German investors look to solar power and renewables for returns

Royal Bank of Scotland has seen a surge in demand from German investors for structured products linked to solar and renewable energy.

The disaster at Japan’s Fukushima nuclear power plant has sparked Europe-wide debate about the safety of nuclear power. And now Royal Bank of Scotland (RBS) in Germany has seen a revival in demand from investors for structures and indexes linked to solar and renewable energy.

“There is popular consensus that the risks in nuclear technology may not be manageable,” says Kemal Bagci, director of equity derivatives and structured retail at RBS in Frankfurt. “The consequences have been severe when it comes nuclear technology failures.”

The contribution of renewable energy in Germany will double over the next decade, according to a report published on March 14 by the Fraunhofer Institute for Solar Energy Systems (ISE), the largest solar research institute in Europe. Supporting 340,000 jobs and replacing €5 billion worth of energy imports per annum, Germany has been a pioneer in building a competitive low-carbon economy and there is currently very strong commitment in Germany to reinforce the use of renewable energy, says Bagci.

In addition to the global 30 Photovotaik index, limited to 30 solar companies, globally diversified and weighted by market capitalisation, RBS has seen a surge in demand from investors for its German environment index, limited to the universe of German stocks.

In response to the European Union’s request for stress tests on all nuclear power stations, Germany has taken its oldest plants out of service. “The government can hardly agree on how fast to shut down nuclear plants. Seven out of 17 are already going to be closed. All that loss must be compensated in one way or another,” says Bagci.

The short-term solution will probably be coal and gas, he says. “But those are not very environmentally friendly. Our emission limits are most likely going to be reached. So our long-run solution has got to be renewable energy,” he says.

The European Union announced this year that it has committed its members to achieving a 20% renewable energy target by 2020. In Europe, solar energy’s contribution is currently below 1% due to the region’s weather conditions.

However, Bagci says solar energy will make a substantial contribution in the long term “because it derives itself from the most powerful source: the sun, an infinite source for us.”

In Germany, wind contributes roughly 5% and hydro power roughly 10% to the power market, and as a result RBS’s wind and hydro-themed structures are doing well. “For investors, what really makes sense is a globally diversified investment into the renewable energies sector,” says Bagci.

Volatility in renewable energy is very high because wind isn’t always strong, he adds. The strongest wind day generated five times more electricity than the lowest day, for example, so technological improvements are needed to reduce the volatility and to store energy.

The bank plans to expand its diversified range of structures and indexes built around renewable energy from wind, water and solar.

“We are offering indexes focusing on certain renewable energy sectors, but also broader indexes combining different renewable energy stocks,” says Bagci.

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Jonathan Boyd
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