Global renewable energy market faces challenging times, with significant consolidation forecast

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London 28 February 2012: While 2011 saw record levels of new investment into clean energy, especially solar technologies, the outlook for 2012 is far less certain, particularly in developed markets according to EY’s latest renewable energy Country Attractiveness Indices report (CAI) released today.

The report predicts this sector will continue to prosper in 2012 in the emerging markets, thanks to ambitious installations programs securing investments, while more established markets will face increasing financial constraints, especially within the Eurozone.

The indices rank 40 countries in order of their attractiveness for investment in renewable energy. This quarter the report shows that the sovereign debt crisis continues to stifle renewable energy investment in the Eurozone, along with governments scaling back their ambitions for the sector. Simultaneously capital scarcity and increased competition from Asia will continue to put pressure on developed markets for the foreseeable future.

The report also suggests that this will lead to almost inevitable consolidation of the wind and solar sectors and increased vertical integration, as equipment manufacturers seek ever more innovative routes to market.

The UK outlook

The UK has climbed a place into fifth position as a result of several large offshore wind projects that are currently in the pipeline. This includes the world’s largest wind farm planned in Scotland with an investment of £4.5billion for 1,500MW.  Other significant developments have been 762MW of solar capacity added in 2011, and a newly approved £120m 53MW wood-fuelled biomass plant in Yorkshire.

The last three months have seen a number of developments in the UK regulatory environment. Most notably, the Court of Appeal rejected the Department of Energy and Climate Change’s (DECC) appeal on feed-in tariffs (FITs), ruling that it did not have the power to enact premature cuts before the end of a consultation with the industry. As a result, solar FIT rates in the UK will be cut from 3 March 2012, rather than 12 December 2011.

Ben Warren, EY's Energy and Environmental Finance Leader, explains: “Following on from its Court of Appeal rejection, the Government has announced two further consultations over its small-scale FIT, which make it clear that it intends to control expenditures going forward within its existing spending framework.”

He added: “The proposals reflect the encouraging trend that we have seen around cost reductions in the renewable technologies market - most notably in solar PV. This is good news for consumers and will result in more clean energy that can be deployed at a lower cost with the potential for lower bills for customers in the future.”

Liquidity constraints set to force transaction activity in 2012

Access to capital is likely to be a major feature throughout 2012.  Total debt issued in European renewable and waste transactions peaked in 2008, and fell dramatically in 2009 and although volumes recovered in 2010 and 2011, signals in the funding market at the beginning of 2012 suggest that the value of deals closed will fall in this year, coupled with shorter contract lengths and higher margins.

Ben Warren, summarises: “The perfect storm of Basel III, banking downgrades and Eurozone instability has increased the underlying costs to banks of lending, especially long-term.  With Basel III to be fully implemented by 2019 we feel it is likely that there will be further impacts on costs of bank funding from the legislation during 2012 and therefore additional increases in margins and reducing availability of long-term bank debt.

Warren concludes: “Access to capital over the next 12 months, whether debt or equity, is likely to define more than any other factor the difference between survival or failure. Capital constraints will therefore be a major driver for transaction activity, from distressed consolidation to creative joint ventures and partnerships.”