Rapid-growth markets provide driving force for renewable energy investment
MOSCOW, LONDON, 24 November 2011 – While developed countries remain focused on slowing demand and cutting costs, an insatiable hunger for energy within the emerging markets now appears to be the surprising driving force behind renewable energy investment, according to EY’s latest quarterly global renewable energy Country Attractiveness Indices report (CAI).
The indices provide scores in 40 countries for national renewable energy markets, renewable energy infrastructures and their suitability for individual technologies. The balance of power is clearly shifting, with Eastern Europe, the Middle East and North Africa, Southeast Asia, and Latin America, now representing the immediate future for renewable energy as the industry adapts to a world transformed. Countries such as Argentina, Hungary, Israel, Tunisia, and Ukraine have been included for the first time within the indices, with all sharing an acute need for more renewable power.
Gil Forer, EY’s Global Cleantech Leader, explains, “The mature renewable energy markets of Western Europe and the US have been hit by a perfect storm of reduced government incentives, restricted access to capital, and increased competition from abroad.
“At the same time we are seeing growing support for renewable energy in emerging markets. Such countries, with a strongly growing energy demand, are seizing this opportunity to leap-frog fossil fuel generation to secure a low carbon and resource efficient future in renewable energy, with 15 emerging markets being added to the CAI in the past two years.”
Continued commitment to the ongoing development of renewable energy means China still tops the All Renewables Index. However, the previous exponential market growth has slowed, and a tightened approval process for new wind energy projects is leading to turbine oversupply and manufacturers are already seeking more export markets.
The US has also dropped one point due to the expiration of the national loan guarantee program and continued uncertainty over the future of the Treasury grants program and production tax credits. There has also been a decline in investor confidence in the solar sector following the bankruptcy of three major manufacturers. The US is now four points behind China and just one point ahead of Germany – which was the only top-ten European country to rise in the index following news that the state-owned development bank, KfW, is to provide more than €100b of funding to ease the country’s transition from nuclear to renewables. In the UK, meanwhile, investor confidence has been dealt a blow by a dramatic drop in solar feed-in-tariff (FIT) rates.
Global race for capital and efficiency drives
The competition for limited capital and the drive for increased efficiencies have combined to define the renewable energy sector over the past twelve months. Investor hesitation has grown because of conflicting government policy signals, ranging from decreased FITs to a drop-off in loan guarantees. At the same time these same governments are struggling to overcome the dilemma of how to deliver secure, low-cost energy without impeding the market, while also creating jobs. In addition, notable business failures and workforce redundancies are driving public opinion away from the sector in some Western European and North American countries.
On the debt side, Basel III and other programs designed to strengthen banks' balance sheets have seriously reduced liquidity in the lending market, and reduced banks’ appetite to provide long dated capital to projects. At the same time, a tightening of balance sheets is being witnessed in the power and utility sector driven by the need to preserve all important credit ratings. There is therefore an urgent need for new capital to enter the sector, whether from direct investments from institutional capital, or accessing much deeper pools of debt capital via the capital markets.
Because of this, Ben Warren, EY’s Energy and Environmental Finance Leader summarizes, “Effective capital management has become a crucial part of an infrastructure developer’s business. There is a lot more stress in a market driven by capital scarcity. Innovative financing solutions that offer financing certainty and a reliable source of low cost capital will become an increasing source of competitive advantage in the sector.”
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