|The Ivanpah solar project in California: the US is ranked as the top location for renewables investment.
Credit: Ivanpah Solar
It has been ten years since business analysts at Ernst & Young (EY) started compiling their annual Renewable Energy Country Attractiveness Index (RECAI), a report that just does what it says – calculates which countries have the most to offer financiers in return for their investment.
The renewable energy landscape is now “unrecognisable from a decade ago”, says Ben Warren, RECAI’s chief editor.
“Internationally, we’re seeing policies built with the planet in mind. Governments are setting targets to cut carbon and convert to green power. Money is being spent and earned in an industry that, just four decades ago, was considered the domain of bearded hippies and eccentrics.”
He adds that “the convergence of culture, politics and science has meant renewable energy is now a global term, with the past decade in particular seeing it move from adolescence into adulthood”.
When the RECAI launched in February 2003 it covered 15 countries. Have a guess which country came top in the debut index. The answer is Spain, a country that ten years on fails to rank in the top 10.
In 2013, the RECAI tracks 40 countries across six continents.
Warren says the index has “become a chronicle of the changes that have completely redrawn the global renewables map over the last decade”. He says during this time, “clean energy has become an economic sector in its own right; technological advancements and global expansion have created new dedicated value chains”.
Not only has it become an economic sector in its own right, it has become one with a healthy price tag: global annual clean energy investment of $269 billion in 2012 represented a five-fold increase on 2004, according to EY.
Tracking renewables over the past decade has resulted in a mirrored tracking of the growth of those Asian and Latin American countries that have become economic powerhouses, such as China, India and Brazil.
Throughout the time of the RECAI, Asia and Oceania is the only region to see continuous positive growth, accounting for 42 per cent of the global total in 2012. This, says EY, is in large part thanks to China, which entered the index in December 2004 in 19th place, behind Finland.
In that issue of the report, EY predicted – accurately yet in hindsight with some understatement – that “China is poised to play an increasingly significant role in world renewable energy markets”. And so it has: China is now number two in the index (behind the US) and EY says “proactive policy measures and an unprecedented expansion have transformed it into a cornerstone of the global renewables market”.
The 2013 landscape
So what of the renewables landscape in 2013. Where should investors be looking to put their money and where should they avoid?
The US is the destination of choice for renewable energy investment, according to this year’s RECAI, with China, Germany, Australia and the UK making up the rest of the top five.
The US is placed first in large part on the back of President Obama’s “blueprint for a clean and secure energy future” which he unveiled earlier this year. This blueprint included a call for the US to double its renewable energy generation by 2020 and halve oil imports against 2008 levels.
It also proposed a $2 billion fund that will provide targeted support over the next decade, via an Energy Security Trust, for research initiatives designed to accelerate the cost-effective rollout of a wide range of clean technologies, including homegrown biofuels and fuel cells.
China takes second place thanks to $2.4 billion of renewable energy subsidies up for grabs, which EY says displays “an appetite for clean energy”.
“While political change often results in policy reversals and varying appetites for a low-carbon economy, there appear to be no such worries in China,” states the report. “Early indications are that significant investment in renewable energy is here to stay and remains a critical part of the government’s long-term growth strategy.”
The report also highlights those countries it deems as ‘hot’ and those which are showing signs of cooling on renewables.
Topping the hot zones is Chile, which is leading a Latin American charge on low-carbon power. The report says that “a cross-party agreement to expedite key energy legislation should boost investment in transmission networks and geothermal exploration, as well as formalise the ambitious target of 20 per cent renewable energy by 2024”.
“High electricity prices and surging energy demand driven by the mining sector are galvanising significant project activity, including a number of >100 MW wind projects and a giant 400 MW CSP [concentrating solar power] project.”
Also ‘hot’ is India, thanks to a revival of wind projects, and Saudi Arabia, which is exploiting its solar potential.
Three countries are highlighted as being on a downward renewables trajectory – Brazil, Romania and Spain.
Brazil is deemed a risk area for investor because of new policies. The report states: “In a bid to avoid further connection delays, the government is proposing that wind farm developers take responsibility for developing new transmission lines in future government-led auctions.
“Regulators may also apply domestic content rules in future tenders, in addition to those already attached to development bank funding. However, such measures will increase project costs and intensify competition, prompting a number of wind companies to reconsider their presence in Brazil.”
In Romania, an announcement in April of a government freeze on support for renewable projects has “threatened a mass exodus from the sector”, while Spain has stripped back subsidies to such a degree that some large international investors have started legal actions against the government.
Warren says that changes in the renewables sector is seeing the balance of power shift. “Declining government support, particularly in Western markets still struggling with austerity, may have put the brakes on some segments, but emerging markets appear eager to fill the gap as renewable energy plays an increasingly important role in energy security, enabling economic growth and stimulating economic diversification.”
He adds that “while global investment may be down on the previous year, installed capacity certainly is not, reflecting serious levels of resilience in the sector during these challenging times”.
Uncertainty in Germany
The RECAI goes into detailed analysis of some countries, and its examination of Germany is particularly interesting in light of the country’s dramatic ‘Energiewende’ policy.
