Turning point for renewables

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As generous government subsidy programs for the renewable energy sector wind down, the industry must find a new path to financial sustainability. Emerging markets may be leading the way. Ben Warren reports.

Our latest quarterly global Renewable Energy Country Attractiveness Indices report reveals that the renewable energy industry is at a critical point. Our survey of the attractiveness of the sector in 40 countries shows China remains at number one, despite losing points. The US has also lost ground, dropping to third place behind Germany due to ongoing policy uncertainty.

The key trend of the report is the rise of emerging markets, where new market-driven models are showing the industry the way to a sustainable future.

Emerging markets go “back to basics”

As government subsidies wind down, the key challenge for the renewable energy industry is the development of new economically viable strategies to create a sustainable growth platform.

The growth of the sector in emerging markets has been driven less by government subsidies and more by fundamental factors that are more sustainable as a “back to basics” model.

Strong economic growth and increasing energy consumption have forced governments in these countries to look for ways to increase supply while also diversifying the energy mix.

For many markets, a flourishing green-energy sector is also seen as a key component of a wider economic strategy, aimed at stimulating:

  • Local economic growth and employment
  • Manufacturing capability
  • Inward investment
  • Investment in infrastructure such as the power grid

Policy makers in these new markets are embedding clean-energy ambitions firmly in national targets and legislation. These are more successful in driving specific renewables markets than the relatively generic targets handed down by central bodies such as the EU.

Capacity-led programs

Government subsidy schemes for the renewables sector in many developed markets have created boom-bust cycles as developers rush to complete projects before schemes expire or policy is revised.

Emerging markets have avoided this instability by favoring capacity-led programs. Brazil and South Africa have successfully launched several rounds of public tenders for specified capacity volumes across a variety of technologies, asking the market to bid the power price required for particular projects. This helps:

  • Overcome the difficulty of setting subsidies at the right rates
  • Create competition across markets
  • Manage the risk of oversupply

Emerging markets are also expanding their power networks as part of the wider clean-energy strategy, learning lessons from countries such as Germany and China, where renewable technology build-out has outpaced available grid capacity.

Many new markets are also seeking to emulate the creation of a strong domestic supply chain that has been key to success in many developed markets. In some cases, they are also imposing local content requirements. In Brazil, access to funding from its national development bank is tied to the use of local components.

Market restructuring driving investment

Globally, the energy sector is experiencing a period of consolidation, rationalization and restructuring as companies realign their portfolios and governments seek to address oversupply in the market and reduce financial support.

This underlying principle of market restructuring is expected to drive future transaction activity, manifesting itself through consolidation and divestment programs, particularly among utilities, as companies seek to:

  • Free up capital to focus on core business strategies
  • Expand into new technologies and geographies within the clean-energy sector

The emerging secondary infrastructure financing market in the renewable sector also reflects a shift in focus for investment transactions. There is an increased uptake of operating assets, which are deemed to be relatively low-risk investments offering stable returns, due to:

  • Reduced appetite for construction financing and investment in project development
  • Change in risk portfolio optimization

New way forward

The global economic slowdown and falling technology costs have enabled the renewable energy industry in emerging markets to “catch up” with developed countries. However, it is important not to write off the more mature markets – which are expected to stabilize in the long term – but instead recognize the fundamental shift taking place in the sector.

Looking forward, the key drivers for all clean-energy markets will be:

  • Energy demand
  • Natural resources
  • Technology maturity
  • Access to finance

Traditional divisions between developed and emerging markets will become less important. In the future, the ability to compete successfully on a global scale is likely to determine which markets remain attractive in the long term.

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