In the wake of a human crisis, do climate goals take a back seat?

RECAI 55: Renewable energy is set to play a central role in the post COVID-19 economic recovery, but the global picture is mixed.

This article is part of the 55th edition of the Renewable Energy Country Attractiveness Index (RECAI).

The response to COVID-19 has brought much of the global economy to a halt, with consequent shocks to energy demand, global supply chains and capital markets. While the contours of a post-pandemic economy are not yet clear, there is reason to believe the renewable energy sector will prove resilient.

Certainly, renewable energy is not immune to the economic disruption being wrought. Some projects under construction are struggling to source equipment. Operating and maintenance teams are harder to move around. Lower power prices will squeeze margins. The collapse in oil prices will raise questions about the ability of oil and gas companies – recent converts to the attractions of clean energy – to continue to invest in the sector.

But many of these effects are likely to be short-term. Already, manufacturers in China and Europe are restarting production. Utilities have worked hard to keep generation going in difficult circumstances. And power demand will rebound as economies get back to work.

Certainly, institutional investors are continuing to direct new money to the sector. In April, for example, EY professionals advised on a major investment by French financial services giant AXA in Acciona’s overseas renewable energy assets. This demonstrates that transactions are pressing ahead, despite the difficulties created by the pandemic.

The investors involved remain confident about the long-term picture for clean energy. Climate change isn’t going away. The need, after the pandemic, to ensure greater economic and social resilience will work in favor of distributed power sources, such as wind and solar, and the applications offered by battery storage. Large companies will be keen to demonstrate that they are responsible corporate citizens, encouraging them to source clean energy.

This issue of RECAI touches on some of these themes: the rise of utility-scale energy storage as an enabler of the low-carbon transition; and the growing concern among investors about environmental, social and governance (ESG) issues. Both of our country deep dive articles – focusing on the US and Spain – find renewable energy sectors well placed to resume growth once COVID-19 is behind us.

None of this is to diminish the profound challenges caused by a pandemic, the like of which none of us has experienced before. But it is important to recognize the central role that clean, low-carbon energy generation will play in the global economy of the future.

  • Methodology

    The index rankings reflect our assessment of the factors driving market attractiveness in a world where renewable energy has gone beyond decarbonization and reliance on subsidies.

    We have defined the questions being asked, based on what we see as global market trends affecting investment and deployment priorities, and the challenges and success factors impacting our clients.

    • Is there a long-term need for additional or replacement energy supply? If so, is there a strong case for energy from renewable resources in particular?
    • Is policy hindering or helping the ability to exploit renewables opportunities in a country?
    • Are essential components in place to ensure project delivery, such as long-term contracts, grid infrastructure and availability of finance?
    • What does the strength of natural resource, track record and project pipeline reveal about the outlook for particular renewable technologies?
    • Even if all other boxes are ticked, does the macro stability and investment climate enable or impede the ease of doing business in a country?

    The index pillars therefore put emphasis on fundamentals such as energy imperative, policy stability, project delivery (including capital availability) and diversity of natural resource, factors which will increasingly become key market differentiators as markets move toward grid parity, and “artificial” motivations such as government targets, or the ring-fencing of technologies, become less critical.

    Accounting for COVID-19

    A new COVID-19 correction parameter has temporarily been added to the RECAI to reflect the impact of the pandemic, which we believe will have a short-term dampening effect on the renewable energy transition. The intention is to gradually reduce the weight of the parameter in future RECAI issues as the data feeding into the RECAI begins to reflect the impact of COVID-19.

    The new COVID-19 correction parameter is centered on three criteria, for which the country is given a score. The criteria are:

    1. the strength of the country’s health care system 
    2. the size of the population at risk based on demographics 
    3. economic vulnerability

    At this time, the parameter does not incorporate COVID-19 data (e.g., tests performed, cases and deaths reported). The inconsistent approaches to testing and reporting on the pandemic across different countries impairs direct comparability.

    Determining the country rankings

    Each parameter within the five pillars comprises a series of datasets that are converted into a score 1-5 and weighted to generate parameter scores. These are then weighted again to produce pillar scores and then an overall RECAI score and ranking. Weightings are based on our assessment of the relative importance of each dataset, parameter and pillar in driving investment and deployment decisions. Each technology is also allocated a weighting based on its share of historical and projected investment levels.

