TODAY’S STUDY: THE BEST PLACES IN THE WORLD FOR NEW ENERGY

Renewable Energy Country Attractiveness Indices
February 2012 (Ernst & Young)

Global highlights

While 2011 saw record levels of new investment into clean energy, eecially solar, the outlook for 2012 is far less certain, particularly in the West. The sovereign debt crisis continues to stifle the Eurozone, and also policy setters’ ambitions in relation to renewable energy deployment. Capital scarcity and increased competition from Asia will continue to put pressure on Western players for the foreseeable future. All this points to almost inevitable consolidation of the wind and solar sectors, and also increased vertical integration as equipment manufacturers seek ever more innovative routes to market.

Emerging markets will continue to prosper in 2012, thanks to ambitious installations programmes securing investments, while the more established countries will endure increasing constraints. Only five years ago, Spain was the most attractive country for renewable investment, but today it has dropped out of the top ten as the Government has temporarily suspended premiums paid to all new renewables plants. A similar suspension has occurred in Portugal, while other countries (such as Italy and Ireland) cut feed-in tariffs (FITs) and other support mechanisms.

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There is no change at the top of this edition of the CAI. But while China continues its prominence, some mixed signals have emerged: increased solar targets (15GW by 2015) to soak up excess supply, together with grid infrastructure issues that are preventing wind connections. And while domestic market growth plateaus, Chinese corporates are increasingly looking to Europe to acquire stakes in relatively low-priced targets.

For example, China Three Gorges has purchased a significant portion of Energias de Portugal and LDK Solar has offered to purchase Germany’s Sunways.

Meanwhile, the US (in 2nd position) has completed a bumper year for the wind industry. The now-expired Treasury Grants and loan guarantee program underpinned a surge to around 7GW of installed capacity. And recently, President Obama appeared to indicate that the Production Tax Credit (PTC) support mechanism would be extended beyond 2012, and we have scored the US on this basis.

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Third placed Germany gained a point due to continued funding for renewables to fill the nuclear gap. Development bank, KfW, and utilities RWE and E.ON have promised hefty investments in coming years. The solar PV market boomed in 2011 with more than 7GW, but a 15% tariff cut and the threat of monthly reductions will suppress activity in 2012.

Emerging markets have grabbed most of the good news headlines. South Africa has moved up seven places on the back of a very successful first round of a new tender bidding process, totaling 1.4GW of new capacity. South Korea climbed a point across all technologies with Government backing for bold ambitions, especially in offshore wind.

Romania and Ukraine also increased their appeal — mainly due to strong wind markets
Another part of the world that holds great potential for renewable generation is the Middle East and North Africa — especially for solar power, and this issue of the CAI includes a special focus article on this region. Most of the countries already have perational pilot projects as well as ambitious plans for significantly sized installations.

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The lead article in this issue reflects on current events and discusses the future benefits of more distributed ownership and generation — through community based schemes and smart grid networks. This upbeat vision for the future is tempered by the debt focus article, which examines how current liquidity constraints are likely to hamper project financing deals through 2012.

Overview of indices:

The Ernst & Young CAI provide scores for national renewable energy markets, renewable energy infrastructures and their suitability for individual technologies. The indices provide scores out of 100 and are updated on a quarterly basis.

The CAI take a generic view and different sponsor or financier requirements will clearly affect how countries are rated. Ernst & Young’s Renewable Energy Group can provide detailed studies to meet specific corporate objectives. It is important that readers refer to the guidance notes set out on page 28 referring to the indices.

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Long-term indices

The long-term indices are forward looking and take a long-term view (up to five years); hence, the UK’s high ranking in the wind index, explained by the large amount of unexploited wind resource, strong offshore regime and attractive tariffs available under the Renewables Obligation (RO) mechanism. Conversely, although Denmark has the highest proportion of installed wind capacity to population level, its score is relatively low because of its restricted grid capacity and reduced tariff incentives.

All renewables index

This index provides an overall score for all renewable energy technologies. It combines individual technology indices as follows:
1. Wind index — 65% (comprising onshore wind index and offshore wind index)
2. Solar index — 18% (comprising solar photovoltaic (PV) index and concentrated solar power (CSP) index)
3. Biomass and other resources index — 17%

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Individual technology indices

These indices are derived from scoring:
• General country-specific parameters (the renewables infrastructure index), accounting for 35%
• Technology-specific parameters (the technology factors), accounting for 65%

Renewables infrastructure index

This provides an assessment, by country, of the general regulatory infrastructure for renewable energy.

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Technology factors

These provide resource-specific assessments for each country.

Long-term wind index

This index is derived from scoring:
• The onshore wind index — 70%
• The offshore wind index — 30%

Long-term solar index

This index is derived from scoring:
• The solar PV index — 73%
• The solar CSP index — 27%

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Post Durban: can community renewables and smart grid brighten a low-margin decade?
Jonathan Johns

The COP17 agreement in Durban to sign up to an unspecified legally binding treaty by 2020, was welcome but weak. It did not remove carbon and climate change wholly from the agenda, but it hardly provided an imperative to invest. Indeed, the subsequent withdrawal of Canada, Japan and Russia from the Kyoto Protocol, fresh after the home planes had landed, foretells the difficulties to come.

The 2015 to 2020 negotiations will thus take place at a time when a material increase in global emissions by the new growth economies is likely to have outstripped any \reductions in the West, even after any impacts from a recession. Higher rises in global temperatures than the two to three degrees currently contemplated may by then be on the cards — if emerging scientific consensus is accepted.

Post Durban, renewables will need to compete within a wider investment class for funds.

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Renewables no longer has the climate change investment arena largely to itself. Forward–looking investment is likely to flow to energy efficiency and climate–affected scarce resources (e.g., water infrastructure). In January 2012, the Chinese Investment Corporation placed its first significant investment in the UK, with a 9.9% stake in Thames Water. This followed a similar investment a month earlier by the Abu Dhabi investment authority, the latter having already invested in the London Array offshore wind farm through Masdar. Post Durban, carbon trading will not bank the renewable
investment challenge.

Largely due to the impact of continued recession and the euro crisis, carbon prices in Europe could well struggle to get materially beyond current low levels of €7/tonne to €8/tonne (for European Union Allowances — EUAs) unless a reserve price is adopted, as some parties are suggesting. In addition Certified Emissions Reduction certificates — carbon credits based on emissions – reduction projects in the developing world — fell to €3.28 per tonne on the EU Emissions Trading Scheme (ETS) last week, half the price of European Emission Allowances, which are themselves near historic lows. This has had the side effect of reducing European funds available for investment in clean energy sourced from carbon credit sales budgeted at higher levels.

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By turning away from setting a global carbon price, Durban has pushed the spotlight back to individual countries’ domestic support mechanisms. Investment in renewables in the poor developing world is likely to be left in limbo and at the mercy of flagship funds, such as the Durban fund whose announcement, while welcome, was not accompanied by concrete and immediate funds. In the West, the political imperative has moved more to financial housekeeping and away from the inconvenience of climate change.

The continued recession is acting as a brake on policy intervention, as ‘renewables-friendly’ stimulus measures are not always renewed and their perceived generosity is challenged. Concerns about the impact of rising energy prices on industry costs and fuel poverty are already having an impact on policy-makers. However, the fact that investment today reduces exposure to rising fossil fuel prices tomorrow does still strike a chord…