TODAY’S STUDY: NEW ENERGY MONEY IN THE WORLD

Global Trends In Clean Energy Investment

July 2013 (Bloomberg New Energy Finance)

Key Facts

n Investment in renewable power and fuels (including small hydro-electric projects) was $244 billion in 2012, down 12% from the previous year’s record figure of $279 billion. Despite the setback, 2012’s total was still the second-highest ever and 8% up on 2010.

n The main issue holding back investment last year was instability in the policy regime for renewable energy in important developed-economy markets. Future investment is likely to coalesce in countries that can offer policies that command investor confidence, plus the need for extra generating capacity and strong renewable power resources.

n The highlight of 2012 was a further shift in activity from developed, to developing, economies. Total investment in developed economies in 2012 was down 29% at $132 billion while that in developing economies was up 19% at $112 billion, the highest ever.

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n After being neck-and-neck with the US in 2011, China was the dominant country in 2012 for investment in renewable energy, its commitments rising 22% to $67 billion, thanks to a jump in solar investment. But there were also sharp increases in investment for several other emerging economies, including South Africa, Morocco, Mexico, Chile and Kenya.

n Activity trends were downbeat in many, but not all, developed economies. Policy uncertainty took a heavy toll of investment in the US – down 34% at $36 billion – and also in former renewable energy early-movers such as Italy and Spain.

n The other major theme of 2012 was a further, significant reduction in the costs of solar photovoltaic technology. The levelised cost of generating a MWh of electricity from PV was around one third lower last year than the 2011 average. This took small- scale residential PV power, in particular, much closer to competitiveness.

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n The result was that, despite problems in former market hot-spots in southern Europe, the amount of PV capacity installed in 2012 was a record 30.5GW, up from 2011’s 28.8GW. However this came at reduced cost, contributing to an 11% fall in overall solar investment last year, to $140 billion.

n Japan and Germany were two countries at the sharp end of the powerful trends in the solar market in 2012. Japan saw investment in renewable energy (excluding research and development) surge 73% to $16 billion, thanks largely to a boom in small-scale PV on the back of new feed-in tariff subsidies for solar installation.

n Germany saw renewables investment slip 35% to $20 billion. Part of this was down to a pause in offshore wind financings, as grid connection delays were addressed, but the major reason was that the 7.6GW of solar capacity installed in 2012 came at much lower cost than would have been the case in 2010 or 2011.

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n Despite high levels of investment in renewable energy, generators are continuing to spend large sums on fossil-fuel assets. In 2012, gross investment on coal, gas and oil power (including replacement plant) was an estimated $262 billion, some $2 billion higher than the total investment in renewable power capacity including large hydro. Net investment in fossil-fuel technologies, at $148 billion, was much less than that in renewables.

n Clean energy share prices had another poor year in 2012, the WilderHill New Energy Global Innovation Index, or NEX, slipping 6% while wider stock markets gained. This followed a 40% plunge in the previous year. The NEX reached a low in late July some 78% below its record level reached in November 2007, before beginning a rally that extended into 2013.

n The main reasons for the further under-performance of renewable energy shares last year were severe distress in the manufacturing supply chain for both wind and solar, caused by over-capacity; and investor unease about future prospects in the light of unhelpful policy moves in Europe and North America.

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n There were contrasts in the trends seen among different categories of investment. Small-scale capacity (of less than 1MW) was the strongest area, rising 3% to $80 billion in 2012. Asset finance of large projects slipped 18% to $149 billion.

n Investment in specialist renewable energy companies by public market investors dropped 61% to $4 billion, while that by venture capital and private equity investors fell 30% to $4 billion, the lowest since 2005. Corporate and government research and development spending, however, edged up 1% to $10 billion.

n In addition to the $244 billion worldwide investment total above, there was an important additional sum spent on new hydro-electric projects of more than 50MW. Some 22GW of such projects are estimated to have come online during 2012, equivalent to investment of around $33 billion.

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Executive Summary

For the first time in several years, 2012 saw a decline, not a new record, for global investment in renewable energy. As last year’s Global Trends report warned, dollar investment worldwide was facing a down-draft from uncertainty over support policies in Europe and the US and – more positively – from sharp falls in technology costs.

The 2012 investment total was $244 billion for renewable power and fuels (including small hydro- electric projects). This was 12% down on 2011’s record of $279 billion,1 but 8% above the figure for 2010.

Not included in the headline 2012 number above is approximately $33 billion of investment in large hydro-electric projects – these outlays are discussed in a special section in Chapter 4. Once again, the dollars spent on additional renewable power capacity including large hydro exceeded those spent on additional fossil-fuel generating capacity worldwide, this time by more than $100 billion.

