Clearer commitments from governments on infrastructure spending — and details of pipelines of relevant investments that are likely to be supported — would help increase funding opportunities for institutional investors and insurers.
RECAI 57 also looks at the role institutional investors can play in financing the energy transition to get us on a pathway to fulfilling the Paris Agreement. Last year, global renewable energy capacity investments grew 2%, to US$303.5b. This marked the second-highest annual figure ever — an impressive achievement considering 2020 was such a difficult year.
A funding gap still exists, however, and EY professionals estimate future global renewable energy development to be a US$5.2t investment challenge, based on the International Energy Agency’s Current Policies Scenario. Around US$7.7t is committed to renewables, while US$12.9t is required under the Sustainable Development Scenario.
ESG has risen up the agenda as a result of the COVID-19 pandemic, and institutional investors’ interest in renewables continues to grow. However, clearer commitments from governments on infrastructure spending — and details of pipelines of relevant investments that are likely to be supported — would help increase funding opportunities for institutional investors and insurers.
In this edition of RECAI, we also feature two green hydrogen case studies from different regions. The situation regarding green hydrogen embodies the larger issue facing the low-carbon transition: emerging technologies — not only hydrogen, but also electric vehicles and battery storage — offer enormous potential for achieving net zero, but require significant funding to bring them to scale and make them cost-competitive.
Finally, we take an in-depth look at power markets across East Asia, which has a strong outlook for renewable energy. Not only was China’s net-zero commitment a big step forward, but there were also commitments from Japan and South Korea in the past year. As a result, the region is likely to benefit from an acceleration of renewables growth, building out the supply chain, driving down technology costs and attracting international investment interest.
In Southeast Asia, demand for energy is snowballing. With 45m people still to be connected to electricity, and the population expected to grow by 25%, renewable energy can play a key role in satisfying this growth demand. Addressing climate change and managing climate risks will be a priority in this region, as several of these markets are among the most vulnerable to climate change.
COP26 provides the world with a platform to accelerate the energy transition, but success during its build-up, at the conference itself and after it concludes will require a collaborative effort. Read on to discover how a variety of stakeholders can step up and put the world on a pathway to realizing the Paris Agreement, as we outline some of the key stories on renewable energy from around the globe.
The index rankings reflect EY’s 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 EY 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 or region?
- Are essential components in place to ensure project delivery, such as long-term contracts, grid infrastructure (including storage) 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 elements are in place, does the macro stability and investment climate enable or impede the ease of doing business in a country or region?
These index pillars, therefore, put emphasis on fundamentals such as energy imperative, policy stability, project delivery (including capital availability) and diversity of natural resource — factors that will increasingly become key market differentiators as markets move toward grid parity and “artificial” motivations, such as government subsidies or the ring-fencing of technologies, become less critical.
Accounting for COVID-19
A COVID-19 correction parameter has been added to RECAI temporarily to reflect the impact of the pandemic, which we believe will have a short-term dampening effect on the renewable energy transition. After its introduction in RECAI 55, published in May 2020, we began to reduce the weight of the COVID-19 parameter, and it is likely to be unwound fully in the next six months as data feeding into the RECAI begins to factor in the impact of COVID-19, and the effect of the pandemic unwinds. The new COVID-19 correction parameter is centered on four criteria, for which the country or region is given a score. The criteria are:
- The strength of the country’s or region’s health care system
- The size of the population at risk, based on demographics
- Economic vulnerability or shock
- Reported COVID-19 metrics (deaths, case counts and tests conducted)
Determining the rankings
Each parameter within the five pillars comprises a series of datasets that are converted into a score (from one to five) and weighted to generate parameter scores. They are then weighted again to produce pillar scores, then an overall RECAI score and ranking. Weightings are based on EY’s 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 from the main index, EY 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. This is because 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.
If you would like to discuss how the analysis could help your business decisions or transactions, please contact the report’s Senior Advisor, Phil Dominy, Ernst & Young LLP.
China: A record year for wind, but less ambitious emissions goals
With “modest acceleration” in decarbonization, China pledges to work with US on climate change. (RECAI ranking – 2)
China added an astounding 72.4GW of new wind power in 2020, including 48GW in December alone, as developers rushed to beat an onshore wind subsidy cut-off — China will no longer approve subsidized onshore wind projects after 2020. It represents a three-fold increase from 2019 and is more than double the nation’s previous record.
However, the figure reported by China’s National Energy Administration could be skewed by 26.3GW, as it includes grid connections that were installed, but not connected, by the end of 2019, according to Feng Zhao, Head of Strategy and Market Intelligence at the Global Wind Energy Council. Regardless, the net figure of 46.1GW in 2020 would still represent a tremendous achievement for China, and nearly equals the entire global capacity installed in 2018.
China also installed 3GW of offshore wind in 2020, representing half of the new global capacity built last year. It is the third year in a row that China has led in new annual offshore wind capacity. In addition, it added 49.3GW of solar capacity, up from 29.7GW in 2019.
