UK renewables in a spin as market loses appeal in eyes of investors
24 February 2014
- UK market has slipped to 5th place behind Japan in rankings of overall attractiveness for investment in renewables
- Mixed market reaction to recent Government announcements and offshore wind project cancellations cited as main reasons for fall
The UK has fallen to fifth place in the quarterly Renewable Country Attractiveness Indices (RECAI) released by EY today. A combination of prolonged policy uncertainty, less-than-welcome news that mature technologies must compete for Contracts for Difference (CfD) from day one, and a series of offshore wind project cancellations mean that the country has become less attractive in the eyes of investors, the report says.
At the same time, rapid solar market growth and a burgeoning offshore sector helped Japan to replace the UK in fourth place.
Ben Warren, EY’s Environmental Finance Leader said: “The UK’s fading appeal is the direct result of the lack of clarity on the Government’s long-term energy strategy at a time when energy security is a concern and investors are looking for commitment.
“Recent announcements around CfDs have been perceived by some investors as a risk to investment stability, for onshore wind in particular, given the regime changes and subsidy cuts already planned. At the same time, the UK offshore sector has also taken a battering, with a number of high-profile projects being mothballed in recent months.
“However, we need to keep reminding ourselves that the UK market has proved itself to be the most resilient compared to other big European markets in the past. In 2013, despite an 11% dip of investment in the sector globally and 44% across Europe, the UK market only saw a modest 8% decline from the record number of £14.3bn investment in 2012. The UK Government and the renewables sector need to work together to regain investors’ confidence and realise the UK market’s potential.”
Key industry trends for 2014
Looking ahead, resilience, efficiency and effectiveness, technology beyond generation, new markets and innovative financing have been identified as fundamental to industry growth in 2014.
Governments and business will need to consider the value put on energy sector resilience, in light of the industry’s historic inability to absorb economic, political and environmental shocks. Governments should aim to depoliticise the energy debate in order to support stable and long-term policy measures, undertake a transparent and objective assessment of the value of energy to determine the most resilient energy mix, and embrace centralised energy planning to counter the uncertainty of the market while still fostering private sector participation.
Business also has a role to play in addressing its own energy risks, such as commodity price exposure, business continuity and regulatory compliance. This should prompt an increased focus on energy mix optimisation that transcends the politics of the boardroom and identifies opportunities for reduced energy consumption and direct generation or procurement of renewable energy.
Efficiency and effectiveness are critical
A stronger focus on asset optimisation and identifying new ways to extract value or reduce costs is also anticipated in 2014.
Ben adds: “In short, “efficiency” and “effectiveness” need to be this year’s buzzwords. The market should be setting its sights on: value chain integration, consolidation on a global scale, repowering, transaction and capital efficiencies and technology improvements. Renewable energy is now a truly global market, and stakeholders must develop a global strategy and a global supply chain, be flexible to market changes, and be willing to go in search of new markets.”
More robust transmission infrastructure and efficient distribution channels needed
Deployment challenges in markets such as China, Japan, Germany and South Africa during 2013 have highlighted the need for more robust transmission infrastructure and efficient distribution channels. More resource and investment is required in grid management, digitalized supply and demand management, distributed applications and the commercialisation of storage technology, if the sector is to address transmission bottlenecks and intermittency challenges.
Ben comments: “Innovation in non-generation infrastructure and technology will not only drive efficiencies and boost deployment, but also represents a significant investment opportunity across both developed and emerging markets. The digitalisation of energy in particular will create a revolution that will have significant social, economic and environmental impact.”
New markets and new capital will continue to open up
Emerging markets will also continue to play a critical role in shaping the renewables landscape, now attracting around half of new investment in the sector. Investors will increasingly focus on those markets characterised by economic and energy demand growth, significant natural resource, an energy security imperative and an absence of infrastructure legacy. Markets to watch in 2014 include Ethiopia, Kenya, Indonesia, Malaysia and Uruguay.
Also, following the urgent call for new sources of capital and new investment vehicles in 2013, the theme of innovative financing will remain at the fore in 2014.
Ben concludes: “As a capital intensive sector, accessing diverse pools of capital is critical for the future of the industry. Renewable energy financing is no longer just the remit of banks and utilities. There are deep pools of capital to be tapped but creative solutions and new conduits must be identified to open up the finance markets once again and bridge the gap between investors and projects. The markets that will rise up the RECAI in 2014 are those that embed renewables as a core part of their energy strategy; to stimulate economic growth through addressing the fundamentals of energy security and low cost energy generation.”