Chinese policy makers focus on domestic solar installations.

Uncertain political support for renewable energy sector dampens US and European investment

Difficult market conditions reflected in 50% decline in Q2 2012 deal value

LONDON  5 September 2012:  Having quadrupled its solar capacity target to 50GW by 2020 and  begun an accelerated domestic installations program to tackle the oversupply of solar panels, China looks set to continue its domination of the global renewable energy market, according to Ernst & Young’s latest quarterly global Renewable energy Country Attractiveness Indices report (CAI).  

The indices provide scores in 40 countries for national renewable energy markets, renewable energy infrastructures and their suitability for individual technologies. During Q2 2012, China remained at the top of the All Renewable Index (ARI) but going forward it has a number of challenges to overcome, such as the oversupply of wind turbines and solar panels, and resolving grid transmission issues.

During the same period, the US dropped 1.5 points, to share second position with Germany. This was due to ongoing uncertainty over the country’s long-term renewable energy strategy and a failure to indicate if there will be an extension to the critical Production Tax Credit (PTC) for wind projects. The drop in the US score coincided with Germany gaining a point —the result of the German government’s proactive approach to addressing barriers to offshore wind development and creating stability in the solar sector.

Gil Forer, Ernst & Young’s Global Cleantech Leader, comments: “While the US and Germany markets are level within the ARI, the contrast between these two markets is evident. The upcoming elections have led to an understandable slowdown in the decision making process in the US, while Germany is pushing ahead with its ambitious renewable energy agenda — including the introduction of a new solar PV tariff and compensation for offshore grid connection delays.

“Having made positive progress, the challenge now facing Germany is making sure that the necessary infrastructure is in place to ensure the renewable power generated in the north of the country can be shipped to customers in the south. It is important for any country not only to focus on policies that support supply, but also on those that will encourage and simulate demand.”

Looking beyond the top three markets to fourth place, India recently suffered severe blackouts leading to speculation that the country has attracted insufficient private investment to modernize its power infrastructure and that renewable energy investment may suffer amid wider power system reforms. India fell a point in the ARI as a result.

Despite dropping half a point, the UK has risen to fifth place in the ARI, due to a fall in Italy’s ranking — a response to worsening economic conditions. While a number of UK policy and subsidy announcements were made during Q2 2012, the general consensus appears to be that these announcements have fallen short of establishing transparency, longevity and certainty, and have potentially created even greater uncertainty within the market.

Ukraine rank change

The overall "attractiveness" of the country in respect of renewable energy investment has increased and ranks 29 (one point higher).

It is acknowledged that, while the net impact on the scores (All Renewables Index and technology specific) is zero, the Ukraine has risen a rank in both the ARI and the wind indices. This is a result of a fall in rank of another country, which has automatically increased the ranking of other countries around it. Specifically, Austria has fallen in the rankings this issue due to a methodology revision which removes a previous weighting adjustment which sought to account for the fact the country (as well as Czech and Hungary) is landlocked and therefore has no offshore wind / marine potential. The overall "attractiveness" of the country in respect of renewable energy investment ranks 29 (one point higher). The fall of Austria in the rankings has automatically increased the Ukraine's overall ranking, as Ukraine has huge potential in developing both onshore and off shore potential of the Black Sea coast.

Ukraine score changes

The impact on the overall score, and the reason for the increase in the All renewables index and wind index are set out below. Solar power offtake attractiveness decreased in score to reflect slight reduction in solar tariffs. While, solar market growth potential increased to reflect the fact that the phasing out tariffs has the goal of creating a more sustainable growth pattern and avoid the “boom-bust” other countries have seen - this pro-activity and honesty is a positive signal to investors that stability is being created for the sector.

Meanwhile, hydro power offtake attractiveness increased to reflect increase in tariffs. The net impact of the solar changes is zero since they effectively cancel each other out. Hence no movement in the solar index score or rank (21 ranking).  The change to the hydro score did not generate sufficient movement to create an overall score/rank change in the "biomass/other" category.

Debt markets and asset finance see total new investment up 24% from Q1 2012

Q2 2012 saw total new investment in the sector at US$59.6b (€48b), up 24% from Q1 2012, with China experiencing a 92% increase on Q1 2012. Europe and the US saw an increase in total new investment of 11% and 18% respectively in Q2 2012, the majority of which was driven by new build asset finance. While the number of deals remained broadly the same, the value of these transactions increased by around 40%–50% across the two regions.

The European Bank for Reconstruction and Development has provided debt finance for its first RES project in the Ukraine under the USELF program. The €13.3m loan to the Eco-Optima wind project is an important milestone in showing the country can attract international bank finance for RES projects.

Transaction deal values down 50% from Q1 2012

Challenging market conditions were reflected in a 50% decline in the value of renewable energy deals in Q2 2012 compared with the previous quarter. Most transaction activity reflected the continued consolidation of the market, which is almost inevitable given the competitive landscape, compressed prices and tightening in demand. 

Ben Warren, Ernst & Young’s Energy and Environmental Financial Leader comments: “During Q2 2012, major utilities and energy groups continued to rationalize their renewable energy portfolios through structured divestment programs to dispose of non-strategic businesses and assets, as they sought to deleverage their balance sheets.”

Looking forward, Warren summarizes: “The Q2 slowdown in transaction activity and deal values may only be temporary. For H2 2012, an increase in outbound Chinese activity is expected, with solar technology companies and wind sector original equipment manufacturers (OEMs) looking to access new markets through the acquisition of development portfolios.”

To download issue 34 of the Renewable energy CAI and previous issues, visit www.ey.com/CAI