Can we avoid gridlock on the road to carbon neutrality? Can we avoid gridlock on the road to carbon neutrality?

RECAI 58: conditions are ripe for renewable energy to keep growing rapidly, but challenges remain that could yet stall progress.

This article is part of the 58th edition of the Renewable Energy Country Attractiveness Index (RECAI).

In brief
  • Market conditions, policy, investment and technology mean renewable energy is growing fast, but can the sector stop transmission issues applying the brakes?
  • Momentum is building ahead of the United Nations Climate Change Conference in November, but can a breakthrough on global climate policy be achieved?
  • A record 23.7GW of renewable energy was bought in corporate PPAs in 2020. What does this mean for the markets’ PPA potential in our new RECAI corporate PPA Index?

The low-carbon transition is coming thick and fast. Renewable energy is thriving as market conditions, policy decisions, investment and technology improvements push clean energy to new heights. Amid the COVID-19 pandemic and recession, investment in renewable energy capacity still grew by 2% to US$303.5b last year, while renewable capacity installs surged 45% compared with 2019, to 265GW, signaling the fastest growth rate since 1999. The prospects look even rosier this year, with the International Energy Agency projecting renewable electricity generation to expand by more than 8% to reach 8,300TWh, which would be the fastest year-on-year growth since the 1970s.

We are also approaching what could be a watershed moment in combatting the climate crisis. The 2021 United Nations Climate Change Conference of the Parties (COP26) is to be held in the UK in November and, in RECAI 57, we discussed the key requirements needed at COP26 if the Paris Agreement goals are to be realized. The urgency for climate action was highlighted by the Intergovernmental Panel on Climate Change’s recent report warning that global warming could reach 1.5°C by as early as 2030 if it continues to increase at the current rate. But momentum has been building in the run-up to the conference and, in April, a pledge by China and the US to commit to working together and with other nations to tackle climate change has sparked optimism for a breakthrough on climate policy.

With growing investment and policy support for renewables, the conditions appear ripe for renewable energy to continue growing at high speed. However, the sector must be careful to navigate around bottlenecks that could threaten the continuing rapid growth.

Integrating increasing volumes of variable resources will put grid infrastructure under significant strain. To meet sustainability goals, a 50% increase in grid spending could be needed over the next decade as markets adapt for a net-zero future. In this edition of RECAI, we examine how the sector could overcome a major obstacle by upgrading and expanding transmission infrastructure.

RECAI 58 also shines a spotlight on how markets in Eastern Europe are beginning to shift into high gear in their drive to net zero. Compared with Western European economies, Eastern Europe is trailing in its development of green energy infrastructure: only Poland and Hungary are among the RECAI top 40. Each nation is navigating its own economic, social and political hurdles to ensure the EU deadline of carbon neutrality by 2050 is achieved, but funding – through instruments such as the Just Transition Fund – is being allocated to catalyze the shift to a net-zero future and the realization of the European Green Deal.

New to this edition of RECAI is the corporate Power Purchase Agreement (PPA) Index (pdf), which puts nations’ corporate PPA markets and growth potential under the microscope. An extension of the established RECAI model, the PPA Index offers a new ranking focused on corporate PPAs, as opposed to the entire renewable energy industry.

With COP26 approaching, we are at a critical juncture for the energy transition. Read on to discover how the low-carbon transformation can be accelerated, as we outline some of the key developments in renewable energy from around the globe. 

  • RECAI methodology

    The index rankings reflect EY 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?
    • 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?

    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 targets or the ring-fencing of technologies, become less critical.

    Note that the COVID-19 impact parameter (introduced in the May 2020 issue) has been removed from the RECAI, as we have assessed that the majority of COVID-19 impacts have now been incorporated into the datasets that we use.

    Determining the country 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. These are then weighted again to produce pillar scores, with an overall RECAI score and ranking. Weightings are based on the EY 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 EY RECAI analysis could help your business decisions or transactions, please contact the report’s senior advisor, Phil Dominy.

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Chapter 1

New EY analysis reveals top 30 PPA markets

The new RECAI ranking shows the corporate PPA growth potential.

As environmental, social and governance (ESG) has soared to the top of the agenda for companies and investors, corporate PPAs are emerging as a key driver of clean energy growth – last year, a record 23.7GW of renewable energy was purchased via corporate PPAs. This is due to their ability to show an organization’s green credentials while providing developers with a secure revenue stream to repay the debt of financing a new project. EY’s new corporate PPA Index – published for the first time in this edition of RECAI – uses key parameters from four pillars (pdf) to analyze and rank the growth potential of a nation’s corporate PPA market.

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Chapter 2

The Netherlands: Tech clusters help green hydrogen drive

Rotterdam and Amsterdam have strong ambitions for offshore wind (RECAI Rank 11).