Despite this increased growth in wind and solar installation, at a policy level, the emissions goals established in China’s 14th Five-Year Plan for 2021-2025 are seen by some analysts as slow-moving and leaving the door open for emissions to grow for the next 10 years.
One of the main targets in the plan — a 20% non-fossil share in total energy consumption by 2025, an increase from 15.9% in 2020 — has been classified as a “modest acceleration” by commentators. It has led to calls for China to do more to reach its climate target of peak carbon emissions before 2030.
Last month, China and the US announced that they would work together, and with other countries and regions, to tackle climate change. The two superpowers agreed to discuss further specific actions to reduce emissions and to help developing nations finance a switch to low-carbon energy.
Brazil: A leap forward to regulate offshore wind sector
Proposed legislation would ask developers to pay up to 5% of power production and other charges. (RECAI ranking – 11)
Brazil is pushing ahead with plans to deploy offshore wind capacity. Currently, it does not have any turbines off its 8,000km Atlantic coast, but a new bill was proposed in Congress in February that, if passed, would open up the sector.
The nation has been locked in debate over how Brazilian waters should be subject to concessions or leases for offshore wind development. The new bill would ask developers to pay up to 5% of power production and other charges. An older offshore wind bill that proposes a “first come first served” system, without charging bonuses or leases, has been approved by the Senate and is being debated by the Lower House. It is expected that the two bills will be combined when the new bill reaches the Lower House.
Meanwhile, Brazil’s federal environmental authority, IBAMA, released licensing guidelines for offshore wind power projects last year. Additionally, the federal energy planning authority, EPE, published a road map for the sector that called attention to infrastructure bottlenecks.
Brazil’s potential offshore pipeline could see strong growth, thanks, in part, to a 50m-deep, 30km-wide continental shelf and wind speeds of 7m/s to 7.5m/s. Equinor and Iberdrola have already sought licenses for 4GW and 9GW respectively, while domestic firm BI Energia has submitted a request to build offshore wind farms. Total and Enauta have also expressed interest.
For the new industry to take off, however, costs will need to be reduced. Currently, planners in Brazil must follow regulations that enforce an order of contracting that combines lowest price with supply security. Given that Brazil’s 18GW onshore wind power fleet is selling power at less than BRL90/MWh (US$13/MWh), offshore wind — which has a global average price of approximately US$50/MWh — is currently far too expensive to win power deals in a government tender.
Poland: Offshore wind legislation passed
Its investors responsibility to construct and finance the connection of wind farms to national grid. (RECAI ranking – 22)
Poland has passed the Offshore Act regulating the development of offshore wind farms in the Baltic Sea. It aims for 5.9GW of capacity to be offered via contracts for difference by the end of June 2021. This is an increase from a previous draft offshore wind bill, which would have allowed for 4.6GW. The first projects could become operational by 2025.
Investors are expected to be responsible for constructing and financing the connection of offshore wind farms to the national grid. Poland’s state-owned transmission system operator, Polskie Sieci Elektroenergetyczne, will have the right of first refusal in case of a potential sale by an investor.
This marks Poland’s first phase of development. Plans for the second phase include two auctions — the first in 2025 and the second in 2027 — both for 2.5GW of capacity. This would bring Poland’s total offshore wind capacity that is operational or under development to 10.9GW by 2027. It also envisions a pipeline of up to 28GW. Poland is viewed as a potential springboard for non-Western European markets, and success here could result in developers turning their eyes toward the Black Sea.
Turkey: Offshore wind tender eyed within next three years
Turkey has technical potential for 75GW within 200km of its coast, says World Bank. (RECAI ranking – 25)
A long-term offshore wind roadmap is being put together for Turkey by the World Bank, with the aim of holding a tender in the next two to three years. After a canceled 1.2GW offshore wind auction in mid-2018, the World Bank is now managing disbursement of EU funds to support feasibility and environmental studies ahead of a second attempt at an auction.
Sites are under assessment in the Sea of Marmara and the Black Sea. Wind speeds in the Turkish part of the Black Sea are estimated at 7m/s to 7.5m/s, in mostly deep waters. Currently, no sites are under assessment in the Aegean or Mediterranean seas, although three sites were being examined for the canceled tender attempt in 2018. The possibility of sites in the Aegean Sea could be limited by the closeness of several Greek islands to Turkish shores.
According to the World Bank, Turkey has the technical potential for 75GW of offshore wind within 200km of its coasts, comprising 63GW of floating wind and 12GW with bottom-fixed foundations.
Turkey ranks in Europe’s top 10 for installed wind capacity and is among Europe’s top 5 wind turbine equipment makers, producing both onshore and offshore equipment.
Greece: Renewables auctions could total 2.1GW by 2025
New digitized licensing will speed up process for developers to take part in national auctions. (RECAI ranking – 26)
Greece’s Regulatory Authority for Energy (RAE) has announced it will hold a joint wind and solar tender on 24 May. It will be the nation’s third joint renewables tender, offering 350MW of capacity to bidders. The process will be open to solar projects with a capacity of up to 20MW and wind projects of up to 50MW.
