The good, the bad and the tomorrow
With the industry at a tipping point in terms of energy policy, and new investment in clean energy dipping 12% in 2013 — a second annual fall — we’ve taken a look back at which markets weathered the storm and which didn’t to see what 2013 can tell us about the industry’s outlook.
Below are the top 10 developments we expect to shake up the index over the next 12–18 months:
- New growth markets such as Ethiopia, Kenya, Indonesia, Malaysia and Uruguay are likely to displace European markets with limited growth potential.
- Troubled offshore markets in the UK, Germany and the Nordics will be challenged by China, the US, Japan, Taiwan, South Korea, and even India.
- Brazil will continue to see high levels of wind deployment, and its fledgling solar market will see rapid growth. An excess supply of turbine manufacturers will also make it a Latin American supply chain hub.
- Electricity market reform in Mexico will open up its energy sector to foreign competition and boost economic growth.
- Europe will experience a year of reckoning as policy reforms start to take effect. Stability created by Germany's new coalition is also expected to calm European markets.
- Saudi Arabia is set to run its next major procurement program, but must accelerate the pace to sustain interest. Russia’s second auction could put it in contention for an index position, while more tenders are expected in Europe and India.
- The US wind sector is expected to make a modest recovery, but it will also be the moment of truth for President Obama’s Climate Change Action Plan, with opinions divided on whether the rhetoric will generate results.
- Japan is likely to increase emphasis on wind energy as it tries to cope with excess demand for solar projects.
- Troubled markets such as Spain and Australia could see a resurgence in project activity as solar and wind applications become economically viable without subsidization.
- It is a crunch year for Chile. Despite more than 9.9GW of project approvals, little is under construction, and faster deployment is needed to maintain interest in the market.
But it’s not just country- or region-specific developments that will shape the market in 2014 to 2015. As globalization goes viral, the trends and imperatives driving the sector will be market-wide.
We expect the following five trends to play a critical role in reshaping the sector in 2014 and beyond.
1. Shock factor
“Resilience = the ability to spring back into shape, or the capacity to recover quickly from difficulties”
In essence, the ability to absorb shocks. But resilience across the world’s energy markets has been hard to find in recent years.
This year, governments and business must think about the value they put on energy sector resilience, or ignore it at their peril. Resilience is not organic, however, and proactivity is needed to create and sustain it.
- Depoliticizing the energy debate. Allowing energy to remain in the political arena, subject to political point scoring and periodic upheavals, will only ever support a short-term outlook fuelled by media hits and voter preference. Stable long-term policy is needed to support stable long-term investment decisions.
- Determining energy’s true value. So far, renewable energy has mainly been assessed against the burden of subsidy. To determine the most resilient energy mix however, we need a transparent and objective assessment of energy’s value that includes factors other than just the price of carbon – like societal and environmental risks, rewards and resilience.
- Taking control. Markets like China and Brazil, which have proven their ability to withstand global shocks, share centralized energy planning. This elevates a country’s control over its energy supply and helps overcome market whims while still fostering private sector participation.
2. The two “E’s”
The march toward grid parity necessitates a stronger focus on efficiency and effectiveness across the value chain, forcing stakeholders at every level to prioritize asset optimization and find new ways to extract value or reduce costs.
- Value chain integration. A “networked industry” fostering upstream-downstream integration will bring synergies into view and under control across the whole value chain.
- Consolidation on a global scale. China, Europe and the US are currently pursuing separate solar consolidation strategies. However, a global approach will promote only the most efficient and cost-effective companies, which will benefit the sector in the long run, and be particularly critical for solar and offshore wind.
- Repowering. As operational assets come to the end of their useful economic life, a focus on asset optimization will create a strong market for repowering, generating demand for new technology and refinancing solutions.
- Transaction and capital efficiencies. Primary and secondary financing should be made more competitive and efficient at every stage of the project life cycle. Transaction synergies and innovative contracting structures should also be a focus for cost reduction.
- Technology improvements. From longer turbine blades to data monitoring, technological advances must increase generating efficiency and reduce costs. The recent cancellation of several UK offshore wind projects has highlighted specific technical challenges that should become the focus of innovators and project developers in the year ahead.
3. Beyond generation
To date, the majority of investment, transaction and project activity in the sector has been centered on generation assets or their immediate value chain.
The last 12–18 months, however, have highlighted a critical challenge that must be addressed if the global renewables market is to increase both its resilience and efficiency.
- The challenge: getting energy generated in the wrong location at the wrong time, to the right consumers at the right time.
- The problem: inadequate transmission networks, intermittent generation, inaccurate forecasting, lack of visibility and control over supply and demand, and low level of electrification in rural areas.
- The solutions: grid expansion and transmission efficiencies; supply management through advanced digital software; smart grids; net metering; distributed applications; and looking further ahead to the ultimate game changer — commercializing storage technology.
- The 2014 message: robust transmission infrastructure and efficient distribution channels are critical, and significant resource and investment is still needed to develop and deploy these technologies if policy-makers and businesses are to achieve their optimal energy mix.
4. Seeking the GRAIL
But what makes new markets attractive for renewable energy investment — and renewable energy attractive for new markets — is increasingly down to more basic factors. We have already seen many so-called emerging economies become highly attractive renewable energy markets, but there are many as yet untapped markets — so the quest for the “GRAIL” countries begins.
- Growth: High energy demand growth, driven by population and economic growth — many emerging markets were shielded from the economic recession.
- Resource: Markets in Latin America, MENA and Southeast Asia have excellent natural resources, high generation efficiency and greater site selection, but remain largely untapped.
- Autonomy: Overcoming reliance on imports to increase energy security, or freeing up indigenous energy sources for export.
- Infrastructure Legacy: Developed markets with entrenched and ageing transmission networks are struggling to adapt to distributed generating assets and a new energy economy. Markets without this legacy can generation-leap on the telecoms industry.
5. Show me the money
Reduced bank liquidity and constrained balance sheets prompted an urgent call for new capital sources and investment vehicles that dominated 2013’s investment landscape. But new sources and solutions are still needed to bridge the gap between investors and project.