Politics polarizing global renewable energy attractiveness
- US, UK, Germany, Australia and Poland experiencing delayed investment, abandoned projects and market exits due to political interventions
- Emerging markets reap benefits of clear policies with growing project pipelines
- Stable yields of mature renewable technologies tempting new investor groups, but the technologies of tomorrow should not be overlooked
LONDON, MOSCOW 13 December 2013: While energy affordability is becoming a major political issue in the mature markets, the emerging markets are becoming increasingly attractive to renewable energy investors looking for stable policy environments according to EY’s latest quarterly Renewable energy country attractiveness index (RECAI), released today.
Gil Forer, EY’s Global Cleantech Leader comments: “When looking at markets from an investment perspective, we’re seeing a gap developing in terms of attractiveness. On one side are countries that are in the process of reviewing, revising or rescheduling their energy policies, which is leading to uncertainty in the markets. On the other side countries are attracting investors by galvanizing large-scale deployment and removing barriers, as we’re seeing in emerging markets such as Brazil and South Africa.
“Governments must work harder to create stable markets in order to secure energy investment. The climate change talks currently taking place in Poland highlight the significant added value of renewable energy from economic, social, and environmental perspectives; which can only help to focus governments’ attention further.”
Renewable energy developers must weather the political storms
The US remains in first place in the RECAI, which ranks countries on the attractiveness of their renewable energy investment and deployment opportunities, based on a number of macro, energy market and technology-specific indicators. However, while the US recently launched New York’s first green bank, to leverage at least US$1b in private investment for clean energy projects, concerns including the impact of shale prices on policy makers and a lack of long term energy policy may lead to renewable energy investor nervousness in the coming months.
Other markets experiencing delayed investment, abandoned projects and market exits due to political interventions include Australia, where the new government is drafting legislation to abolish the country’s carbon pricing mechanism in 2014. In Germany, which is placed third in the index, Chancellor Merkel is facing pressure from the energy sector to re-examine the renewable energy subsidies. Meanwhile in the UK, political point scoring on rising consumer energy bills only heightens uncertainty for investors. In Poland, a proposed switch from green certificates to competitive bidding has received mixed responses.
Not all markets are suffering from political indecision. China continues to pursue its ambitious 2015 solar target of 35GW, with the introduction of solar tax breaks and subsidies and the implementation of specific measures to facilitate consolidation. Internationally, the EU’s decision to impose minimum pricing and quotas on Chinese solar equipment is expected to leave the European solar industry facing an uncertain two years ahead.
Ben Warren EY’s Global Cleantech Transactions Leader comments: “China has ambitious renewable energy targets. Through a variety of tools such a 50% tax break on the sale of solar power until 2015, limits on solar factory expansions and a requirement for 3% of annual revenue to be spent on R&D, the government is creating a strong pipeline of innovation and deployment. While the minimum pricing proposed by the EU has handed Chinese manufacturers a very welcome boost to their margins, by guaranteeing prices for two years, what everyone is waiting to see is the impact this will have on European installers and developers.”
South America seeing healthy project pipelines to 2018
Looking outside the index’s top 10, South America continues to expand its presence in the renewables industry. In Brazil, 3GW of capacity has already been awarded in 2013 and almost 40GW of projects have registered for the November and December auctions. Chile continues to attract large-scale projects, including the world’s largest unsubsidized PV plant, while the government has officially doubled its target to 20% renewable electricity by 2025.
Markets such as Turkey and Thailand are also targeting renewables as a way to meet surging energy demand. Thailand’s government recently announced a 51% rise in its renewables target for 2021 to almost 14GW, or 25% of total electricity generation, up from 8% currently. High electricity market prices and a robust support framework in Turkey have resulted in significant oversubscription for its renewable energy auctions.
While not in the index, Russia has seen a significant amount of activity in 2013 and if broad political and structural concerns can be overcome, the country could be a major force within the renewables industry in the next decade.
Ksenia Leschinskaya, Partner, Cleantech and Sustainability Services Leader in the CIS, comments: “Following the plan to achieve the share of renewable energy in the total generation of 4.5% by 2020 in May 2013 Russian Government adopted a decree introducing the mechanism of capacity trading of qualified generating facilities operating on renewable energy. Supporting green energy through the capacity market is a new practice, as in most countries support is done via the feed-in tariff that is proportional to generation volume. According to the decree, the provision of access to the capacity market is based on the competition of projects for the construction of solar and wind power plants and small hydroelectric plants. The results of the first competition summed up in September 2013 can be considered positive. The participants submitted the applications for the construction of solar power plants with a total capacity of 1 GW from 2014 to 2017, of which the applications for 32 projects with total capacity of 399 MW were selected. The results for wind and hydro power plants were more modest. One of the main challenges for prospective investors remains a requirement to source 50% of equipment used at renewable generating facilities operation from local suppliers”.
Renewable energy developers look for new investor options
Despite government intervention creating uncertainty in some markets, this year has seen resurgence in renewable energy initial public offerings (IPO), taking place at the fastest rate since 2010. The robust foundations underpinning the current surge in renewable energy “yieldco” IPOs – specifically, the promise of stable returns – indicates a potentially sustainable source of infrastructure financing. This is positive news for an industry still struggling to adapt to constrained balance sheets and scarce project financing.
Warren comments: “It remains to be seen how dependent the future success of listed yieldcos is on continued government policy. In the medium to long term, as the renewable energy market reaches grid parity and is no longer hostage to the uncertainty of government-controlled tariffs, it seems likely that the public equity markets will once again start to believe in the renewable energy supply chain and fast-growing and profitable development companies.”
Scarce project finance is also prompting renewable project developers to look for new investors with deep pockets and a long term outlook. Pension funds, managing approximately US$28t in assets globally, are becoming increasingly attracted to the long-term predictable yields offered by projects based on mature technologies such as solar PV and onshore wind. However, a recent EY survey highlights that more must be done to attract a bigger portion of the pension fund pot.
Looking ahead, Forer concludes: “Innovation remains critical to the renewable energy sector, from a technology and financing perspective. Political indecision and complacency over mature technologies could seriously hinder the evolution. However, while certain markets stumble, the future is looking very bright indeed for those markets which can deliver stable energy policy and investor confidence.”
EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.
EY works together with companies across the CIS and assists them in realizing their business goals. 4,500 professionals work at 20 CIS offices (in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Kazan, Krasnodar, Togliatti, Vladivostok, Yuzhno-Sakhalinsk, Almaty, Astana, Atyrau, Bishkek, Baku, Kyiv, Donetsk, Tashkent, Tbilisi, Yerevan, and Minsk).
EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.
This news release has been issued by EYGM Limited, a member of the global EY organization that also does not provide any services to clients.