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Climatescope 2014; Mapping the Global Frontiers for Clean Energy Investment
October 2014 (Bloomberg New Energy Finance)
For years, it has been widely accepted that only the world’s wealthiest nations have the means to enjoy the benefits of zero-carbon emitting sources of energy. Developing nations, it was assumed, could afford only fossil generation. This belief guided numerous investment decisions and policies. It has even shaped the dynamics of international climate talks.
But green technologies have come a long way, and clean energy technologies are no longer out of reach for developing countries, which are home to some of the most extraordinary wind, solar, geothermal, biomass, large and small hydro, and other natural resources. In many cases, insufficient energy access has meant high reliance on accessible but dirty fossil fuels. Reliance on diesel generation in many developing countries results in some of the poorest nations having some of the most expensive electricity in the world, making the economic case for alternative sources of power often quite compelling. And in the least developed nations, where hundreds of millions of people have little or no access to electricity, cleaner energy as a distributed source of power is often the obvious choice over extending traditional hub-and-spoke transmission networks or local diesel generators.
Do global investors or policy-makers in the developing world yet recognize this? And what steps have they taken to facilitate clean energy development and deployment?
These are the fundamental questions that this project – Climatescope – asks asks and seeks to answer. Climatescope surveyed and analyzed 55 important developing nations to understand market conditions for accommodating the growth of the most innovative, clean energy technologies, such as solar (photovoltaics and concentrating), wind, biomass, geothermal, and small hydro (projects smaller than 50MW). The report focused particularly on India and China where 10 states and 15 provinces were examined in greater detail. The goal was to produce snapshots of these jurisdictions potentially useful in strategic decision-making for investors, manufacturers, project developers, policy-makers, and researchers, among others.
While a number of Climatescope nations has historically embraced large hydro generation to meet local power needs, the study focused exclusively on newer sources of low-carbon generation, both because they are often technologically cutting edge and because they can generally be deployed far faster than large hydro projects, which can take years or even decades to commission. By comparison, wind projects can be sited and erected in as little as two to three years. Utility-scale photovoltaic solar projects can be constructed in as few as six months and distributed photovoltaic systems can be added to rooftops in a day or less. In short, these technologies are poised to make an immediate impact on energy supply and access in the developing world. Climatescope sought to assess how ready these countries are to embrace them.
The Climatescope methodology
Climatescope seeks to bring quantitative rigor to complex questions. At its core is a data-driven model that takes into account 54 distinct inputs or “indicators” to produce overall scores for individual nations on a zero-to-five basis. These countries are then ranked to highlight those most attractive for clean energy investment and capacity build-out. These scores and rankings are published in this report and at www.global-climatescope.org where users are encouraged to delve more deeply into the data.
For the sake of simplicity and order, each of these indicators falls under one of four umbrella “parameters.” Each of these has a default weighting in the final Climatescope score used to produce a country’s overall score. The parameters (and their default weightings, which can be adjusted at Global-Climatescope.org) are:
Enabling Framework (40 %) Parameter I
An assessment of a country’s fundamental market conditions. This includes the regulatory and power market structures, local power prices, and expectations for electricity demand overall. Countries with more liberalized electricity markets, higher electricity prices, and higher expectations for demand tended to score higher as they were deemed more appealing for clean energy development. In all, 22 indicators were taken into account in this parameter.
Clean Energy Investment and Climate Financing (30 %) Parameter II
An examination of financings that have taken place to date, along with the availability of capital for further development. This included a look at microfinance loans in support of green development with an eye toward micro entrepreneurs and individuals looking for low-carbon solutions to improve their businesses or living standards. Countries where more capital has been deployed or more capital is viewed as available tended to score better on this parameter, which included 14 indicators.
Low-Carbon Business and Clean Energy Value Chains (15 %) Parameter III
A look at the financial, manufacturing and service industries which typically support clean energy development. This includes detailed examinations of segments of the clean energy manufacturing chains. For the least developed nations, the parameter more closely analyzes the companies needed to facilitate distributed, “off-grid” energy deployment. Countries with more value chain players present locally scored higher in this parameter, which comprises five indicators.
Greenhouse Gas Management Activities (15 %) Parameter IV
An assessment of public and private sector efforts to mitigate greenhouse gas emissions in three spheres: carbon offset projects, policy and corporate initiatives. Countries deemed to be doing more to specifically address CO2 emissions scored higher on this parameter, which encompasses 13 indicators. Climatescope examined a highly heterogeneous set of nations.
This review included the world’s two largest by population (India and China, each with over 1 billion citizens) and three of the smallest (Bahamas, Barbados, and Belize with fewer than 1 million citizens each). As a result, some indicators in the study were “levelized” to account for a country’s gross domestic product (GDP). For instance, countries were not judged in Parameter II based just on the total volume of clean energy investment attracted but rather on how that investment compared to the size of the country’s overall economy.
