Rapid-growth markets provide driving force for renewable energy investment
London, 22 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 driving force behind renewable energy investment, according to Ernst & Young’s latest quarterly global renewable energy Country Attractiveness Indices report (CAI) released today.
The indices rank 40 countries in order of their attractiveness for investment in renewable energy. This quarter the report shows the balance of power is clearly shifting away from developed countries to those that are developing including Eastern Europe, the Middle East and Latin America. These countries now represent the immediate future for renewable energy as the industry adapts to a transformed world.
Ben Warren, Ernst & Young's Global Energy and Environmental Finance Leader, explains: “Western Europe and the US markets have been hit by a storm of reduced government incentives, restricted access to capital, and increased competition from abroad.
“The UK renewable energy market has been hit by significant reductions to solar FiT rates. Whilst tariff reductions were widely expected, and justified through reducing supply chain costs, the speed of implementing the changes proposed by Government has taken the market by surprise. Investors who are potentially left out of pocket will be very cautious before committing further capital to the UK energy sector, at a time when new sources of capital are desperately needed. ”
This has resulted in the UK dropping a position to 6th place in the All Renewables Index taking it below Italy and just above France. There were falls for most of the UK's renewable technology indices - most noticeably a three point reduction in the solar PV index. Many other Western European and US markets also saw their attractiveness scores cut, with an exception being Germany which received increased scores across the board - as the Government increases its support for renewables and moves away from nuclear power.
Capital constraints continue to define the sector. Not only is public sector support dwindling, but many major integrated utilities are rebuilding balance sheets constrained by tight credit ratings and debt capital is proving increasingly scarce. 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. The sector needs to access capital from deeper equity and debt pools than before, whether through direct investment from institutional investors or via the capital and public markets.
Ben Warren concludes: “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 solutions that offer financing certainty and a reliable source of low cost capital will become an increasing source of competitive advantage in the sector.”