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Asia tops renewables investment ranking

An influential poll has named China and India as the best destinations for clean energy investment. Kelvin Ross examines the results and also hears how the integration of battery storage is the next big challenge for the energy industry

China and India have overtaken the US as the top destinations for renewable energy investment in an influential annual report.

The Renewable Energy Country Attractiveness Index (RECAI) from analysts at EY ranks 40 countries in terms of their allure for clean energy investors.

The US has been top since 2015 but the latest report released in May sees it fall to third behind the two Asian powerhouses, a drop attributed to “a marked shift in policy” under the Trump administration.

The report identifies the US government’s executive orders to roll back many of the past administration’s climate change policies, revive the US coal industry and review the Clean Power Plan as key downward pressures on renewable investment attractiveness.

Ben Warren, EY Global Power & Utilities Corporate Finance Leader and RECAI Chief Editor, says: “Movements in the index illustrate the influence of policy on renewable energy investment and development – both productive and detrimental. Supportive policy and a long-term vision are critical to achieving a clean energy future.”

In China, the National Energy Administration announced in January that it will spend $363 billion developing renewable capacity by 2020. This investment will see renewables account for half of all new generating capacity and create 13 million jobs. China also plans to launch a pilot tradable green certificate programme in July for project operators to prove they have generated clean power and sell to consumers. The country has also committed to cutting greenhouse gas emissions by 18 per cent per unit of economic growth by 2020 under the Paris Agreement.

In recent years India has climbed the RECAI and it continues its upward trend to second position on the back of the government’s plan to build 175 GW in renewable energy generation by 2022 and to have renewables account for 40 per cent of installed capacity by 2040. The country has added more than 10 GW of solar capacity in the last three years.

Warren says: “The renewable energy industry is beginning to break free of the shackles that have stalled progress in the past. More refined technology, lower costs and advances in battery storage are enabling more widespread investment and adoption of clean energy.”

He adds that economically viable renewable energy alternatives coupled with security of supply concerns are encouraging more countries to support a clean energy future. Kazakhstan, Panama and the Dominican Republic have all entered the index for the first time.

The ten ranking, in descending order, are: China, India, the US, Germany, Australia, Chile, Japan, France, Mexico and the UK.

The UK has climbed back into the top ten after dropping to an all-time low of 14th place in the last report in October 2016.

But EY cautions that “the outlook for the industry remains cloudy amid a lingering lack of clarity around targets and subsidies”.

The RECAI says that the UK investment environment is more settled than in recent years, which were beset by subsidy cuts, but the future post-Brexit remains uncertain. While the UK is behind schedule to meet its 2020 EU renewables target, coal-fired power has declined significantly and even reached zero for a day on 21 April.

Warren explains: “The UK’s reappearance in the RECAI top ten is the result of other countries falling away rather than any particularly encouraging resurgence.

“The UK continues to underwhelm investors who are waiting to see if future policy will support and encourage the renewables industry towards a subsidy-free environment, where consumers can benefit from the UK’s excellent natural resources for renewable energy. Investors are still waiting for clarity around the post-Brexit landscape. Question marks linger around renewable energy targets, subsidies and connections with mainland power markets. Unfortunately, the likelihood of getting complete answers to those questions before the UK exits the EU are slim.”

In April the UK kicked off the second round of renewable energy auctions for Contracts for Difference (CfD) subsidies. The government plans to allocate à‚£730 million ($925 million) of annual funding over three rounds, including à‚£290 million in the current round.

Warren adds: “The CfD funding allocation is relatively modest and there is continued uncertainty around the outcome of the mechanism. In the absence of a buoyant CfD regime it’s difficult to see how the UK can force its way back among the front runners for renewable energy investment.”

This round of CfD auctions is open to “less established” technologies such as offshore wind, wave, tidal stream, geothermal and biomass with combined heat and power. Falling costs and advances in technology in the offshore wind industry now represent the UK’s best hopes for future investment, according to the RECAI.

Warren says: “The offshore wind sector is showing signs of creating a sustainable industry and driving down costs to provide more value for money for UK plc. The technology is becoming increasingly competitive and we are likely to see offshore wind emerge as the clear winner from this round of auctions.”

Warren says the renewables story to date has been “remarkable” and is one where “the industry has rapidly refined its technology and slashed costs. It shows what is possible with supportive policy and a long-term vision.”

He adds that a parallel process is taking place in energy storage, albeit with somewhat different drivers. “Here, the possibilities presented by electric vehicles have driven enormous investment in battery technology, leading to dramatic price declines. This is enabling battery storage to insert itself into a growing number of niches within power generation, distribution and supply.”

Warren stresses that “is difficult to overstate just how profound the impacts of wide-scale, low-cost energy storage will be on the utility sector. Ever since the first power plants were built in the 1880s, electrical engineers have grappled with the challenges of balancing, in real time, the supply and demand of a commodity that was almost impossible to store. These challenges have become only greater with the rising proportion of intermittent renewable energy on electrical grids around the world. Battery storage promises to address these challenges, as well as ultimately enabling the entire decarbonization of the world’s electricity supply.”

But he warns that the impacts on the power and utility sector will be disruptive. “While the sector has generally been able to adapt to new types of generation capacity such as renewables, the rapid spread of battery technology will be much harder to integrate into legacy business models. It promises to shift power toward consumers, undermine grid operators’ investment plans and allow new entrants to challenge utilities. It also presents an enormous investment opportunity. Utilities start with some advantages – existing customer bases, network knowledge and relationships with regulators – but they will have to move quickly.”

Ane he says that the combination of distributed renewable energy and affordable storage “presents perhaps the biggest challenge to the utility sector since the switch was flicked on at the first Edison power plant”.