UK renewables’ investor appeal continues to fall
The attractiveness of the UK renewables market in the eyes of investors and developers has decreased dramatically – falling back to levels last seen in November 2012, according to EY’s latest Renewable Energy Country Attractiveness Index (RECAI). The quarterly report, which ranks the investment potential of forty countries’ renewables markets, has ranked the UK in sixth place behind the US, China, Germany, Japan and Canada.
According to the report, the UK has slipped a place for the second consecutive quarter. This is mainly due to conflicting signals over the future of support for renewables beyond the 2015 election, as well as the proposed cap on solar power projects eligible for Renewable Obligation support being introduced two years earlier than planned. At the same time, a new auction program for utility-scale renewable energy supports Canada’s move up into fifth place. And in Asia China, Japan and India continue to strengthen their positions and close the gap on their Western counterparts in the top 10.
Ben Warren, EY’s environmental finance leader said: “The UK has slipped to sixth place for the first time in more than a year. Policy tinkering and conflicting signals once again become too much for investors and developers to handle.
“The recent carbon tax freeze, an energy market competition probe and Conservative Party plans to scrap onshore wind subsidies post 2015 are weighing heavily on the sector’s ability to assess the long-term outlook. In addition, the launch of a Government consultation on future financial support for solar has taken the shine off the UK’s otherwise booming solar market.
“As ever with the renewables sector, more damaging than the outcome of any review itself, is the uncertainty it creates and the trust it erodes. This last quarter has been no exception, with little done to foster sympathy from the renewable energy sector, which appears to be continuously caught in the firing line.”
Index outlook
Continuous policy amendments are still hindering renewable energy development across many markets, but changing energy mix dynamics, a need for new sources of capital and innovative business models are also creating significant opportunities for developers and investors.
In the US, expectations of a renewables-led energy transformation this decade are mounting as the US energy market finds itself at a crossroads. At the same time Indonesia and the Philippines entered the index for the first time. Elsewhere in the top 10, revised incentive schemes, large-scale projects and ambitious capacity programs see Japan and India poised to take over their closest rivals in the index. However, mixed signals for Japan following the release of a draft national energy plan that favors nuclear and coal, and persisting macroeconomic challenges and solar trade disputes in India are preventing a climb up the rankings in the immediate term.
Strong capacity forecasts and approval of a new feed-in tariff regime for wind projects have helped France up to eighth place above Australia, where a potential cancelation the Renewable Energy Target is slowing investment. A rapidly growing solar sector and the promise of further capacity auctions in 2014 sees Brazil enter the top 10 after auction cancellations pushed it down the index in early 2013.
US must stay on the right path to remain the land of opportunity
A flourishing solar market, 45GW of coal capacity retirement and signs of a reinvigorated capital market are painting a promising picture for the US renewable energy market, helping it to retain its position at the top of the index rankings as the most. However, uncertainty over tax credits and equity financing, increased shale gas production and ongoing congressional gridlock could take the US back down a path of boom-bust investment.
Ben continued: “Policy volatility in the US at a federal level can sometimes mask attractive incentive regimes or ambitious renewable programs at the state level, especially with grid parity closer in some markets than others. Estimates that 85% of additional electricity demand in the US through to 2025 will be met by renewable energy also send strong signals of the opportunities to be realized. Overall, the energy markets are being disrupted and we have witnessed the beginning of a paradigm shift of a new and evolving energy mix.
“Institutional investment, public market vehicles, corporate capital and crowdfunding are all gaining popularity and creating opportunities in the US for domestic and foreign investors. However, greater availability and diversity of capital is a phenomenon that we are now seeing globally as investors look for new opportunities. It’s really therefore a question of whether renewable energy markets, including the US, will be sufficiently proactive in attracting this capital.”
China to capitalise on market liberalisation and pollution imperative
With the US firmly leading the index rankings for now, China continues to strengthen its hold on second place. Increasing signs of a more market-based approach in China, both in the renewable energy sector and the economy more broadly, are pushing various forecasts to eclipse the US in wind and solar by the end of the decade. China is projected to add nearly 100GW of wind power and 60GW of solar power by 2018.
Ben added: “New impetus has been injected into the Chinese market with even more ambitious renewables targets being introduced. The dual objectives of driving local manufacturing and tackling air pollution create an extremely favorable outlook, which is reinforced by a willingness of the Chinese Government to open up the sector to provide greater competition, and therefore opportunity, for in-bound investors.”
Africa puts itself on the renewables map
Looking outside the index’s top 10, Africa continues to expand its presence in the global renewables market. In South Africa, the decision to award additional capacity under Round 3 of its national renewable energy procurement program and an increasing energy imperative prompted by disrupted coal supplies have boosted it to 17th place. Meanwhile, the US$870m financing of the 300MW Lake Turkana project has helped move Kenya up to 37th place, also marking a critical milestone for large-scale clean energy project financing in Africa more broadly.
Nigeria features as this issue’s “market to watch” given its ambitious energy sector reform program and news of a US$5b public-private project to develop 3GW of solar capacity in the country. With major gas supply shortages, a renewable energy incentive regime currently under development and the first signs of utility-scale projects, Nigeria looks set to become an attractive market for developers and investors in the long run.
Ben concluded: “Notwithstanding the major prospects for renewable energy in emerging markets such as Nigeria, political unrest cannot be ignored and should not be understated as a short-term barrier to investment and deployment. The use of risk mitigation tools, such as political risk insurance and even more innovative products targeting policy risk specifically will become increasingly critical for the renewables sector to tap into the most attractive opportunities in both developed and emerging markets. A need for tailored solutions and greater collaboration between energy providers and off-takers in energy-intensive industries such mining will also become critical to opening up new markets.”