    Separate to the main index, our technology-specific indices rankings reflect a weighted average score across the technology-specific parameters and a combined score covering our other macro and energy market parameters, since some markets may be highly attractive for specific technologies but face other major barriers to entry.

    Datasets are based on publicly available or purchased data, EY analysis or adjustments to third-party data. We are unable to publicly disclose the underlying datasets or weightings used to produce the indices. However, if you would like to discuss how our RECAI analysis could help your business decisions or transactions, please contact the report’s senior advisor, Phil Dominy.

In this article, we take a closer look at eight countries:

China
Greece
Chile
Finland
Japan
Ireland
France
Italy

Certainly, institutional investors are continuing to direct new money to the sector. In April, for example, EY professionals advised on a major investment by French financial services giant AXA in Acciona’s overseas renewable energy assets. This demonstrates that transactions are pressing ahead, despite the difficulties created by the pandemic.

1. China’s renewables sector stumbles

The government looks to reduce subsidies.

China has lost its spot at the top of the RECAI index for the first time since October 2016, slipping to second place behind the US, as it seeks to cut the cost of its renewable energy subsidy regime. Disruption caused by COVID-19 will also crimp the development pipeline, although China is continuing to invest heavily in the clean-energy supply chain.

The Government has been gradually lowering the subsidies paid to onshore wind and solar projects – which currently support around 210GW of wind capacity – as it tries to reduce the RMB100b (US$14b) deficit of its Renewable Energy Development Fund. According to Wood Mackenzie, the Ministry of Finance has budgeted just RMB5b (US$700m) to subsidize new renewables in 2020, which is expected to support 8GW–10GW of new onshore wind capacity.

As a result, the Government is incentivizing wind projects that are currently receiving feed-in tariffs to switch to an unsubsidized system, whereby they would be offered long-term power purchase agreements and the preferential payment of unpaid subsidies. Wood Mackenzie calculates that around 60GW of older capacity, which will have recouped its initial investment, can maintain current yields by making the switch, potentially eliminating RMB291b of subsidies.

Despite these challenges, Wood Mackenzie is forecasting that yearly onshore power additions, after dipping to 18.8GW in 2021, will rise to almost 23GW by 2028. However, it warns that growth in the offshore wind market is set to be hampered by political uncertainty, a limited subsidy quota, and disruptions caused to supply chains by COVID-19. Its base case sees total installations reaching 14.5GW by the end of 2021, with new additions falling to just 2GW the following year before recovering to 5GW in 2025. Worst case, China could reach 11GW by the end of next year, followed by less than 0.5GW awarded each year for the rest of the decade if the sector is not supported by provincial governments, and if low demand fails to prime local supply chains.

While the near-term picture for domestic capacity additions looks cloudy, Chinese companies are continuing to invest and position themselves for the global low-carbon transition. Solar maker GCL System Integration Technology is investing RMB18b (US$2.5b) in a solar-module factory in Hefei, Anhui Province, that will have capacity to produce 60GW of modules – the single largest production site in the world, able to supply around half of current global demand for solar modules.

2. Greece market reforms herald renewables boost 

Speeding up renewable energy permitting and approvals.

Greece has submitted a plan for renewables to supply 35% of final energy consumption by 2030, with renewables meeting 61% of power demand by that date. Its National Energy and Climate Plan, drawn up in late 2019, mandates 7.7GW of cumulative solar PV capacity by 2030, up from approximately 2.7GW of installed capacity at present. Wind is expected to account for 7.05GW of capacity, up from 3.6GW at present.

The plan envisages €9b (US$9.8b) of investment in renewables by that date, alongside €11b (US$11.9b) of investments in energy efficiency.

This follows an announcement last year that the Government plans to phase out the use of lignite coal for power generation, closing down around 4GW of coal-fired capacity between 2019 and 2023.

To enable the transformation of the country’s energy sector, the Greek Parliament approved a package of market reforms late last year. These include changes to wholesale electricity market operations, and a suite of measures to speed up renewable energy permitting and approval processes.

