Guest post by Ben Warren – Global Power & Utilities Corporate Finance Leader of Ernst & Young.
Renewable energy investment is on the move. In a world where subsidy is becoming subordinated to economics, where technology trumps policy, the global investment landscape for clean energy developing is fast being redrawn.
In a growing number of jurisdictions, renewable energy technology can stand on its own two feet: it can compete, without subsidy, against conventional fossil fuel generation.
Competitive tenders in Morocco, India, Mexico, Peru, Brazil and Chile in recent months have all seen wind or solar projects bid to supply power at lower cost than conventional generation. As the cost of energy storage technology falls, renewables are becoming an increasingly compelling source of reliable energy in a lengthening list of markets.
This remorseless march towards grid parity is changing the calculations that renewable energy investors are making when they assess the relative attractiveness of various jurisdictions. Specific subsidy mechanisms are becoming less important. Instead, more fundamental considerations are coming to the fore.
Investors are asking themselves what need a particular market has for generating capacity – either to meet rising demand, or to replace or repower existing plant. How easy is it to get projects done, whether in terms of financing, or in contracting to sell the power they generate? How stable is the macro environment? How easy is it to do business in the country in question?
Policy remains important, of course. Of particular importance is policy stability, including the transparency of policy-making and clarity around tariff setting. But, as technology costs continue to fall, access to the market, rather than revenue support mechanisms, becomes critical.
These changes have prompted us to revisit the methodology underpinning EY’s closely watched Renewable energy country attractiveness index (RECAI). We have carried out a root and branch review of the factors that we consider when assessing each jurisdiction, introducing some new metrics, and reweighting others.
A longer explanation of these methodology changes, the full results of the refreshed index, and the latest edition of our RECAI publication, are available here:
The headline is that emerging markets are leading the charge: within the top 20, Chile, Brazil, Mexico, South Africa, Morocco and Egypt have all risen strongly. Argentina joins the index, at number 18. In the lower half of the index, Jordan, Uruguay and Pakistan appear for the first time.
The case of Argentina illustrates how quickly a market can be transformed: its new Government has enthusiastically embarked on a raft of energy market reforms that have won international plaudits. Amid a broad reform agenda, a series of ambitious renewable energy targets, fiscal incentives and tender announcements will likely see investors and foreign developers scrambling to participate.
More generally, the trend towards competitive tenders in many of these emerging markets is contributing to dramatic cost reductions and efficiency improvements that are turbo-charging the race towards grid parity.
These markets benefit from lower technology risk, better resource forecasting and low costs of capital, especially with European investors on the hunt for yield. It remains to be seen how many of these projects will ultimately deliver the promised electricity; project attrition has been relatively high in India and some Latin American countries, and success or failure will dictate whether they maintain or improve their positions in the index.
Successful markets are those that learn from experience – their own, and those of their peers – and continue to improve the conditions within which renewable energy developers and investors are operating. Falling technology costs may be irrevocably changing the renewables landscape, but there is plenty that policy-makers can still do to attract – or deter – investment.