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Utilities Unbundled - Rating the attractiveness of renewable energy markets - EY - Global

Utilities Unbundled    issue 12

Rating the attractiveness of renewable energy markets

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Investment in renewable energy dipped sharply in Q1 2012, and the sector faces a challenging year, but long-term prospects still appear sound.

Key trends

  • Clean energy investment fell sharply in Q1 2012
  • Renewed commitment in emerging clean energy markets contrasts with policy uncertainty in developed countries
  • Consolidation drives M&A activity up 41% in Q1 2012, but new asset finance is down 30% on previous quarter

Figure 1: New financial investment in clean energy

Figure 1

Source: EY analysis based on data from Bloomberg New Energy Finance.1

Clean energy investment is at its lowest in three years (see Figure 1), down 28% from Q4 2011 to US$26.7b. This reflects fiscal challenges in Europe, increased competition from Asian manufacturers, growth in shale gas and the end of key EU and US stimulus programs (see Keeping the capital flowing for renewable energy).

But while these factors are causing uncertainty over public policy support in developed economies, a number of developing countries are introducing incentives and national strategies that favor renewables.

Comparing top country results
These new dynamics are revealed in our latest Renewable energy country attractiveness indices, a quarterly report which compares the attractiveness of 40 countries’ renewable energy markets, infrastructure, and suitability for individual technologies.

Rankings at the top of the index are unchanged, but all top five countries — China, the US, Germany, India and Italy — dropped points in Q1 2012. Insufficient grid access continues to stifle China’s wind sector growth, while a boom-bust pattern has returned to the US following uncertainty over the expiry of key stimulus programs.

In Germany and Italy, grid challenges and tariff cuts have reduced short-term attractiveness, and in India, the end of a key tax break incentive is likely to dampen growth through 2012.

Japan bucked the trend in established markets with a higher score for Q1 2012, following the announcement of favorable feed-in tariff levels to encourage investment from July 2012.

Activity in emerging markets
Asia-Pacific still had the highest growth in wind, driven by China and India. Developers are turning from the US to Canada and Latin America, especially Mexico, as a hedge against expected US market weakness.

Latin America’s strong economic growth and electricity demand continue to fuel activity, particularly wind adoption. Other positive changes included countries such as Mexico and Chile announcing new national clean energy generation targets, or reaffirming government support through incentive schemes.

Figure 2: All renewables index May 2012


Figure 2

Click to expand

Figure 2: All renewables index May 2012

Consolidation drives M&A increase 
Globally, an estimated US$21.7b of renewable energy transactions were completed in Q1 2012, a 41% increase on Q4 2011 (see Figure 3) despite — or perhaps because of — continuing difficult economic conditions and diminishing levels of policy support in Europe and the US. New asset finance fell sharply — only US$24.2b was raised in Q1, a 30% decline on Q4 2011 and a 13% decline on Q1 2011.

Figure 3: Global new energy sector M&A - value and volume of completed deals

Global new energy sector ma deals

Source: Bloomberg New Energy Finance.

We expect market consolidation to continue, particularly in solar and wind, as participants try to control supply chain costs and access new markets. There was also increasing appetite for energy from waste.2

Europe faces major challenge with frozen and even declining tariffs, supply chain overcapacity and difficult project finance conditions.

The next 12 months will probably see more consolidation in solar and wind supply chains. For the foreseeable future, access to capital will be the biggest differentiator for companies in technology and infrastructure markets.

Grid parity key to long-term success
It will be hard to beat 2011’s investment record unless US and European policy and financing issues are resolved.

However, activity is being stimulated as the cost of clean energy technologies, especially solar PV and onshore wind, continues to fall and approach competitiveness with fossil-fuels. The price of PV modules also fell in 2011, and the cost of wind power is set to fall further.

Continuing improvements in the sector’s economics mean companies surviving the next few years will be well positioned for the next growth phase in the wind and solar markets.

 

For more information, contact:

Environmental Finance, London
+ 44 20 7951 6024
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1 Global Trends in Clean Energy Investment, presentation at the Clean Energy Ministerial in London, Bloomberg New Energy Finance, 25 April 2012, ©2012 Bloomberg New Energy Finance. Total new financial investment in clean energy includes asset finance, public markets and VC/PE. It excludes corporate and government R&D, and small distributed capacity. Not adjusted for re-invested equity.

2 Transaction volumes in the biomass and energy from waste sectors were up 40% on Q1 2011.


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