Trends in the Renewable Energy Landscape
A new era is dawning in the renewable energy industry. Energy demand, natural resource, technology costs, access to finance and global competitiveness are identified as the key influences for investors. According to the tenth anniversary edition of the Renewable Energy Country Attractiveness Index (RECAI), which was recently released by Ernst & Young, global annual clean energy investment totaled US$269b in 2012, representing a five-fold increase on 2004. The sector now competes for investment with more traditional energy sources, and new technologies — such as solar panels, biomass boilers and mini wind turbines — are enabling energy users to run their own small power plants, changing the way businesses and consumers think about energy.
The renewable energy landscape today is truly global. From Japan and Southeast Asia to Africa and South America, renewable energy is a viable energy source that is gaining a solid and growing share in the energy mix. But, the renewables industry is facing growing pains. Not only is the future a place with less government support, but industry players also have to fight for market share across all corners of the globe and with some worrying signs of trade barriers emerging. For an industry that is still relatively new, this is a seriously challenging time; leaders need to be conversant in international business, conscious of global politics, and clever in innovating new business models and business relationships to win in an increasingly global competitive world.
South America and Asia Pac continue to rise as Europe and the Middle East stall
Our index sees the US regain the top spot, as high barriers to entry for external investors realign China into second place. However, growth prospects for the sector in China remain strong with continued GDP growth, increasing energy demand, and the ongoing strategic importance of the sector to the local economy providing solid foundations for the future.
South America continues to grow in prominence, thanks in part to its growing energy demand. Chile’s project pipeline includes 300MW-400MW concentrated solar power (CSP) plants, while Peru has entered the index for the first time due to good resources and a strong investment climate. However, new policy measures and tender cancelations in Brazil are likely to temper the rapid growth seen in the region over the last 18 months.
High levels of project activity and investment interest in Japan and Australia give the Asia Pacific region a stronger presence at the top of the index. Thailand also joins the index in this issue, boasting strong solar resource and a healthy project pipeline, as well as stable fiscal and regulatory support measures.
In Europe, Romania became the latest to slash its subsidies, reinforcing the relatively somber mood in Eastern Europe as policy makers try to find the balance between growth and sustainability.
A number of the Middle East and North Africa countries, including Egypt, Tunisia and the UAE, have fallen out of the top 40 due to a slow recovery from the Arab Spring and an absence of clear policy frameworks delaying capacity deployment.
Transaction market – the continuing squeeze
Recent deal activity in the sector has been characterized by incumbents and new entrants driving industry consolidation. There is also a strong appetite from Far East construction groups and original equipment manufacturers (OEMs) seeking development pipelines of solar and wind assets to provide a distribution channel for their products.
Factors driving the levels of investment in renewable energy include divestment needs, market restructuring and the entry of new investors into the sector. Utilities and financial buyers are finding greater value in buying operational plants than investing in plant construction.
The mismatch between project sponsors’ capital expenditure plans and the corporate capacity to finance this investment will continue to drive more asset disposals. Both financial investors and OEMs under pressure from overcapacity are likely to remain the most active buyers of operational assets and development assets respectively.
Further consolidation can be expected in the supply chain. New markets are gaining momentum. Countries and corporations are increasing their focus on changing their energy mix to ensure it provides financial, reputational, operational and social benefits. We’re also seeing the development and implementation of national renewable energy program best practices. In summary, with the shift in the democratization of the energy sector and the increasing power of the customer, the future of renewable energy in the energy mix is bright.
For more information about the report, including a discussion of our evolved methodology, please visit www.ey.com/recai.
Gil Forer is global leader of the Global Cleantech Center for Ernst & Young.
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