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However there is dauntingly far still to go to reduce the carbon intensity of the generation fleet. In 2012, just 6.5% of global electricity was produced using wind, solar, biomass and waste-to-power, geothermal, marine and small hydro technologies, up from 5.7% in 2011. Although the use of these sources meant that an estimated 900 megatonnes of CO2 were not produced, overall global energy- related emissions remained on a rising trend.

The most important change that took place in 2012 was an acceleration in the geographical shift of renewable energy investment. Back in 2007, developed economies invested two and a half times as much in renewables (excluding large hydro) than developing economies. In 2012, the gap was just 18%.

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Bitter-Sweet $244 Billion

From the standpoint of any year other than 2011, last year was a strong one for investment in renewable energy worldwide. The total of $244 billion was the second-highest ever, nearly one and a half times the 2009 figure and six times the 2004 number (see Figure 1).

However there is no hiding from the fact that 2012 marked the sharpest setback for renewable energy investment in recent years, far exceeding the 2% reverse in 2009 that followed the climax of the financial crisis. So what went wrong?

The main reason for the 12% decline in 2012 was investor concern over policies to support renewable energy in its longest-established markets, Europe and the US. In part this was a case of uncertainty – developers, equity providers and lenders were unsure about whether commitments to subsidise renewable energy deployment would continue beyond scheduled expiry dates in countries like the US, the UK and Germany.

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In part it was a case of actual action – Spain’s late- 2010 retroactive cuts in tariff support for existing PV projects were followed in 2012 by further negative developments in the same country (a moratorium over feed-in tariff support for all new projects, and a tax on the revenues of clean power plants), and in Italy (a tight cap on capacity eligible for feed-in tariffs).

There was also negative impact on investment levels from other factors, notably pressure on utility balance sheets in some European countries, the low natural gas price in the US (which reduced the value of power purchasing agreements available to generators, including wind developers), and the poor performance, once again, of clean energy share prices. The latter factor hit public market investment in specialist renewable energy companies and made venture capital and private equity funds more hesitant about putting money into the sector.

There was also an ominous, rising tide of protectionism in renewable energy. The US imposed relatively mild tariffs on Chinese-made solar hardware in the spring of 2012, but by the end of the year the pressure was on in Europe for higher duties on Chinese products.

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However, the taste of 2012 was not all bitter. First of all, the weaker investment number disguised a much better performance in terms of renewable power megawatts installed.

There were falls in utility-scale PV system costs of around 40% (and in residential PV system cost of nearly 30%) between 2011 and 2012, as excess capacity in the manufacturing chain put a fierce squeeze on selling prices and margins. The result was that although solar investment fell 11% worldwide in 2012, the number of PV megawatts installed actually increased, from 28.8GW the previous year, to 30.5GW.

In wind, there was a little of the same. The wind capacity installed in 2012 hit a record of 48.4GW, up from 42.1GW in 2011. Much of this reflected timing effects, so a lot of projects were financed in 2011 – and so showed up in that year’s investment figures – but not completed until 2012. But there was also a cost effect – average prices paid for onshore turbines in 2012 were some 2-3% lower than those in 2011.

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The continued improvements in cost-competitiveness for solar and wind helped to support demand in many markets. Developers found they could get an acceptable return even with subsidies well below their former levels, in countries such as Germany, and that they could get an attractive return in markets that had just introduced feed-in tariffs, notably Japan. Prices continued to fall in wind capacity auctions and tender mechanisms in emerging economies such as Brazil and South Africa.

There were other sweeter spots too. One was that, despite the fears about policy support, in several countries governments eventually clarified and extended their subsidy programmes and put in place new, more transparent “degression” mechanisms for scaling back subsidy support. In the US, the Production Tax Credit for wind was extended for a further year in a deal in Congress at the start of January this year. In the UK, the government published last summer new levels of green certificate support that were broadly compatible with industry demands. In India, the administration confirmed that its generation- based incentive for wind would be restored after a period of suspension.

Another was that clean energy share prices finally managed to begin a rally, after a painful decline of 78% from their highs reached in 2007. The WilderHill Global Innovation Index, or NEX, which tracks the performance of 96 clean energy stocks worldwide, bottomed at 102.20 on 25 July 2012, had rallied by 18% by the end of the year, and continued its upswing well into 2013.

Finally, and most importantly, there was further evidence last year that renewable energy investment is gravitating to the parts of the world that have greatest need for additional power, and have the best natural resources for wind, solar, geothermal, small hydro and other technologies. In many cases, this means developing countries. This trend is explored further…

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