Other reforms encourage renewable energy generators to participate directly in the wholesale market, rather than relying on the transmission operator, potentially incurring balancing costs. They can do so on their own or by pooling their assets with an aggregator; such pooling would help to reduce these balancing costs.

The market reforms are also set to enable generators and private offtakers to structure power purchase agreements (PPAs), which are not permitted under current regulations. The first such deals are expected in 2021.

3. Chile postpones 2020 auction

Drops in GDP and projected demand are cited.

A drop-off in projected energy demand has led Chile’s National Energy Commission (CNE) to delay a planned electricity auction. The decision – which predated the COVID-19 pandemic – will result in the auction being held in December rather than June, with bids now due by 18 November.

The CNE’s delay was prompted by downward revisions to GDP, which is partly attributed to civil unrest in the country in late 2019, and an associated 6% drop in projected power demand. However, the CNE is sticking to its original target of auctioning 5.6TWh of electricity through 15-year PPAs, which will begin in 2026.

The last auction took place in 2017, when Enel Generación Chile bid the lowest power price of US$21.48/MWh, from a solar project. Around 600MW of renewables won PPAs under the auction, which saw average prices of US$32.5/MWh.

Despite the delay to the latest auction, renewable energy projects are continuing to move forward in the country. Renewables developer Atlas, for example, is planning to build a large-scale solar project in the north of the country. Its proposed 854MW Alfa Solar farm is expected to cost around US$450m.

Offshore worker standing on helipad with wind-turbines behind him in sunset

4. Finland’s PPA market attracts corporates

Firms take advantage of cost reductions.

Finland’s wind-energy market is increasingly attracting corporate energy buyers, as they take advantage of cost reductions and a healthy wind resource in the Nordic country.

In one of the largest recent deals, Finnish pulp and paper firm UPM bought 4TWh of power from the Karhunnevankangas wind farm in western Finland, under development by German developer WPD. The 192MW wind farm is expected to be operational in 2022. Announced in February, the PPA will enable UPM to cut its carbon dioxide emissions by 5%.

Also in February, Lundin Petroleum struck a PPA to take power from the planned 132MW Metsälamminkangas wind farm in northern Finland, developed by OX2. The project is due to be completed by the end of 2021.

The following month, Norway-based energy trader Statkraft and Finnish chemical company Kemira signed a 10-year PPA for the latter to take around 44GWh of power each year from Statkraft’s 1.06GW Fosen Vind complex. In addition to physical power, the deal includes the sale of guarantees of origin.

Finally, in January, IKEA announced it has bought the 30MW Ponsivuori wind farm in the country from local developer OX2. It followed a 2018 agreement under which the home-furnishing giant agreed to buy four projects – Ponsivuori, Verhonkulma, Långmossa and Ribäcken – totaling 107MW, once they are completed. Those four farms represent one of the largest subsidy-free platforms in the region.

5. Japan’s wind sector takes to the seas

Two wind farms are expected to become operational in 2022.

The first offshore wind farm complex in Japanese waters has reached financial close, as sector participants prepare for the country’s first offshore wind auction.

In January, a Marubeni-led consortium closed a JPY100b (US$928m) financing to build a 55MW wind farm at Akita Port, and another 84MW project at Noshiro Port, off Akita Prefecture. The projects are expected to become operational in 2022.

This comes ahead of an auction for an anticipated several hundred megawatts of offshore capacity for the Choshi area, in northern Japan, expected in the second half of this year. Danish offshore wind giant Ørsted has formed a joint-venture with Tokyo Electric Power to bid in the auction.

Last July, Japan’s Government identified four potential development sites, including two in Akita Prefecture, Choshi City in Chiba Prefecture, and Goto City in Nagasaki Prefecture. It expects surveys, environmental impact assessments and project design to take around five years, and construction approximately three years.

Onshore, growth in solar capacity is expected to slow, according to BMI Research, which notes the disappointing results of recent auctions, where allocated capacity has been much lower than the size of the auctions. Prices are high in international terms – the average accepted bid in the January auction was Y12,570/MWh (US$117/MWh) – and just 40MW was allocated out of a targeted 416MW. BMI Research expects year-on-year growth rates to fall from above 10% in 2019 to around 5% for the rest of the decade.

