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Renewable energy industry must adapt and innovate to fuel growth
EY LLC, Kyiv, Ukraine, Thursday, October 31, 2013
Europe’s struggle to phase out supportmechanisms and ongoing policy uncertainty slows deployment and investment
Emerging markets prosper as Chile, South Africaand Thailand move up the index
“Amicable solutions” to cross-border tradeissues set a path for future growth
Latin America and East Africa provide surgingdemand and untapped resources
LONDON, KYIV, 31 October 2013: Thetradeoff between rising energy costs and the low carbon agenda continues to seepolicy makers retreating from traditional renewable energy support mechanisms; forcingthe industry to look for innovative financing solutions. At the same time,energy mix optimization has come to the fore, particularly in emerging markets,with governments increasingly seeing the need to intervene in order to manage energysecurity in a cost-effective way, according to EY’s latest quarterly Renewableenergy country attractiveness index (RECAI) report.
In recent months, Europe has seen further policyU-turns and reactive subsidy cuts, in countries such as Czech Republic, Italyand Greece, severely impacting project revenue streams and contributing to aslow-down in the pace of investment and deployment across the region. InGermany, energy is set to be a major political battleground for next month’selection, but vague rhetoric about affordability and policy uncertainty regardingrenewable energy subsidies is paralyzing investment. Meanwhile in the UK, therelease of feed-in tariff strike price details has boosted the sector, althoughpiecemeal announcements means uncertainty still lingers.
Outside Europe, other developed markets are alsostruggling to adapt, plagued by policy uncertainty and unstable supportmechanisms. Political infighting over Australia’s carbon pricing mechanism, forexample, has raised questions over its decarbonization agenda, while India’s renewableenergy certificate market faces an unclear future.
GilForer, EY Global Cleantech Leader, says: “Governments know the lights must stayon and that any solutions need to be financially sustainable. While we’re notseeing a withdrawal of investors from Europe, changing levels of financialincentives for renewable energy projects has slowed the investment pipeline.However, activity isn’t slowing everywhere. Investors are considering newmarkets with booming energy demand and an abundance of natural resources suchas East Africa, Asia, Latin America to energize their portfolio.”
Emerging markets stepping up large-scale deployment tomeet power demands
Peru, with its strongmacro environment and investment climate has significant deployment potential,while Brazil is currently experiencing an “auction fever” and a new regulatoryframework could unlock around 21GW of demand for renewables. In Asia, safetyconcerns across South Korea’s nuclear sector may create renewable energyopportunities, although mixed signals from the new government have left energy policyat a crossroads.
The ongoing success of the South Africa IndependentPower Producer (SARIPP) program has made it a key case study for the rollout ofpublic-private partnerships (PPPs), as means of setting tariffs while alsodriving price competition. Reverse auctions have helped the South AfricanDepartment of Energy procure over 2GW of its 2016 3.7GW target, with furtherrounds underway.
BenWarren, EY Global Cleantech Transactions Leader comments: “In a world ofconstrained government balance sheets and a growing need to secure energysupplies, PPPs are quickly becoming one of the most effective ways for policymakers to stimulate long-term investment and sustainable renewable energy deployment.”
Elsewhere in Africa, healthy economic growth, a risingpopulation and huge base-load energy potential from geothermal is making EastAfrica ripe for investment. At a country level, Kenya is targeting 8GW ofadditional renewables capacity by 2030 to meet an expected uplift in energy demandby 8% per annum, while Uganda is aiming to generate 61% of total energyconsumption from renewables by 2017, from just 4% in 2007. Tanzania forecasts powerdemand to increase almost 500% by 2031, requiring an investment of around US$8b.
Forer comments: “Significant investment byinternational finance institutions and state-owned entities has sent a clearsignal of the energy opportunities that exist in these emerging markets. Theneed for both energy security and increased supply has created an investorappetite to make renewables the cornerstone of the energy mix of theseeconomies.”
Cross border agreements signal energy agenda cantranscend national boundaries
A number of global pacts and initiatives agreed inrecent months have sent strong signals that the energy agenda can transcendnational borders as well as overcome potentially harmful protectionist measuresvia amicable solutions. July saw both the signing of a climate change pactbetween China and the US setting out a five-point action plan, and a solutionthat will replace the EU anti-dumping tariffs on Chinese solar imports withminimum prices and quantity quotas.
Capital must be found in new places
Adapting to austerity has prompted a rise ininnovative funding solutions to identify new sources of capital. Due toconstrained balance sheets and a tight project finance market, the sector has soughtto raise capital through increased IPO activity, recycling of project sponsorfunds via strategic divestments and leveraging of capital markets. This hasbeen particularly prevalent within the biomass market – where a lack of a free “naturalresource” adds greater perceived risk and a more volatile margin creates theneed for more innovative approaches to raising capital.
Warren says: “New clean energy investment levelsglobally suggest the demand for new capital is not subsiding and liquidity needsto increase, especially with technologies such as bio-energy. Capitalinnovation in bio-energy continue to evolve, closely following innovations incontracting models, the development of a liquid trading market for feedstockand the commoditization of some parts of the project spectrum. To increase liquidity,policy commitment to the sector is vital. Legislators need a clear andconsistent approach, to enable market forces to work appropriately.”
Utility transactions allocate risk and reward
As the energy industryadapts, constrained balance sheets and the entry of new investor groups lookingfor long-term stable yields, have galvanized a shift in utilities from assetowners to asset operators. Utilities are increasingly looking to divestment, particularlyof renewable assets, as a way of creating sustainable capital flows forreinvestment in emerging markets and technologies.
Looking ahead at thefuture of the renewable energy industry Warren concludes “Governments,corporations, investors and developers are all looking for ways to adapt tothis new energy world. We can expect the use of innovative funding solutions,business models and policy instruments to become the norm as the industryfirmly establishes itself within the global energy mix.”
-ends-
Notes to Editors
Global Cleantech invest figures sourcedfrom Bloomberg New Energy Finance(BNEF).
About the RECAI
The report ranks 40 countries worldwide on theattractiveness of their renewable energy investment and deployment opportunities,based on a number of macro, energy market and technology-specificindicators.
The index tracks 40 markets: Australia, Austria,Belgium, Brazil, Bulgaria, Canada, Chile, China, Czech Republic, Denmark,Finland, France, Germany, Greece, India, Ireland, Israel, Italy, Japan, Mexico,Morocco, Netherlands, New Zealand, Norway, Peru, Poland, Portugal, Romania,Saudi Arabia, Slovenia, South Africa, South Korea, Spain, Sweden, Taiwan,Thailand, Turkey, Ukraine, UK and the US.
About EY