EY notes that “for a country that is well known for its stable and decisive policy-making, the current uncertainty over proposed reductions to financial support for renewables has proved to be disconcerting for many, with rumblings that a range of investors and developers intend to reduce investment heavily in the country’s green energy market”.
The report states that there are already “signs that the uncertainty is starting to deter investment” and highlights the case of Munich utility Stadtwerke Màƒ¼nchen. It unveiled a €9 billion ($12 billion) renewables investment programme in 2008 but this year announced it will halt all planned projects in the sector that are not already under construction.
Stadtwerke Màƒ¼nchen is far from alone in being cautious – other industry players including Nordex and REpower have spoken of the insecurity being caused by the Merkel government’s policies.
EY says that this investment uncertainty “is particularly pertinent in the offshore sector, where long lead times mean companies are now planning projects for 2017 with no idea of what the regime will look like, which in some cases could render original investment calculations invalid”.
Wizards of Oz
EY notes that with “stable policy measures currently at the top of the wish list for every investor and developer trying to make long-term project decisions, it seems at least one policymaker is intent on making dreams come true”.
Those policies are being formed in Australia. In March, the country’s climate change minister, Greg Combet, confirmed that Australia’s 2020 renewable energy target (RET) would remain unchanged at 41 TWh, equivalent to around 20 per cent of total electricity consumption.
|An offshore wind farm in the UK: Britain must do more to realise its renewables potential, says EY
High-profile players such as Alstom and Samsung had previously threatened to halt investment in Australia should the RET be amended, so EY stresses that “the importance of such decisions should not be understated”.
However it warns that “a fairytale ending is not guaranteed. Wrangling between political parties, together with an upcoming election in September, means the RET could still be modified should the seemingly anti-renewables Liberal-National Coalition be successful at the polls.
“However, more pressing on their agenda, in the event of an opposition election victory, would be the repeal of the carbon price legislation. The national carbon tax – which came into force only last year – has sparked heated political debates. Although the question of how, when and if a repeal may be possible remains an issue for the lawyers, there is little doubt that such a threat has created a gray cloud of uncertainty over the renewables sector.”
Warning for UK
EY has a warning for the UK in this year’s RECAI. It states that political infighting is putting Britain at risk of blowing its chance to become “the market of choice for investment in renewables in Europe”.
The UK is placed fifth in this year’s ranking, yet the report states that at a time when investment in most other European markets is wavering, “further delays in delivering a stable framework in the UK are weakening the country’s promising prospects and holding back investment”. Warren says that Britain has “a unique opportunity to become a safe harbour for renewable energy investment in Europe”.
“However, competing visions and strategies within the government about the country’s future energy mix, pose serious questions amongst investors about whether we can compete for capital on a global level.”
He adds that although “we are starting to see nods towards a more stable investment environment through initiatives, like the Green Investment Bank, attracting significant foreign investment, more needs to be done to help the UK realise its full potential”.
“There has never been a better time to turn the UK into the go-to market for investment in renewable energy in Europe,” he stresses.
The future of renewables?
The renewable energy industry has come a very long way in the ten years that EY has been compiling the RECAI, and if that decade has proved one thing is is this: that it is almost impossible to predict future trends, especially when they relate to long-term investment decisions.
This year’s RECAI says a paradigm shift is happening “at a time when renewable energy is becoming increasingly affordable and its role in the future energy mix is moving firmly into the mainstream”.
Warren states that “as the sector considers a future with less government subsidy, the cost reductions achieved in recent years make mature renewable energy technologies far more affordable, enabling the sector to finally break from subsidy”.
He concedes that “some casualties are inevitable, and we will continue to witness further consolidation, financial restructurings and some bankruptcies, particularly in the supply chain”.
Yet he stresses that the global renewable energy sector today is “much more aligned to energy market and general economic fundamentals, rather than being wholly reliant on fiscal support regimes that have proven to be vulnerable to both economic health and politics”.
“The affordability of renewable energy, and the important role it can play in the global energy mix, is now more critical than ever. “And it will likely be these factors, in addition to the decarbonisation agenda, that will provide a much more robust foundation for growth in the foreseeable future.”
He adds that while”investment incentive programmes might be losing their popularity in some parts of the world, they are emerging in new markets keen to attract the global investment community”.
“Flourishing feed-in tariff schemes in Kenya and Uganda, Thailand, South Korea and Israel, are pushing more and more consumers down the renewable energy path.”
He adds that “businesses aren’t missing a trick either: the price of energy has made it a boardroom issue”.
“Energy has become not only a financial and business issue, but also a social one, as companies scramble to manage their businesses in a more responsible manner.”
He sites the example of Apple, which this year announced plans to run its iCloud data centres on 100 per cent renewable energy.
“Energy demand, natural resource, technology costs, access to finance and global competitiveness are the factors that will likely determine which markets remain attractive in the long run, regardless of whether we categorise them as ’emerging’or ‘developed’ markets right now,” concludes Warren.
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