Japan has also disappointed environmentalists by declining to increase the 2030 emissions target it proposed ahead of the 2015 Paris Agreement. The UN is calling for countries to increase the ambition of their targets, to reflect the latest climate science and declining costs of low-carbon technologies – collectively, current Nationally Determined Contributions (NDCs) would result in more than 3oC of warming by the end of the century. In its submission, Japan is continuing to target a 26% reduction in greenhouse gas emissions by 2030 and a “decarbonized society” by 2050.

Wind Power Pland in a Grassy Field with Cows Grazing

6. Ireland unveils new renewables support scheme

The goal: 70% of electricity from renewables by 2030.

The Irish Government has announced details of the first round of auctions under its new Renewable Electricity Support Scheme. In mid-2020, it anticipates holding the first of a series of auctions designed to help Ireland reach its target of sourcing 70% of its electricity from renewables by 2030, up from 33% in 2018.

In the first auction, the Government anticipates entering into contracts-for-difference (CFD) for between 1,000GWh and 3,000GWh of power, to be delivered for a period of up to 15 years. While the auction will be technology neutral, it will include a solar category – of up to 10% of the overall auction – as well as a community-led category for up to 30GWh of power. The auction program is subject to state aid approval from the EU Competition Authority.

The original timetable required projects to be registered by 2 April, but that date was pushed back to 30 April on account of COVID-19.

Meanwhile, interest in offshore wind continues to grow strongly. In February, France’s EDF announced it has acquired a 50% stake in a planned 2GW project on Codling Bank, from developer Hazel Shore. In the same month, Statkraft announced that it has applied for licenses to survey for a planned 530MW wind farm in the Irish Sea. It follows Statkraft’s acquisition, in 2018, of developer Element Power, which had a 1.3GW pipeline of offshore Irish projects.

7. France awards 1.7GW of wind and solar in latest tender

The next round has been delayed until November.

The French Government has awarded contracts to 750MW of onshore wind projects and 650MW of ground-based solar in its latest tender round. It has also relaxed completion dates and pushed back the next round of tenders from July to November, in response to COVID-19.

The onshore wind tender was oversubscribed, with 750MW awarded to 25 projects at an average bid of €62.90/MWh (US$67.90/MWh). The low prices that were bid allowed for more than the allotted 650MW to be awarded.

However, the ground-mounted solar tender was undersubscribed at 650MW, falling short of the 850MW on offer. Here, bids averaged €62.11/MWh (US$67.42/MWh). An additional 312MW of solar capacity was awarded in specific tenders, including 94MW to compensate for the closure of France’s oldest nuclear power plant.

France plans to tender 28GW of wind and solar projects over the next five years, comprising 10GW of ground-based solar, 4.5GW of rooftop solar, 9GW of onshore and almost 5GW of offshore wind. According to Platts, France currently has 17GW of onshore wind and 10GW of solar capacity installed.

8. Italy awards 500MW in renewables auction

Most of the capacity was taken by onshore wind projects.

Italy has awarded contracts of 500MW in renewable energy capacity in the first of a series of renewables auctions. Nineteen onshore wind projects won the majority of the capacity, at 495MW, with one 5MW solar plant also securing a 20-year CFD.

The auction – the first in a series of seven that Italy plans to hold in 2020 and 2021, for around 4.7GW of capacity – involved developers bidding for discounts to a reference price of €70/MWh (US$76/MWh). Successful bids ranged from €48.65/MWh (US$52.80/MWh) to €66.5/MWh (US$72.15/MWh).

Successful bidders included EDP Renováveis, which won contracts for three wind plants with a combined capacity of 109MW. The lowest cost power is to be delivered by CEA’s 84MW Ariano wind farm, which won a CFD struck 30% below the reference price.

The next round will also award 500MW of CFDs, while the following three rounds are expected to allocate 700MW of contracts each, and the final two 800MW of CFDs each.

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Summary

COVID-19 has caused its share of disruption in the short term, and the renewable energy sector has not been immune to the effects. But despite the profound challenges presented by the pandemic, the long-term trend hasn’t changed: clean, low-carbon energy generation will play a central role in the global economy of the future.