Climatescope also assessed nations across a wide income range, from those at the very bottom of the development pyramid to others firmly considered “middle income.” For the least developed nations, a modified, “off-grid” methodology was used to magnify the importance of addressing energy access issues. All African nations with the exception of South Africa were scored using the off-grid methodology, along with four countries in Asia and one in Latin America and the Caribbean.
The Climatescope nations represent over half the world’s population and approximately a quarter of its GDP.
Among the key findings:
• Demand for electricity overall is growing swiftly in the Climatescope nations. From 2008 through 2013, these countries added 603 gigawatts (GW) of new capacity (roughly three times Russia’s current capacity), growing their grids by nearly a third to 2,013GW. By comparison, over the same period OECD nations added 258GW and grew by 9.6 percent to 2,887GW.
• Demand for clean energy is growing even faster in these countries than in the most developed nations. From 2008 through 2013, Climatescope nations added 142GW (more than France’s current total capacity) of new, non-large hydro renewables capacity, representing a 143 percent growth rate. OECD nations also saw strong growth, adding 213GW over those five years or 84 percent more non-large hydro clean energy than in 2008. On a percentage basis, new non-large hydro clean energy has been growing at a quicker clip in Climatescope countries (18.8 percent per year, on average, since 2008) than in OECD countries (12.8 percent). In fact, in 2013 on a volume basis, Climatescope countries added nearly as much capacity (37GW) as OECD nations (43GW). Counting large hydro as an additional source of zero-carbon energy, Climatescope nations now have 666GW installed capacity compared to 806GW in OECD countries. Moreover, in Climatescope nations, renewables (including large hydro) actually represent a larger percentage of total capacity than they do in OECD countries.
• Large-scale clean energy project development makes basic economic sense in many Climatescope countries, given local conditions. Virtually all nations have energy security concerns, and the Climatescope countries are no exception. Moreover, in these countries electricity prices paid by industrial players such as manufacturers averaged $147.90 per megawatt-hour in 2013. This falls well above Bloomberg New Energy Finance’s (BNEF) estimate for the average price at which wind power needs to be sold for a typical wind project owner to earn an acceptable financial return. In fact, the mid-point for the BNEF “levelized cost of electricity” (LCOE) for wind globally is $82, suggesting that industrial customers in these nations could potentially enjoy a substantial saving by purchasing wind-generated power rather than what they currently receive from the grid. In the case of photovoltaics, the BNEF LCOE is $142, suggesting a potentially even match between this newer source of generation and existing generation. Twenty-three of the Climatescope jurisdictions (42 percent of the countries, states and provinces) had average industrial power prices that topped $142 in 2013 and 32 (58 percent) had such prices topping $82. Doing business in these regions is typically more expensive than in more developed countries. Still, these high prices suggest major opportunities – particularly given the outstanding local natural resources.
• Distributed clean energy has major potential in Climatescope nations. Across the Climatescope countries, the price residents paid for electricity (the “retail” price) averaged 14.7 cents per kilowatt-hour in 2013. However, prices topped 15 cents per kilowatt-hour in 20 Climatescope countries and 22 cents in 16 countries. Bloomberg New Energy Finance estimates the levelized cost of residential electricity for solar power at approximately 15 cents per kWh with the LCOE potentially much lower in the sunniest parts of the world. That is, when power is priced at 15 cents or higher it can often make more financial sense for a homeowner to have a solar system installed rather than continue to pay monthly bills. Moreover, in countries where less than half the population has access to a grid of any sort, distributed sources of clean generation represent a logical and less costly alternative solution to diesel generation.
• Policy-makers in these nations are moving rapidly to improve their policy frameworks to attract more clean energy investment. In all, there are at least 359 clean energy-supportive policies on the books in the 55 Climatescope nations. Nearly half went into effect in 2012 and 2013. The most popular policy tools involve energy market mechanisms, which seek to harness the power of market competition among project developers to spur development. Often, this has meant “reverse auctions” held by regulators in which developers must bid to supply power at lowest possible cost. No less than 228 policies currently in effect in these nations involve some form of energy market mechanism. (All of these policies are reviewable via the Climatescope website.)
• Countries with policy frameworks viewed as more stable and ambitious tended to attract higher levels of clean energy investment. Policies in each of the Climatescope nations were judged by a global panel of outside experts on the basis of their ambition and potential for success. Those nations that received higher policy scores on Climatescope also tended to be those that attracted higher levels of investment.
• Microfinance (MFI) is playing a key role in bringing initial capital to far-flung communities. Climatescope found at least 114 organizations that self-identified as providing “green” microfinance. Still, the survey suggested that a number of MFI organizations are just beginning to address these issues. Of 70 organizations that responded to the Climatescope survey from Africa, only 30 said they offer any type of green microfinance assistance.