The Netherlands has been touted as a market leader for green hydrogen production by Fitch Solutions, drawing praise for its advanced regulatory, policy and strategy support. With nearly 300 hydrogen tech firms already operating in the country, and clusters in the ports of Amsterdam and Rotterdam, the nation is a step ahead of many of its European neighbors in this nascent industry.

Headlining developments is NortH2, a 10GW offshore wind-to-hydrogen project in the North Sea being developed by a consortium of Equinor, Dutch gas grid operator Gasunie, RWE and Shell. The project, which will be one of the world’s biggest renewable hydrogen projects, is currently in the study phase.

In September 2021, news also broke of a new hydrogen production facility at the Port of Rotterdam that will see Uniper develop a 100MW electrolyzer plant at its Maasvlakte location. An investment decision will be made in 2022, and the facility could potentially be scaled up to a 500MW unit.

The Port of Rotterdam is also expected to boast a 200MW green hydrogen plant that is being developed as a joint venture between Gasunie and Shell. Scheduled to go into operation by 2023, the facility will produce about 50,000kg–60,000kg of hydrogen per day. Additionally, the H2-Fifty project by BP and Nouryon at the same location will see the construction of a 250MW electrolyzer facility that is expected to become operational in 2025. The Netherlands has also set ambitious offshore wind targets of 11.5GW by 2030 and 38GW by 2040. The first project to be added to the 2030 development pipeline is expected to be a 2GW area north of the existing 4GW IJmuiden Ver Wind Farm Zone, which will bring power ashore at Rotterdam.

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Chapter 3

The UK: Largest round of CfDs in bid to boost renewable capacity

Offshore wind will benefit the most from government support (RECAI Rank 5).

The UK has announced £265m (US$366m) for its biggest ever round of the contracts for difference (CfD) scheme, as it seeks to reach record extra renewable energy capacity. The scheme has been instrumental in driving investment in green energy, incentivizing investment by providing protection from volatile energy prices for developers of projects with high upfront costs.

Offshore wind will be the biggest beneficiary, with £200m (US$276m) allocated to support projects. Emerging renewable technologies will be given £55m (US$76m), of which £24m (US$33m) will be ring-fenced for floating offshore wind projects. An additional £10m will be available for established technologies, including onshore wind, solar and hydropower.

As many as eight million homes could be powered by the addition of an estimated 7GW of offshore wind capacity resulting from the funding, while the government hopes to add up to 5GW of capacity for onshore wind and solar. This comes after a hugely successful fourth leasing round in the recent Scottish offshore wind auction that drew 74 bids for the rights to secure seabed leases across 15 areas. The bidders will begin receiving initial offers to progress with their applications in
January 2022.

In August, the UK launched its hydrogen strategy, which will also use a CfD mechanism. The strategy will adopt a twin-track approach to support both zero-carbon green hydrogen and low-carbon blue hydrogen. The UK is seeking to build 5GW of hydrogen capacity by 2030, to be used in industry, transport and heating. Consultation is also under way for the design of the £240m (US$332m) Net Zero Hydrogen Fund, which will support the commercial deployment of new low-carbon hydrogen production plants.

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Chapter 4

The US: Solar installation to overtake wind in 2022

The nation passes 100GW of total installed solar capacity (RECAI Rank 1).

Large-scale solar installation will exceed wind power installation in the US for the first time in 2022, predicts the Energy Information Administration (EIA). With government support diminishing for onshore wind power, utility solar capacity installation is expected to dwarf wind with 16GW vs. 6GW. In 2021, the EIA expects new wind installation to narrowly edge solar by 18GW to 16GW. With solar installation accelerating, the US passed 100GW of total installed capacity in the first quarter of this year.

Utility-scale renewables are expected to increase their share of the electricity mix this year to a record 21%, with further growth to 23% projected in 2022, boosted by the country’s infrastructure bill allocating US$73bn for clean energy. Meanwhile, because of project delays caused by the COVID-19 pandemic, the Internal Revenue Service will allow wind and solar companies one to two years longer to finish construction of existing projects and to qualify for federal tax credits on projects where construction started between 2016 and 2020.

As part of the path to net zero, US$52.5m of support for 31 next-generation clean hydrogen R&D projects has been announced under the Energy Earthshots scheme. The projects have been selected for their potential to bridge technical gaps in production, storage, distribution and utilization, and the technologies range from electrolysis innovation and new fuel cell designs to domestic supply systems.

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Chapter 5

Indonesia: Renewables ambition increased as energy demand soars

A target of 48% green energy by 2030 and plans to retire diesel power plants (RECAI Rank 39)

Indonesia is aiming to increase the proportion of renewable energy in its power mix to at least 48% by 2030 – a rise in ambition from its previous target of 30% by 2028. The announcement symbolizes a significant U-turn, as investment in fossil fuels was three times more than renewable energy from 2016 to 2019.

