Emerging markets big winners within clean energy sector in 2012

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  • Emerging markets drive growth in sector during 2012
  • Pockets of strategic investment in Brazil, South Africa and Eastern Europe
  • Overall sector investment levels likely to be down on 2011, due in part to decrease in equipment costs

London, 28 December 2012. With an abundance of natural resources and an increasing demand for energy; emerging markets have been the big winners within the clean energy sector during 2012 according to EY’s quarterly global Renewable energy country attractiveness indices. However, after eight years of rising levels of new investment within the sector, it seems likely that there will be a drop, this year following a record year in 2011.

Commenting on the factors behind a potential decrease in investment, Ben Warren, EY’s Energy and Environmental Finance Leader, says: “While early indications suggest that clean energy investment levels are decreasing, this may not necessarily be a sign of bad health. There is still a lot of clean energy capacity being deployed, but it is significantly less expensive than last year. In addition, clean energy investment and installations continue to be propelled by activity in booming emerging markets.”

Ksenia Leschinskaya, EY’s CIS Cleantech and Sustainability Leader, comments: “Energy consumption per capita in CIS countries exceeds the world average. CIS economies remain very energy-intensive. However, national strategic documents of CIS countries have already adopted targets for reducing energy intensity and increasing the share of renewables in their national energy balance. For example, the Energy strategy of the Russian Federation aims to reduce national energy intensity by 56% by 2030 compared to 2005, the Energy Strategy of Ukraine sets the target of reducing energy intensity by 50% compared to 2005, the Sustainable Program of Kazakhstan aims to increase the share of renewables in the national energy balance up to 5% by 2024. Moreover, positive cleantech trends are confirmed by the fact that CIS countries have already implemented various cleantech projects by the end of 2012. These projects are based on geothermal, solar and biogas power use.”

Gil Forer, EY's Global Cleantech Leader, adds: “Clean energy has seen a growing role in the energy mix of corporations around the globe. As corporations evaluate the risks in regards to energy security, energy prices, the regulatory environment, brand and pressure from stakeholders; they are beginning to focus on optimizing their energy mix through increasing their investment in – and deployment of – renewable energy. Although we have faced a slow recovery from the global financial crisis, the transition to a more resource-efficient and low-carbon economy is inevitable.”

Throughout 2012, changing conditions within the clean energy sector have been tracked by the EY’s quarterly global Renewable energy country attractiveness indices, which scores 40 countries on the attractiveness of their renewable energy markets, energy infrastructure and the suitability for individual technologies.

Mixed fortunes around the globe
China remained at the top of the All Renewables Index (ARI) in 2012, partly driven by increased solar targets designed absorb over-supply in the solar panel market and counter the impact of US and EU protectionist measures. Q2 2012 also saw a 92% increase on Q1 2012 new investment levels for China. The increase was made up, not only of domestic activity, but also increased outbound investment into major energy independent power producers’ platforms such as China Three Gorges Corp’s US$2.5b investment in EDP Renovaveis, and Sky Solar’s US$800m solar plans in Brazil. However looking forward, challenges remain, particularly in the wind sector where many turbines have been left unconnected due to insufficient grid capacity, forcing China to shift its focus toward energy infrastructure improvements and tighter regulations on new wind project approvals.

Beyond China, there have been mixed fortunes; with the US forfeiting second place in the ARI to Germany in Q3 2012, due to concerns over the extension of key renewable energy incentives and the availability of low-priced natural gas. This is likely to continue slowing US growth in the sector in the short to medium term, particularly in the wind sector.

Germany has continued its drive towards renewables in 2012, resulting in its move up to second place in the ARI in Q3 2012, ahead of the US. While the government recently increased the country’s renewable target for electricity to 40% by 2020, the phased solar tariff cuts throughout 2012 and grid challenges in the offshore sector are likely to reduce Germany’s short-term attractiveness in early 2013.

Further down the index, 2012 saw Spain drop out of the ARI top 10 for the first time, after being at the top of the indices only five years earlier. This is due to the Spanish government’s temporary suspension of all renewable energy premiums at the beginning of the year and the introduction of a 6% flat tax on all energy generation in Q3 2012.

2012 has also been a tough year for India, with the severe blackouts in July 2012 leading many to speculate that the country has attracted insufficient private investment to modernize its power infrastructure and that renewable energy investment may suffer amid wider power system reforms.

Emerging markets driving growth
There have been positive movers in the index during 2012, with many markets driving through capacity-led programs, fuelling new growth in the sector, and it’s anticipated that this will continue in 2013. Over the last 18 months, South Africa has moved up 10 places in the index on the back of two successful rounds in its renewable energy auction, totaling approximately 2.5GW of new capacity. Brazil’s energy auctions have also shown that wind power in particular is able to compete with traditional sources such as natural gas.

2012 has seen the inclusion of Saudi Arabia and UAE in the index for the first time, reflecting the increasing importance of the Middle East for the sector. The increasing demands for energy in the region, along with strategies to diversify the energy mix ,continue to generate investment opportunities.

Finally looking at the industry as a whole, 2012 has also been extremely challenging for the industry’s manufacturers. Oversupply, falling technology costs, reduced demand in some European markets and ensuing trade protectionism have resulted in a period of corporate consolidation and the rationalization of government support, causing supply chain paralysis across certain markets. The outlook remains challenging for 2013, with corporates and utilities looking to reduce oversupply in the market, and governments aiming to reduce the industry’s reliance on subsidies.

Forer concludes: “Looking forward to 2013, as more mature technologies move ever closer to achieving grid parity and competition increases globally between markets, creating a sustainable future for the clean energy sector is becoming increasingly a reality. With regards to new investment opportunities, Asian investors will continue to expand their geographical presence by participating in European divestment programs and general opportunistic acquisitions. Deal activity in the emerging economies of Latin America is also expected to rise, driven by significant infrastructure requirements, particularly as the renewable portfolio build-out in the region continues, especially in Brazil.”

To download the Renewable energy Country Attractiveness Indices, visit www.ey.com/CAI

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