Global renewable energy market faces challenging times, with significant consolidation forecast
London, 28 February 2012: While 2011 saw record levels of new investment into clean energy, especially solar technologies, the outlook for 2012 is far less certain, particularly in developed markets according to Ernst & Young’s latest quarterly global renewable energy Country Attractiveness Indices report (CAI) released today. The report says that the sector will continue to prosper in 2012 in the emerging markets, thanks to ambitious installation programs securing investments, while more established markets will face increasing financial constraints, especially within the Eurozone.
The sovereign debt crisis continues to stifle renewable energy investment in the Eurozone, along with Governments scaling back their ambitions for the sector. Simultaneously capital scarcity and increased competition from Asia will continue to put pressure on developed markets for the foreseeable future. The report also suggests that this will lead to almost inevitable consolidation of the wind and solar sectors and increased vertical integration, as equipment manufacturers seek ever more innovative routes to market.
Commenting on the tough global economic environment facing the renewable sector, Gil Forer, Ernst & Young’s Global Cleantech Leader, says “During 2011 we saw increased M&A activity signaling that the solar market is starting to mature, coupled with record levels of investment in a rush to beat declining government incentives.
“Early indications for 2012 are that it will be more challenging for stakeholders, with mature markets getting softer due to continued liquidity constraints and the ongoing withdrawal of government incentives. However within emerging markets we continue to witness growth in the levels of capacity, as energy security concerns and demand for jobs drive increased government commitments to renewable energy.”
The indices provide scores in 40 countries for national renewable energy markets, renewable energy infrastructures and their suitability for individual technologies. There is no change at the top of the CAI with China remaining in first place; however some mixed signals have emerged. Increased solar targets to soak up excess supply fail to chime with grid infrastructure issues that are preventing wind connections. And while domestic market growth plateaus, Chinese corporates are increasingly looking to Europe to acquire stakes in relatively low-priced targets.
The US is also still in second place having completed an extremely busy year for the domestic wind industry, with approximately 7GW of installed capacity, as developers benefited from treasury grants and loan guarantee programs. With these incentive mechanisms now expired, the American market will however struggle to expand at the same rate in 2012.
Germany remained in third place due to the continued funding of renewables to fill the nuclear void. The German solar photovoltaic (PV) market expanded in 2011 with more than 7GW installed, but if currently proposed reductions and restrictions in photovoltaic (PV) feed in tariffs pass the German government in March, this would significantly suppress market activity in 2012 and beyond.
By contrast, the report highlights that the Middle East and North Africa (MENA) region’s renewable energy sector has the potential for expansive rapid growth. An abundance of solar and wind resources are expected to attract a significant amount of investment in the short to medium term, particularly in more economic and politically stable markets. Many countries in the region are seeking to significantly increase the proportion of renewable energy in their generation mix as they look to diversify their predominantly hydrocarbon fuel supply and to meet the ever-increasing consumer demand.
Liquidity constraints set to force transaction activity in 2012
Access to capital is likely to be a major feature throughout 2012. Total debt issued in European renewable and waste transactions peaked in 2008 before falling dramatically in 2009, and although volumes recovered in 2010 and 2011 signals in the funding market at the beginning of 2012 suggest that the value of deals closed will fall in this year, coupled with shorter contract lengths and higher margins.
Ben Warren, Ernst & Young’s Energy and Environmental Finance Leader summarizes, “The perfect storm of Basel III, banking downgrades and Eurozone instability has increased the underlying costs to banks of lending, especially long-term. With Basel III to be fully implemented by 2019 we feel it is likely that there will be further impacts on costs of bank funding from the legislation during 2012 and therefore additional increases in margins and reducing availability of long-term bank debt.
“Access to capital over the next 12 months, whether debt or equity, is likely to define more than any other factor the difference between survival or failure. Capital constraints will therefore be a major driver for transaction activity, from distressed consolidation to creative joint ventures and partnerships.”
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About the survey
The Country Attractiveness Indices publication has been running since the beginning of 2003 and is distributed to over 4,000 people each quarter. It provides scores for national renewable energy markets, renewable energy infrastructures and their suitability for individual technologies.
The Indices now monitors forty entries: Argentina, Australia, Austria, Belgium, Brazil, Bulgaria, Canada, Chile, China, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hungary, India, Ireland, Israel, Italy, Japan, Mexico, Morocco, Netherlands, New Zealand, Norway, Poland, Portugal, Romania, South Africa, South Korea, Spain, Sweden, Taiwan, Tunisia, Turkey, Ukraine, UK and the US.
The Indices publication is available on www.ey.com/CAI.
About Ernst & Young’s Energy and Environmental Finance Group
With a dedicated team of over 100 international advisors operating from our global team, Ernst & Young’s Environmental Finance Group helps private and public sector clients to increase value from renewable energy activity. The team covers established and emerging renewable technologies, providing advisory services from initial market entry strategies to commercial analysis, finance raising, and M&A transactions advice.
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