Rethinking renewables

In 2003, EY began publishing its quarterly index, analyzing and scoring countries across the globe on the attractiveness of their renewable energy markets, energy infrastructure and suitability for individual technologies. The renewable energy sector is now almost unrecognizable from what it was 10 years ago. Today, it is much more aligned to macroeconomic, political and energy market fundamentals, rather than being wholly reliant on fiscal support regimes. This increasingly diverse range of factors is driving record levels of new investment in an industry once considered on the fringe: global annual clean energy investment totaled US$269b in 2012, representing a fivefold increase from 2004.

New decade, new methodologyThe changing landscape has prompted EY to revise the methodology it uses to score and rank the top 40 countries to better reflect today’s investment and deployment drivers. Key changes include:

• More focus on the extent to which markets are prioritizing renewables as a necessary and desirable part of the energy mix, including an assessment of:

• Energy supply and demand

• The competitiveness of renewables relative to other energy sources

• The importance of decarbonization (including targets and market mechanisms)

• An increased emphasis on the economic and political stability of a particular market

Investors continue to cite the ease of doing business as an important differentiator between markets, resulting in a renewed focus on investment climate and the bankability of renewables from a financing, infrastructure and transactions perspective.

The sustainability and transparency of energy policies have also become more critical given the impact on long-term decision-making by investors and other stakeholders. Policymakers are now under increasing pressure to implement stable long-term policies that avoid “U-turns” and boom-bust cycles.

US back on topThe revamped index sees the US regain the top spot, as high barriers to entry for external investors realign China into second place. However, growth prospects

in China remain strong, with continued GDP growth, increasing demand and the strategic importance of the sector to the local economy providing solid foundations for the future.

While South America continues to grow in prominence, new policy measures and tender cancellations in Brazil may temper the region’s rapid growth in the short term. Chile, meanwhile, continues to be the rising star in the index, supported by strong natural resources, huge energy demand from the mining sector and a rapidly growing project pipeline.

Australia’s relative ranking has significantly improved thanks to robust macro conditions, a strong decarbonization agenda, cost-competitive wind power and high levels of deal activity with Chinese and Japanese investors in particular. Whether it remains highly attractive in the medium to long term, however, may depend on whether the upcoming federal election results in policy “U-turns” on issues such as carbon pricing.

Elsewhere in Asia-Pacific, Japan is continuing to see high levels of project activity and investment, while Thailand has entered the index (in 30th place) for

Rethinking renewables

As it celebrates its 10-year anniversary, EY’s Renewable energy country attractiveness index (RECAI) has been revamped to reflect the fundamental shifts in the industry over the past decade. Klair White reports on the changes.

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the first time. This debut — as well as that of Peru (in 26th place) — highlights the ongoing globalization of the renewables market, as investors and developers disillusioned with struggling Western markets seek new opportunities.

In Europe, ongoing economic concerns and rising electricity prices are triggering severe subsidy reductions. Even Germany — always a beacon of stability — is now considering downward revisions to its renewable support scheme. Policymakers in Eastern Europe, in particular, are also struggling to balance growth and sustainability, with Romania the latest to slash its subsidies while legislative delays in Poland are dampening investor appetite.

Political instability and an absence of clear policy frameworks across parts of the Middle East and North Africa region have resulted in Egypt, Tunisia and the UAE falling out of the top 40.

Transaction trendsDespite soaring levels of new investment in clean energy globally, 2012 also represented an 11% decrease on record levels seen in 2011. And it seems 2013 will see the market continuing to find its feet after a turbulent 12 months, in which falling subsidies, oversupply and capital constraints created a market focused on consolidation, restructuring and distress-driven transactions. This focus on portfolio management and deleveraging is expected to continue, and the mismatch between capital expenditure plans and the corporate capacity to finance this investment is expected to drive more asset disposals.

At the same time, the changing risk appetite of utilities and financial investors is driving secondary asset transactions, with greater value placed on operational projects over plant construction.

New entrants will spur increased transaction activity. High-profile corporates are developing energy mix optimization strategies to manage their own energy portfolios and institutional investors are looking to renewable infrastructure assets as attractive low-risk investments with moderate yields.

Companies and investors from the Asia-Pacific region are also likely to continue driving sector-wide deal activity.

Importantly, new markets relating to grid infrastructure, capacity markets, energy storage and smart meters will also need to emerge to facilitate the ongoing expansion of renewable deployment.

From subsidy to diversityThe diversity of factors now driving renewable energy will impact its future. As we move closer to grid parity, the role of policy will need to change, and governments must consider what sustainable support looks like in a post-fiscal-subsidy world. An emphasis on regulation rather than policy may emerge,

and cross-border or global agreements could help transcend local politics, geographical constraints and protectionist measures. The focus is now on the affordability of renewable energy and its impact on energy security, economic growth, job creation and infrastructure investment. And it will likely be these factors, in addition to the decarbonization agenda, that will provide a much more robust foundation for the growth of renewables in the foreseeable future.

Macro drivers Energy market drivers Technology-specific drivers

Rank CountryRECAI score

Macro stability

Ease of doing business Total

Prioritization of renewables

Bankability of renewables Total Wind Solar

Other technologies

1 US 71.6 77.3 71.2 73.6 38.6 75.0 60.4 68.0 79.4 52.02 China 70.7 66.4 44.2 53.1 58.3 62.9 61.1 77.5 78.5 55.73 Germany 67.6 75.7 61.0 66.9 55.4 72.7 65.8 59.9 63.0 45.84 Australia 60.6 85.1 73.0 77.9 53.6 65.6 60.8 46.9 57.2 30.1

5 UK 60.0 77.8 75.0 76.1 51.2 68.7 61.7 59.0 38.7 35.36 Japan 59.4 77.1 59.8 66.7 45.1 69.9 60.0 44.3 57.1 49.87 Canada 57.8 81.3 74.0 76.9 47.8 61.6 56.1 52.4 45.6 45.48 India 54.9 52.1 37.3 43.2 58.8 49.3 53.1 52.2 61.0 44.9

9 France 54.0 70.4 60.8 64.6 42.0 60.6 53.1 47.0 49.3 39.310 Belgium 53.9 67.3 78.0 73.7 65.0 61.1 62.6 42.4 36.9 26.4

Table 1: Top 10 RECAI rankings (at May 2013)

For more information

How we can help

EY’s Global Cleantech Center offers you a worldwide team of professionals in assurance, tax, transaction and advisory services who understand the business dynamics of cleantech. We have the experience to help you make the most of opportunities in this marketplace, and address any challenges.

Klair White Environmental Finance + 44 161 333 2734

Klair White is a Manager in the UK Environmental Finance team and is the editor of the RECAI publication. She has six years of experience in transaction advisory services, three of which have

focused on providing policy, financing and transaction services to projects and clients within the clean energy sector.

Source: RECAI, May 2013

Read the latest RECAI issue for more details and individual technology indices.

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About EY’s Global Power & Utilities Center In a world of uncertainty, changing regulatory frameworks and environmental challenges, utility companies need to maintain a secure and reliable supply, while anticipating change and reacting to it quickly. EY’s Global Power & Utilities Center brings together a worldwide team of professionals to help you succeed — a team with deep technical experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify the implications and develop points of view on relevant sector issues. Ultimately it enables us to help you meet your goals and compete more effectively.

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