The refreshed index rankings reflect our reassessment of the factors driving market attractiveness in a world where renewable energy has gone beyond decarbonization and reliance on subsidies.
We have redefined 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 new index pillars therefore put a greater 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.
RECAI methodology overview
Additional commentary on selected parameters
The new methodology has redefined and reprioritized the parameters impacting energy imperative as a critical factor driving long term supply and demand dynamics. This is important both at a macro level (i.e. sheer need for power, whether due to demand, security or diversity) and more specifically for renewables, including the extent to which other “cleaner” sources are being prioritized (e.g. nuclear and natural gas). Affordability remains key, so this parameter also reflects the extent to which electricity costs impact the case for renewables.
Notwithstanding renewables’ increasing cost-competitiveness, policy enablement continues to have a significant impact on market attractiveness. However, the revised index puts greater emphasis on the degree of visibility over a country’s long-term energy strategy and the level of policy stability underpinning this, in addition to the specific support mechanisms designed to achieve it.
The project delivery parameters focus on energy market access, infrastructure and finance as indicators of the ability to get deals done. They try to address a number of critical questions, including:
- How competitive is the energy market?
- What are the routes to market for the sale of renewable electricity and securing long-term contracts?
- Can projects be connected, and/or exploit opportunities that circumvent the need for grid access (e.g., distributed generation, storage)?
- Can projects secure financing?
- Is there a sufficiently liquid market for different investors to enter or exit renewables opportunities?
At a technology potential level, power offtake and incentive regimes remain important parameters alongside the strength of natural resource and capacity forecasts. However, we have reassessed and reweighted the various mechanisms (e.g., feed-in tariffs, premium tariffs, auctions, green certificates) to take account of the increasingly complex tradeoffs between price, volume and policy risks.
Technology weightings continue to be based on current and projected investment volumes. This means that solar in particular is continuing to increase in importance as a proportion of the overall weighting, even taking into account the higher $/MW value of some other technologies. This also reflects the fact that solar typically creates a broader range of opportunities, given its flexibility and scalability across a range of applications and a growing number of markets globally.
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.