The RAE says a ceiling price of €53.86/MWh (US$64.04/MWh) will be put in place for prospective bidders. Greece’s first joint auction for wind and solar projects was in April 2019, when it awarded 437MW of capacity. Last year’s auction awarded 503MW of capacity, including a record-breaking tariff of €49.11 per MWh (US$58/MWh) for a 200MW solar project in Ptolemaida by state-owned utility Public Power Corporation.
The upcoming auction will be the first of six that Greece plans to hold before the end of 2024, with a target of awarding 2.1GW of renewables capacity. Its tender regime has brought a steady reduction in tariffs and created a competitive environment for domestic companies.
Greece has also introduced a new digitized licensing process, helping to expedite procedures for developers to participate in national renewable energy auctions.
Belgium: Wind subsidies reduced in Flanders region
About 30 projects are affected by new rules, as developers prepare for subsidies to be phased out. (RECAI ranking – 30)
Belgium’s Flanders region has reduced subsidy payments for future wind projects. Wind farms of 2.5MW or larger will now fall into a lower payment band, compared with a previous cut-off of 3MW.
A reduction in the internal rate-of-return parameters for wind farms entering the support scheme has also been introduced in Flanders, as has a mandate that wind projects will only receive the appropriate payment for their nameplate capacity. The measures come as developers prepare for the phase-out of subsidies by 2024.
The changes also prevent developers from taking advantage of a perceived loophole that would allow them to de-rate installed wind farms to qualify for larger subsidy payments. Approximately 30 permitted wind projects in Flanders will be affected by the new regulations.
Hungary: Sun shines on Hungary’s solar sector
Successful bidders at latest auction will be granted 15-year feed-in tariff (FIT) payments. (RECAI ranking – 38)
Hungary’s second renewables auction, held in October, was significantly oversubscribed. Of the 257 projects submitted (of which 256 were solar projects and the other a 0.5MW geothermal plant), only 36 projects were successful.
For small photovoltaic (PV) power plants between 300kW and 1MW, the lowest bid was HUF21000/MWh (US$71/MWh). For projects ranging from 1MW to 49.9MW, the lowest bid was HUF16180/MWh (US$54.9/MWh).
In total, the Hungarian Energy and Public Utility Regulatory Authority (HEA) expects to contract 390GWh. At Hungary’s first renewable energy auction, held in March 2020, it contracted 199GWh. For the second tender, there was a rise in the capacity limit — from 20MW to 50MW — for large-scale projects, which was popular among foreign investors. HEA will grant 15-year FIT payments to the 36 successful projects, to top up wholesale electricity prices.
Despite the strong growth of Hungary’s solar PV market, its renewable energy market is still hampered by a tax that supports small district heat producers. Hungary has put solar at the heart of its renewable energy policy, setting a target of 6GW of solar PV capacity by 2030, with existing capacity at just above 1GW.
Kenya: Eyeing a solar breakthrough
Two 40MW plants due by end of 2021 as Kenya looks to boost domestic and industrial uptake. (RECAI ranking – 40)
Kenya is expected to add 80MW of solar power to the national grid this year — a huge increase for a nation that currently generates about 200MW of solar power. Two solar plants, both 40MW, have received approval and will be built by private investors. They are due to be operational before the end of the year.
With abundant sunshine throughout the year in most of its regions, Kenya is an ideal location for solar power, from both utility-scale and rooftop installations.
Meanwhile, the nation is planning to review its solar legal framework to improve uptake among the industrial sector. To boost uptake of household rooftop installations, Kenya is seeking to introduce regulations for standards of imported solar equipment, to safeguard consumers from substandard products. Currently, the nation imports more than 90% of its solar equipment.
Kenya is hindered by a lack of local production technology and capacity, and the Energy and Petroleum Regulatory Authority is currently considering a new regulatory framework to promote technology transfer.
France: 1GW fourth-round Normandy offshore tender launched
A three-stage process for 500km wind park in English Channel will help power 800,000 homes. (RECAI ranking – 5)
France opened bidding in January for a tender for the construction, operation and maintenance of an offshore wind park in the English Channel off the coast of Normandy. It will have a capacity of between 900MW and 1,050MW, spread across a zone covering 500km.
The tender will have three stages: the selected developer, responsible for the project financing and management, will be announced in 2022; environmental studies will be conducted in the project area, in consultation with relevant stakeholders; and the wind farm will then be built at least 30km from the Normandy coast, to minimize the impact on fishing activities, maritime traffic and the marine environment.
Upon completion, it is expected to generate enough electricity to power 800,000 homes, and will be France’s eighth offshore wind farm. Last year, the Government announced plans to hold tenders for 2.4GW of offshore wind to be commissioned by 2023.
The 2021 United Nations Climate Change Conference of the Parties (COP26) is expected to be the most important moment for the climate since the signing of the Paris Agreement six years ago. Like never before, governments are under pressure to deliver on the promises they made, while institutional investors are also being scrutinized for how they address ESG and sustainability risks. In issue 57 of the Renewable Energy Country Attractiveness Index (RECAI), we’ve outlined the actions that need to be taken in Glasgow — and how the world’s transition to net zero could be financed.