Liebreich: Here Comes the “Rest of the World”

HERE COMES THE “REST OF THE WORLD”

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It is almost the half-way mark in 2012, and time to take stock of how the year is progressing so far for clean energy. We all knew this would be a difficult 12 months for the sector, with subsidies under pressure, extraordinarily cheap natural gas in the US, the European financial crisis continuing, and investors feeling bruised.

“Expect 2012 to beat rock-bottom expectations” was how we titled this column in January. And indeed, apart from yet another dire performance from sector stocks – the WilderHill New Energy Global Innovation Index (NEX) has under-performed the S&P 500 by 19% so far this year and recently hit a nine-year low – clean energy has mostly done slightly better than some feared.

Bloomberg New Energy Finance’s data for investment in the second quarter will be crunched by our analysts over the coming week or so, but early indications are that while companies are struggling to attract finance, capacity investment has been more resilient.

In Q1, asset finance of utility-scale renewable energy projects came to $24.2bn, down 18% from the same three months in 2011. Nevertheless, it was still nearly 50% above the asset finance figure recorded in the first quarter of 2009, just after the financial crisis. Meanwhile the boom in European small-scale PV is continuing much further into 2012 than seemed likely at the turn of the year. Germany alone may well install between 6GW and 8GW of PV this year, on top of last year’s record 7.4GW – partly because Berlin has not yet managed to impose its planned tariff cuts in the face of resistance from some German states. Meanwhile installation of solar panels in the US jumped 85% in the first quarter compared to a year earlier, according to the industry’s trade association.

Most exciting of all, however, is that renewable energy is on the move outside its established core markets of the European Union, the US and China. For years, the “rest of the world” has failed to disturb the dominant troika – accounting for between 20% and 25% of the world total every year from 2006 to 2011. This is despite the fact that “the rest of the world” accounts for 69% of world population and 43% of its GDP.

This year may well be remembered as the point at which this 69% of the world arrived, starting to grow its share of investment well above the 20% mark. There were clear signs of something happening in Q1, when the three largest asset finance deals were all “rest of the world” deals – the 396MW Marena wind portfolio in Mexico, phase one of the 400MW Menengai geothermal project in Kenya, and the 100MW KVK Chinnu solar thermal electricity generation project in India.

There has been further evidence this quarter. Take Saudi Arabia, where the government announced plans for an eventual 71GW of low-carbon power by 2032, with the first round of auctions-and-tenders in 2012-13 to cover 1.1GW of PV projects, 900MW of solar thermal and 650MW of wind. With a second round slated to follow in 2013-14, and perhaps a tariff support mechanism thereafter, there is likely to be a furious scramble on the part of developers and manufacturers to get involved from the beginning.

Or South Africa, which one financier recently called “the hottest renewable energy market on the planet”. It is experiencing a rush to finance by the end of this month some 1.4GW of wind and solar capacity approved in the first round of its auction process last December.

In May, South Africa approved a further 1GW in the second round of its auction, at significantly lower bid prices for both wind and PV. If three quarters of the capacity approved in rounds one and two actually gets built during 2012 and 2013, this would represent total investment of around $5bn.

Then there is Japan. One of the world’s biggest economies it may be, and a pioneer in energy efficiency since the 1970s, but it has not been one of the mainstays of world renewable energy investment in the past decade. As the new energy reality following the Fukushima disaster in March 2011 takes shape, that is about to change.

Helped by the confirmation of a generous feed-in tariff for PV earlier this month, we expect Japanese PV demand to climb from 1.3GW in 2011 to 3.8GW in 2014, even in the more conservative of our two forecast scenarios. In our more optimistic scenario, it could beat 5GW in 2014 – almost German or Italian rates of installation.

Latin America and the Caribbean are also on the move, thanks to strong economic growth rates through much of the region, and serious energy security concerns, both among diesel-reliant island nations and South American countries that are dependent for oil and gas on Venezuela or Bolivia. Last week at the Rio+20 conference in Brazil, Bloomberg New Energy Finance and the Multilateral Investment Fund of the Inter-American Bank released a landmark study on the region entitled Climatescope. The report offers unprecedented detail on the market, policy, and investment environment in all 26 Latin American and Caribbean nations, grading them on their potential attractiveness to private investors.

While Latin America and the Caribbean accounted for less than 5% of the $280bn invested in clean energy globally in 2011, the region is readying itself for take-off. Bloomberg New Energy Finance’s Q2 2012 Wind Market Outlook estimates that Brazil added 583MW of onshore wind capacity in 2011, that this will rise to 1.7GW this year, and amount to another 3.4GW over 2013-15. Our Q2 PV Market Outlook, even in its conservative scenario, sees Latin America installing 176MW of photovoltaics this year, up from almost nothing in 2011, and then projects this rising to 0.5GW by 2014.