Energy demand is soaring in Indonesia and is expected to increase five-fold to 1,800TWh by 2060, by which time the nation intends to be carbon neutral.

Over the next 10 years, however, Indonesia – a major producer and exporter of thermal coal – will continue to prioritize fossil fuel power plants over renewable energy plants at a rate of 52% to 48%, as it plans to add power plants with a total capacity of up to 41GW.

In an effort to achieve the 48% renewables target by 2030, Indonesia plans to convert diesel power plants into renewables plants, with older facilities gradually retired. Problems around regulatory and contractual considerations could be encountered, however, given that many of the power plants have been developed under an independent power producer model.

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Chapter 6

Greece: Licensing regime reforms spark record auction

Competition for contracts is welcomed after previous tenders were undersubscribed (RECAI Rank 24).

Greece’s latest renewable energy tender in May resulted in 350MW of contracts being awarded to solar photovoltaic projects up to 20MW, with an average tariff of €37.6/MWh (US$44.5/MWh).

Tariffs ranged from €32.97/MWh (US$38.99/MWh) to €51.2/MWh (US$60.55/MWh), with domestic firm Egnatia Group’s bid for a 19.3MW solar farm marking a new record low for the Greek market. In total, the company was awarded 130MW, while EcoSolar won 90MW. Wind power projects failed to win any capacity.

The successful tender had 126 projects, totaling close to 1.1GW, competing against each other. The stiff competition for contracts was a welcome sight after previous tenders were undersubscribed.

Under the previous regime, Greece’s Regulatory Authority for Energy (RAE) was required to process all projects’ generation licenses, resulting in a backlog of applications that surpassed 6GW. This led to only a few projects acquiring a generation license, causing tenders to be undersubscribed and failing to reach the full amount of power capacity allocated. Last year’s reform of Greece’s licensing regime to an expedited digitized process was the key driver in improving the market outlook.

Amid a boom in production license requests following the simplification of the system in September 2019, Greece has passed legislation requiring developers to submit a bond alongside permit applications. All new bids, as well as those filed in the past 18 months, must include letters of guarantee of €35,000 (US$41,000) per MW.

Since the licensing restructuring, the RAE has received applications of more than 85GW, increasing Greece’s in-planning renewables pipeline to more than 100GW. A significant portion of the applications are believed to be speculative moves by inexperienced developers. The 100GW+ in the permitting system far exceeds the 19GW of renewable energy the nation needs to meet its 2030 target of at least 61% renewable energy in the electricity mix.

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Chapter 7

Spain: Plans could secure lead role in floating offshore wind

Spain might provide a large part of the European Commission’s 60GW target (RECAI Rank 10).

Spain has announced plans to develop up to 3GW of floating offshore wind by 2030, with a public monetary injection between 2021 and 2023 of more than €200m (US$237m) invested in its floating offshore sector technologies, including development of infrastructure at ports.

Funding would come from the Recovery, Transformation and Resilience Plan. If the plans come to fruition, Spain would provide an important portion of the 60GW of floating offshore wind that the European Commission has vowed to achieve by 2030.

Spanish firms are already on the front foot. BlueFloat Energy has announced it wants to develop a 1GW floating wind farm off the coast of Catalonia, in the Gulf of Roses. The Parc Tramuntana project will be constructed in two phases of 500MW, with up to 40 floating wind turbines installed each time. The permitting phase is expected to be completed by 2023, with the first phase operational by 2026.

The development comes as Spain’s wind power sector faces issues related to proposed legislation to reduce the impact of the sharp rise in electricity prices on consumers’ bills. Measures to be applied include a transitory reduction in the remuneration of electricity production facilities that do not emit greenhouse gases in the Spanish mainland, regardless of their technology, provided that they are not less than 10MW, are not covered by any regulated remuneration scheme and have not signed bilateral fixed price contracts with third parties prior to the publication of the regulation.

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Chapter 8

Taiwan: Price ceiling set for Round 3 offshore wind auction

There are plans to allocate 15GW capacity by 2035 (RECAI Rank 30).

Taiwan has revealed plans for its Round 3 auctions for offshore wind projects, allocating an aggregate of 15GW capacity by 2035. This will be broken down into two phases, with 9GW added between 2026 and 2031, with the aim of allocating 1.5GW each year through three auctions, each covering two years. A further 6GW will be allocated between 2032 and 2035. Each offshore wind farm will be limited to 500MW, subject to an adjustment of up to an additional 100MW. And bidders will also face a performance ability review.