The Climatescope model was intentionally designed to be flexible. While it produces overall scores and rankings for all the nations, users can also go online to “drill down” on specific parameters and indicators. Aggregated data can also be downloaded. No quantitative model can fully portray the many characteristics of a specific energy market. Still, the Climatescope model yields interesting insights about the state of clean energy development in the 55 nations. Among the key findings:
• No nation scored higher than 2.23 and the average score was just 1.1. Given the continuum of zero-to-five, this suggests room for significant improvement in these countries in many respects. Policy frameworks can be strengthened, local value chain segments can be fulfilled, and more local capital can be made available, , among many areas for potential improvement.
• China achieved the highest overall Climatescope score. China is the largest manufacturer of wind and solar equipment in the world, has the largest demand market for wind and solar equipment, and has taken major strides to improve its domestic policy framework.
• Brazil finished 2nd with a score of 2.17. The country has moved aggressively to facilitate greater clean energy development through a series of state-organized tenders for power contracts. Its manufacturing value chain is expanding and the country makes considerable volumes of lower-cost capital available through its national development bank.
• South Africa achieved 3rd place with a score of 1.92. The country attracted $10 billion in new clean energy investment in 2012 and 2013 after holding a series of reverse auctions for clean power contracts. Its overall score was boosted by an explosive clean energy investment growth rate.
• Among 10 nations with the highest overall scores in Climatescope, , there was relative geographic diversity. Four are in Latin America: Brazil; Chile; Uruguay; and Mexico. Three are in Asia: China; India; and Indonesia. Three are in Africa: South Africa; Kenya; and Uganda.
• Among the three continents, the 10 Asian nations surveyed had the highest average score of 1.31. While China is a major part of the global clean energy story, Asia more broadly is becoming a clean energy equipment manufacturing hub. Seven of 10 Asian nations surveyed finished in Climatescope’s top 20. Pakistan, India, Indonesia, and Vietnam, among others, are all rapidly scaling their clean energy economies.
• Latin American and Caribbean nations, which scored a collective 1.07, were buoyed by the performance not just of traditional powerhouse Brazil, but relative newcomers Peru, Costa Rica, Colombia, and Nicaragua. Clean energy activity across the region has become substantially more diversified in recent years with Brazil no longer accounting for the large majority of activity or investment. Thanks to policy reforms and a surge in outside investment, other countries are making important strides while others in the region with ample local fossil reserves are doing less.
• The 19 African nations surveyed for Climatescope collectively scored 1.06 and were helped by strong performances from South Africa, Kenya, and Uganda. South Africa and Kenya have had significant clean energy projects either kick off or completed in the past few years while Uganda fared well because of the abundance of players there providing off-grid energy services. Energy poverty issues are paramount in many of these countries and those that have found ways to pair the goals of expanding energy access with growing clean energy tended to score highest.
• On Enabling Framework Parameter I, the overall average score was a 1.09 suggesting substantial room for improvement across nearly all Climatescope countries. Brazil scored highest on this parameter due to its policy regime and its relatively high electricity prices. Rwanda also scored well under the Climatescope “off-grid” methodology, in part because of its level of clean energy capacity installed on a per-capita basis and because its current distributed sources of energy – kerosene and diesel – could be cost effectively replaced with alternative generation.
• On Clean Energy Investment & Climate Financing Parameter II, the Climatescope countries overall averaged a score of just 0.62 indicating that more capital must be deployed into these nations if clean energy is to truly advance. Uruguay was the high scorer on this parameter after attracting $2.2 billion in new clean energy investment in 2013 and posting a massive 142 percent investment growth rate from the prior year. South Africa finished second on this parameter, also due to a surge of investment in 2013.
• On Low-Carbon Value Chain Parameter III, the Climatescope nations had their best performance with a 1.93. The overall result was helped by China, which had a “perfect” 5.0 score since it has in place every segment of the clean energy value chains surveyed for Climatescope. Unsurprisingly, several of the other largest countries in the survey also scored well, including Brazil, South Africa, and India.
• On Greenhouse Gas Management Activities Parameter IV, the Climatescope nations collectively scored 1.34 with a wide range of performances among countries. Chile scored best on this parameter thanks to a comparably high level of offset activity. A total of 14 nations have some form of CO2 reduction enshrined in law.
This year’s report builds upon two Climatescopes produced in 2012 and 2013 that focused exclusively on 26 Latin American and Caribbean nations. The Climatescope was conceived and produced in partnership with the Multilateral Investment Fund (MIF) of the Inter-American Development Bank Group. The MIF is once again a supporter of Climatescope in 2014 and is joined by the UK Department for International Development (DFID) and the Power Africa. BNEF would like to thank all three organizations for supporting this important project.