Other emerging market countries are also poised for significant growth, with Turkey expected to increase its wind capacity addition from 409MW last year, to 713MW in 2012 and 1.2GW per year by 2014-15.

Southeast Asia is set to increase PV installations from 211MW last year to 1.4GW in 2014. Even Ukraine is enjoying a meteoric rise in solar, with news in early June that Activ Solar of Austria had raised more than EUR 100m in debt from a Russian bank, VTB, to finance 100MW of PV, part of a possible 400-800MW in that country this year.

Enel Green Power, the Rome-based company that operates just over 7GW of renewable energy capacity worldwide, is an interesting case study illustrating the change in geographical focus in the sector. In 2010 it envisaged adding 3.5GW of new capacity over the next four years, with 68% of this in Europe, 23% in North America and just 9% in emerging markets. Two years later, its 2012-16 business plan projects 4.5GW of new capacity, but now just 38% is planned for Europe, 24% will be in North America, but a much chunkier 38% will be in emerging markets.

While this is all a refreshing sign that the industry is innovating in order to survive tough conditions in its established markets, it does come with two important caveats. The first is that most of these new markets are high-, middle- or lower-middle-income nations rather than the poorest of the poor, who are still largely excluded. Renewable energy has great potential to improve energy access in least developed countries, and is already starting to do so with off-grid applications such as solar lanterns, solar telecom towers and waste-to-power, but we may need to wait another few years before the likes of Ethiopia, Bangladesh and Burkina Faso start to attract billions in investment.

The second caveat is that however quickly investment grows in busy new markets, this gain would be hard pressed to offset a collapse in activity in core countries, such as the US, Germany and Italy.

While the growth of the periphery is useful, the miserable performance of the NEX shows that public equity investors have clearly decided – in the words of William Butler Yeats – that “things fall apart, the centre cannot hold”. Are they right?

Indications so far are mixed. This year is on track to be an energetic one for US wind, as developers rush to beat the scheduled expiry of the Production Tax Credit at the end of December. However, a severe contraction for US wind next year is certain; we expect installations to fall from close to 10GW this year to less than 2GW in 2013 if the PTC is not extended.

Meanwhile, in Europe, the small-scale PV markets have refused to die – yet. Germany may have another record, or near-record, year, and Italy may manage more than 4GW of PV despite the caps imposed by the Conto Energia programmes. There will be strong wind investment in Romania and Scandinavia.

However the euro area crisis and the associated banking problems are restraining both the project finance market and investment by the utilities. There continues to be great uncertainty about energy policy in important countries such as Spain and the UK. Meanwhile, in China it looks like the wind market hit a peak in 2011, and this year is expected to fall a gigawatt or so short of last year’s record 20GW.

On top of this, two important sub-sectors that enjoyed a burst of financings in 2011 will fail to match this in 2012. Offshore wind and solar thermal between them accounted for more than $30bn of investment last year. The $660m debt package for the 270MW Lincs project in the UK part of the North Sea has been the only offshore wind deal to date this year; meanwhile there have been no Spanish or US solar thermal financings at all so far in 2012.

Earlier this month, alongside the publication of Global Trends In Renewable Energy Investment 2012, which we write each year for UNEP, we revised up our estimate for total clean energy investment in 2011 from $263bn to $280bn, taking account of fresh information on project transactions late last year.

Given the picture we have seen in the first six months of this year, it will be extremely difficult for 2012 to exceed that $280bn figure. Given the drops in equipment costs, we could still see a record year for capacity installation in terms of GW, but it looks like being a down year in dollars invested. Looking forward to 2013, it could be another tough year in the EU and the US, if euro area economics and US politics continue to be unfriendly to renewable energy investment. The pressure for the “rest of world” to take up the slack is not going to recede.

There is little doubt now that investment is going to shift rapidly from the largest, most mature markets to those of the ”the rest of the world”. The question is whether adoption in these new markets can come fast enough to ensure that the top line figure for total investment grows in the years after 2012.

Regardless of the headline figures for total investment, diversification and globalisation of the clean energy sector are good for the industry in the long term. In the short term, however, shifts in the sector’s geographical centre of mass are making for some serious growing pains.

About Bloomberg New Energy Finance

Bloomberg New Energy Finance (BNEF) is an industry research firm focused on helping energy professionals generate opportunities. With a team of experts spread across six continents, BNEF provides independent analysis and insight, enabling decision-makers to navigate change in an evolving energy economy.
 
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