Officials have scrapped a plan to use Taipower’s “avoidance cost” – the average cost of electricity generation, including fossil fuels. Instead, they have chosen a new price ceiling limit of NT$2.49/kWh (US$0.09/kWh). The previous plan had drawn criticism from developers, as the price cap would have put a heavy premium on corporate PPAs. As a result, developers would have been best served looking for agreements with tech companies and other large electricity users in need of green energy at a premium, and using Taipower as a last resort offtaker.

Meanwhile, a Taiwanese consortium consisting of developer Swancor Renewable Energy and three supply chain companies has revealed it will target “mega-scale” fixed and floating wind power development domestically and throughout Asia. The partners’ first collaboration will be the development of Swancor Renewable Energy’s Formosa 4 Offshore Wind Farm as a fixed-bottom project, before turning its attention to floating foundations at Formosa 5. The project is located about 20km off the coast of Miaoli County in north-western Taiwan and will have total potential capacity of up to 4.4GW, capable of powering more than 4.5 million homes.

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Chapter 9

Kazakhstan: Plans for world’s largest green hydrogen facility

Wind and solar arrays could supply 30GW of electrolyzers (RECAI Rank 36).

German investor and project developer Svevind has signed a memorandum of understanding with Kazakhstan’s investment promotion agency to develop what would be the world’s largest single-nation green hydrogen facility planned to date.

Under the proposed project, Svevind would install wind and solar arrays with a combined capacity of 45GW in flat steppe areas in western and central Kazakhstan. These would supply 30GW of electrolyzers to produce around three million tonnes of green hydrogen annually. Taking advantage of Kazakhstan’s vast natural resources, the plant could produce green hydrogen to be exported to Eurasian markets, or used domestically to produce fossil-free ammonia, steel or aluminium.

The project’s development engineering, procurement and financing phases are predicted to take three to five years, while the construction and commissioning phase is expected to take around five years. A final investment decision on the project is expected to be made between 2025 and 2027.

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Chapter 10

Germany: Onshore wind installation surges at beginning of 2021

The renewables sector is boosted with an approval of the hydrogen strategy (RECAI Rank 6).

Germany’s onshore wind market had a fruitful first half of 2021, with 971MW added, marking a 62% rise from the first half of 2020. Overall, net additions reached 831MW as turbines with a capacity of 140MW were decommissioned. Germany’s onshore wind power generation capacity now exceeds 55GW, and a rosy outlook persists, with wind power installation expected to range from
2.2GW–2.4GW for the whole year.

Slow permitting and an insufficient allocation of land areas for onshore wind power had caused the sector to slump in recent years, with heavily undersubscribed tenders and new installations dwindling. It is hoped that regulatory reforms through the establishment of a new federal-state cooperation committee will lead to more land area allocated for development and a streamlined permit process.

Germany’s renewables sector also received a boost with the approval of its National Hydrogen Strategy. Complementing existing funding for research and pilot projects, the strategy allocates €9b (US$10.2b) in fresh support. Germany is targeting 5GW of electrolyzer capacity by 2030, with the aim of adding an additional 5GW by 2040 at the latest.

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Chapter 11

Japan: First offshore wind foundation plant to be constructed

Falling solar costs highlight a promising outlook for the renewables sector (RECAI Rank 8).

Domestic engineering conglomerate JFE Engineering Corporation has announced it will construct Japan’s first offshore wind foundation plant, as the nation looks to develop a local supply base in targeting expansion of offshore wind capacity.

Initially, the firm will build monopiles and transition pieces, with plans to then add construction of jacket structures to give Japan a full line-up system for manufacturing offshore wind power foundations. The plant, as well as a secondary site for finishing transition pieces, comes at a cost of JPY40b (US$362m).

The announcement marks a key step forward in the ambition for a 60% share of local content in offshore wind projects. Japan is seeking to add 10GW of offshore wind by 2030 and up to 45GW by 2040.

Its renewables sector looks set to take off, with growing domestic manufacturing capabilities and falling costs for renewable energy. The government estimates that lower costs for solar panels will result in the cost of solar power dropping to be the cheapest of all energy sources by 2030, at a price of between JPY8/kWh (US$0.07/kWh) and JPY11/kWh (US$0.10/kWh) – less than the JPY12/kWh (US$0.11/kWh) in 2020.

The cost of offshore wind power is also expected to drop from JPY30/kWh (US$0.27/kWh) to JPY26/kWh (US$0.24/kWh).

Summary

Renewable electricity generation is predicted to expand this year at its fastest rate since the 1970s. But spending on grid infrastructure must also increase markedly if variable resources are to be integrated effectively and sustainability goals are to be met. Rapidly approaching emissions deadlines pose difficulties for economies still dependent on coal-fired power, such as many Eastern Europe nations, which are beginning to accelerate their drive to net zero. Meanwhile, as corporate PPAs become more important to clean energy growth, the new RECAI corporate PPA Index (pdf) puts nations’ PPA markets under the microscope.