sub-sectors.

The report also hints at potential reputational risks associated with some forms of renewable energy, including the finding that offshore wind generation is likely to increase energy bills.

To make the case for investing, the government will need to implement short-term policies that either reduce the return required by investors for a given technology or improve the expected return of targeted technologies and reduce the variability in future cash flows, the report said.

In the longer term, the return required by equity and debt investors should decrease as technology becomes better established and therefore less risky.

The report focuses on three risk categories - the technology itself; capital intensity and the ratio of fixed costs to total operating costs; and extrinsic policy risk - the risk that a particular policy might not be sustained over a period of time.

In a chart featuring risk profiles of various renewable sectors, the report identifies wave, tidal stream and CCS energy as highest risk because the technology underpinning them is relatively unproven.

Although nuclear energy carries equivalent construction cost risk, the report gives it a medium risk rating because of its relative maturity.

Combined-cycle gas turbine, solar, hydro, dedicated biogas and onshore wind generation appear in the lowest risk category.

The report said: "Given the sheer size of the required investment, new investors are likely to play a critical role in funding the transition to a greener future. But the costs of financing local and technologies could prove to be high, in particular to those technologies that are still being developed and have no proven track record."

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